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Operator: Good morning, and welcome to the Shoals Technologies Group Third Quarter 2025 Earnings Conference Call. Today's call is being recorded, and we've allocated 1 hour for prepared remarks and Q&A. At this time, I'd like to turn the conference over to Matt Tractenberg, Vice President of Finance and Investor Relations for Shoals Technologies Group. Thank you. You may begin. Matthew Tractenberg: Thank you, Charlie, and thank you, everyone, for joining us today. Hosting the call with me is our CEO, Brandon Moss; and our CFO, Dominic Bardos. On this call, management will be making projections or other forward-looking statements based on current expectations and assumptions, which are subject to risks and uncertainties and should not be considered guarantees of performance or results. Actual results could differ materially. Those risks and uncertainties are listed for investors in our most recent SEC filings. Today's presentation also includes references to non-GAAP financial measures. You should refer to the information contained in the company's third quarter press release for definitional information and reconciliations of historical non-GAAP measures to the nearest comparable GAAP financial measures. Please note that the slides you see here are available for download from the Investors section of our website at investors.shoals.com. With that, let me turn the call over to Brandon. Brandon Moss: Thank you, Matt, and thanks to everyone joining us on the call. I'll begin by sharing key results from the third quarter. I'll then discuss the current demand environment in the U.S. And finally, I will review the progress on our strategic growth initiatives. Dominic will dive deeper into the third quarter results and provide our outlook on the fourth quarter 2025. We'll then finish the call with questions from our analysts. I'm very pleased with our execution during the third quarter. We delivered record revenue of $135.8 million, slightly above the high end of our expected range. Revenue grew 32.9% over the prior year period and was up 22.5% sequentially over second quarter results. Our commercial team continues to drive significant growth in our book of business. We added approximately $185.4 million in new orders in the period, helping to achieve a company record for backlog and awarded orders or BLAO, of $720.9 million, a 21% year-over-year increase. This resulted in a very strong book-to-bill of 1.4 this quarter and supports the continued growth we see as we look ahead toward 2026. As of September 30, 2025, approximately $575 million of our BLAO has shipment dates in the upcoming 4 quarters running through the third quarter of 2026. Next year is shaping up to be another year of strong growth for Shoals. As you are aware, 2025 brought with it some volatility, largely a function of an uncertain and rapidly shifting political environment. However, as you've seen in our results thus far, our business has been resilient. The actions we've taken to attract and retain customers over the past 2 years are paying off. We've improved our relationships with EPCs and developers and signed new MSAs that reflect our shared objectives. Our focus on providing innovative solutions to meet customers' needs has led to new product development and additional opportunities for growth. We continue to improve our operating model to drive out inefficiencies and increase capacity. And we've maintained excellent liquidity and positive free cash flow despite increased capital expenditures and warranty remediation needs over the past year. As a result of our strong Q3 results and the current demand environment, we have slightly increased the range of anticipated revenue for the full year 2025, now representing between 17% and 20% year-over-year growth and above the range presented at our September 2024 Investor Day. Adjusted gross profit percentage remained in the expected range for the quarter, landing at 37%. Gross profit was $50.3 million, the highest quarterly amount since 2023. Dominic will provide more insight into the impact of both product mix and tariffs on our margins in a few moments. The sequential increase in SG&A this quarter was largely a function of increased legal expenses. The ITC hearing during the third quarter was one driver, but we also had elevated legal expenses related to the pending shrinkback litigation as we work through fact discovery, depositions and expert analysis. Our third quarter adjusted EBITDA was within our expected range at $32 million or 23.5% of revenue. And finally, the remediation work for known shrinkback issues progressed as expected. The probability that some additional work may be required in the coming quarters still remains, so we are not changing our estimated range of expense this quarter. However, we are pleased with our ability to respond to all customers that express concerns thus far and resolve those issues requiring remediation. Congratulations to our customer support team, and thank you to our customers for their continued trust and patience. Turning to the broader U.S. market. While current headlines remain distracting and somewhat disconnected from the underlying demand for solar energy, our customers remain as busy as ever. Developers have safe harbor projects for several years with many projects confirmed through 2030. While we do not expect a significant number of projects to be pulled forward, it is reassuring to know that the industry is healthy and growing. As we have discussed, the need for new energy supply is real. The massive investment cycle in AI and data centers, combined with the potential industrialization and onshoring of manufacturing will result in low growth far in excess of what we've seen in recent decades. Solar is best positioned to meet these rising energy needs today and through the balance of the decade. The U.S. Department of Energy acknowledged that solar will play a notable role meeting the growing demand given its speed of deployment and favorable cost structure. Following the passage of HR 1 in July and the treasury guidance issued in August, we believe developers will successfully navigate the tax incentive landscape and as a result, have not seen material changes to project calendars. Less uncertainty and the unrelenting focus on bridging the power supply gap is driving continued investment. Turning to our business units. Third quarter was another strong period of growth within our core utility scale solar market. Customer project calendars remain tight with little excess capacity to move things around. Labor availability is a focus for the industry and will likely remain so for the foreseeable future. That said, our quote volume exceeded $900 million in the third quarter, a sequential increase of more than 20%. These are projects that would generate revenue in late 2026 and 2027, further supporting our long-term growth trajectory. Our core utility scale market is resilient, and our commercial strategy continues to drive growth. I'd like to now discuss progress we are making in other strategic areas of our business. Shoal's additional growth opportunities include international, CC&I, OEM and BESS. Our progress in each of these is meeting or exceeding our expectations. The opportunity set across international markets continues to expand. Our pipeline exceeds 20 gigawatts and includes projects in Latin America, EMEA and Asia Pacific. We've hired an experienced commercial leader in Australia, where the government mandate has been expanded to target 40 gigawatts of new capacity, including 14 gigawatts of clean energy capacity by 2027. This is expected to stimulate approximately $73 billion in overall electricity sector investment. It's a very attractive market and one we're aggressively pursuing. We recognized more than $6 million of revenue in Q3 from 2 ongoing projects in LatAm and in Australia. We expect to complete all 3 of these international projects in the fourth quarter. Our team anticipates continued acceleration and diversification across our focus markets through 2026. In addition, our relationships with large global developers with ties to the U.S. Export-Import Bank are opening doors and growing our pipeline in developing markets outside our targets of Australia, Latin America and Europe. Our community, commercial and industrial or CC&I business is performing well. We are engaged with large, well-respected electrical distributors that are driving meaningful quote volume increases. While this market remains small as compared to our core utility scale opportunity, it is one that provides us a path to create lasting relationships and future growth with new customers. Our OEM business is tracking ahead of expectations as our partner continues to see strong demand for their panels. Our deep engineering and manufacturing relationship with the largest domestic module provider is a strategic advantage for Shoals and one we're committed to maintain and expand. The opportunity we've received the most questions about this year is our battery energy storage solutions or BESS offering. So I'd like to provide a little bit more detail today. Last year, we introduced a BESS solution targeting the solar plus storage market, specifically when new solar plants are built with attached storage systems. That opportunity remains exciting for us today since it builds upon our relationships with existing customers and developers. In addition to that opportunity, there are also 2 additional use cases that we are now pursuing, grid firming and data centers. Let's start with grid firming solutions. Utilities are very interested in providing more reliable and consistent power to their customers. One method is to add grid scale battery storage solutions to their existing grids in order to provide real-time balance between supply and demand. Shoals' product offerings can play a part in providing solutions to system integrators in this area, and we are actively quoting opportunities in this space. In addition to grid firming, there are emerging use cases with data centers. Once again, consistent and dependable energy is critical to operations. Battery storage solutions can provide uninterrupted power as well as to help regulate power demand spikes and troughs created by artificial intelligence processing. This is an area that has significant market potential in the coming years, and we are actively engaged with system integrators in this market as well. This is an exciting time in a relatively young market, but one we are investing heavily in. I'm pleased to share with you today that we have already signed 2 MSAs to deliver products in these emerging BESS markets and are in conversation with several others about providing Shoals systems and their unique solutions. At the end of Q3, we had approximately $18 million of BESS in our backlog and awarded orders. In summary, our domestic utility scale market is healthy and growing. We are executing our strategic framework of market diversification as anticipated, and we are leveraging our expertise, engineering and manufacturing capabilities to pursue new opportunities with speed and purpose. It is an exciting time to be at Shoals. With that, I'll now turn it over to Dominic, who will discuss our third quarter financial results in more detail and our outlook for the fourth quarter. Dominic? Dominic Bardos: Thanks, Brandon, and greetings to everyone on the call. Turning to our third quarter financial results. Revenue increased by 32.9% year-over-year to $135.8 million. The increase in revenue was primarily driven by higher domestic project volume from both new and existing customers. In addition, as Brandon mentioned earlier, our strategic growth channels of international, CC&I and OEM contributed to year-over-year revenue growth in the quarter. Gross profit increased to $50.3 million compared to $25.4 million in the prior year period. Our GAAP gross profit percentage was 37.0% compared to 24.8% in the prior year period within our expected percentage range of mid- to upper 30s. There are a few dynamics worth mentioning with regards to gross profit percentage. First, I'd like to discuss product mix. Certain EBOS solutions drive more value for customers than others. As such, those custom and engineered solutions typically carry higher margins than other product lines. Some new products such as long-tail BLA drive incremental revenue in our share of wallet, but do not carry the same gross profit percentage as our traditional BLA solution. Long-tail BLA does, however, provide incremental gross profit dollars and has allowed us to capture additional share while meeting customer needs. Second, I'd like to provide some color regarding tariffs. Our supply chain team is constantly working to drive material costs out of our products. Months of work to test new raw materials, negotiate terms and onboard new suppliers can be undone in a moment as trade policies change without notice. Unfortunately, like many others, Shoals has been impacted by these policy shifts this year. And as a result, some margin-enhancing savings could not be realized as expected. Moving on to general and administrative expenses. G&A was $29.4 million, which is $10.7 million higher than the prior year period. Our legal expenses, which accounted for approximately $5.7 million of the increase, remain elevated while we make our way through ongoing litigation matters. Approximately $6.8 million of legal expense was specifically related to the ongoing wire insulation shrinkback litigation. Income from operations or operating profit was $18.7 million compared to $4.5 million during the prior year period. Operating profit margin was 13.7% compared to 4.4% a year ago. Net income was $11.9 million compared to a net loss of $300,000 during the prior year period. Adjusted net income was $21.0 million compared to $13.9 million in the prior year period. Adjusted EBITDA was $32.0 million compared to $24.5 million in the prior year period, representing 30% growth. Adjusted EBITDA margin was 23.5% compared to 24.0% a year ago, driven primarily by lower gross margin flow-through. Adjusted diluted earnings per share of $0.12 was approximately 50% higher than the prior year period. During the third quarter, we spent $11.9 million on wire insulation shrinkback remediation and had a remaining warranty liability on our balance sheet of $7.2 million as of September 30. The current portion of the remaining liability related to shrinkback is now $4.2 million. Operationally, we generated $19.4 million of cash in the third quarter, driven by higher net income, an increase in accounts payable and higher accrued expenses. These increases were partially offset by a higher accounts receivable balance, driven by strong sales volumes and increased spend on warranty remediation. On a year-to-date basis, we have generated $21.2 million in operating cash flow. Free cash flow was $9.0 million in the third quarter, reflecting both the $11.9 million impact of remediation costs and elevated capital expenditures related to our new facility. These 2 items impacted free cash flow by a total of $22.4 million in the quarter. We received our certificate of occupancy for our new facility in Portland, Tennessee, and we began moving into the new facility in September. We expect to begin consolidating operations from our 3 existing facilities in the fourth quarter and expect to complete the entire consolidation by mid-2026. Our balance sheet remains high quality, and we ended the quarter with cash and equivalents of $8.6 million and net debt to adjusted EBITDA of 1.2x. Our net debt was $118.2 million, a slight decrease over the prior quarter. We paid an additional $5.0 million down on our revolver during the period, which had an outstanding balance of $126.8 million at the end of the quarter. With regards to capital allocation, given the number of competing priorities for our cash this year, including shrinkback remediation and factory consolidation, we did not purchase any shares in the third quarter under our share repurchase program. Backlog and awarded orders ended the third quarter at a record $721 million, a sequential increase of $50 million. Backlog constitutes $298 million of the total BLAO, providing us with confidence that the growth projections we have for the upcoming period can be achieved. As of September 30, $575 million of our backlog and awarded orders have planned delivery dates in the coming 4 quarters with the remaining $146 million beyond that. Turning now to the outlook. Quarterly pacing within the year has continued to follow the strong back half we've been communicating since February. For the quarter ending December 31, 2025, the company expects revenue now to be in the range of $140 million to $150 million, representing 36% year-over-year growth at the midpoint and adjusted EBITDA to be in the range of $35 million to $40 million. This will result in full year 2025 revenue between $467 million to $477 million and adjusted EBITDA in the range of $105 million to $110 million. In addition, for the full year, we expect cash flow from operations to remain in the range of $15 million to $25 million, capital expenditures to remain in the range of $30 million to $40 million and interest expense to remain in the range of $8 million to $12. With that, I'll turn it back over to Brandon for closing remarks. Brandon Moss: Thank you, Dominic. The demand environment over the last few years has been volatile, driven not only by the macroeconomic and political backdrop, but also labor availability, supply chain disruptions and permitting. That said, 2025 appears to be playing out slightly better than we had anticipated when we provided guidance in February. The changes we've implemented, which span both commercial and operational process improvements and shifts in strategic direction and focus are enabling exciting and visible improvements across the company. The transformation from a company with a narrow customer mix, product offering and geographic footprint to a diversified multinational energy solutions provider is beginning to take shape. These changes do not occur overnight, but through the deployment of repeatable processes that improve productivity, visibility and scale, through the hiring of seasoned business leaders who can execute with consistency, through the focus on developing new innovative product solutions for customers facing real-world problems and through an unyielding focus on improving the customer experience from start to finish. We are building the next version of Shoals, one that will deliver attractive returns for our shareholders through profitable growth and strong cash flow generation. I'm very encouraged about the progress we've made and how well we're set to continue the journey in 2026 and beyond. We want to thank our shareholders and customers for their continued trust and our employees for their hard work and dedication. Operator, we are now ready for questions. Operator: [Operator Instructions] Our first question comes from Christine Cho of Barclays. Christine Cho: I just wanted to start with the data center opportunity. Brandon, I think in your prepared remarks, you talked about conversations with system integrators. Is that how you expect the data center opportunity to materialize through integrators? And if that's the case, how should we expect the opportunity will show up in your bookings? Should we think something like this $18 million that you guys talked about this quarter, like more consistently every quarter? Or could we see a lumpy large booking? Also, if you could provide some more information on the MSAs, maybe size, type of counterparty, how we should expect orders from these MSAs to make it into backlog? Brandon Moss: Thanks, Christine. As you mentioned, we are excited about the 2 new MSAs. We're excited about the $18 million of backlog and awarded orders. Specifically, our channel to market, the question around system integrators, we could be partnering with system integrators directly. We could be partnering with EPCs directly on the projects, and we've talked about in past quarters, even a sale to a hyperscaler. So it's a new market and how we partner for a particular project may change from project to project. I think the important thing for us is that we are engaged in some way, shape or form with these projects and are helping customers engineer solutions. Many of these solutions at data centers, and I know you asked specifically about who the MSAs are with and the size, as you know, this one, the data centers, typically, there's a level of confidentiality about where they are and who they are. And specifically with our MSAs, our partners may be deploying some proprietary system architecture. So we're limited about what we can share for those specific opportunities. As we've talked about in the past, this business for us because of the newness of it and even the size and scale of some of these projects, our backlog and awarded orders may at times be lumpy. So I wouldn't specifically count on, hey, we've booked $18 million, and we're going to continue to book that quarter after quarter. We can have some lumpy bookings. That said, as we begin recognizing revenue on this, the revenue should be somewhat stable as customers take deliveries. On this specific -- or these specific opportunities in our backlog and awarded orders, I would anticipate revenue beginning to materialize in the beginning of second quarter. So very young and evolving market, new product set for us. We're very excited about it. And as we've commented in the past, we're dedicating about 15% of our floor space, our operating floor space here in our new facility to our BESS product offering, and that build-out is underway. So things are progressing ahead of plans. Christine Cho: Okay. Great. And then just moving on to gross margins. They were soft this quarter despite system solutions being a bigger part of the business than it has been for a while. Can you just help us parse out how much of this is due to tariffs? Is it lower pricing to get back some share? You talked about the lower margin BLA. Is there a margin drag from the expansion of the new manufacturing? Just kind of help us parse it out and if you can give us some idea of how we should expect it to trend over the next year? Dominic Bardos: Sure, Christine, it's Dominic here. Yes. So the margins have been stable this year and right within the range that we've expected, the 35 -- the mid-30s to upper 30s percent. So coming in at 37% was right within our expectations. In my prepared remarks, I did talk about a couple of things because the new long-tail BLA, as an example, is one where the margins will fall on a percentage basis. There's a large section of that, that expands our share of wallet into the solar field for the feeder cable, and that is just not the same amount of value engineering on that section of revenue. So we've talked about that, and that is part of what's going on as expected. Now the tariff thing is also an interesting one for us because while we're largely protected and mitigated from an increase when we're quoting jobs, we can pass those along as we do the final purchase order. There are some things that we're doing behind the scenes to drive cost out of the system. And that's what I was referring to on the prepared remarks that all the work of our supply chain team to onboard with our engineers to test the new products and to really get new raw materials ready to go, it was actually undone for us. So we did not realize the margin lift that we were expecting. It was still within the range. I would quite honestly hope to have a more pleasant surprise on the upside there, but we were not able to achieve that due to the tariffs that changed in the middle of that process for us. So on the tariffs alone, on that savings, we actually had forecast about a 100 to 200 basis point improvement in margin, and that was undone for us this year. So while we still have very stable margins, keep in mind that the projects that we've done thus far in 2025 were priced in 2024, they still have some of the new incentives that we provided, new customers to come back to Shoals. And I do believe that our stability in the gross profit margin is fine. As I mentioned, we are shifting and have been trying to focus on cash generation, our strong cash flows and operating profit, and we will continue to do so going forward as well. Matthew Tractenberg: Charlie, next question, please. Operator: Our next question comes from Julien Dumoulin-Smith of Jefferies. Julien Dumoulin-Smith: I'm going to try this from a slightly different perspective. You alluded here in your prepared remarks that you're doing slightly better than planned for 2025. But I'd love to hear how you're doing against the longer-term metrics you articulated from September '24's Analyst Day, right? You've got this 20% plus year-over-year increase in backlog, the $900 million quoted here in the quarter. How are you looking at the beyond '25 period at this point versus the targets and ranges that you implied at the time here? Dominic Bardos: Sure. So I'll start and ask Brandon to join in because as he said in his prepared remarks, all of these areas are exceeding our expectations that we laid out at Analyst Day. Of the metrics that we've talked about, I certainly want to focus a little bit on the revenue growth. As we've also said, it's exceeded the expectations and the range that we laid out a year ago. And keeping in mind that a year ago, we also thought that we were victorious in our voltage case with the ITC. So as we look ahead, we're not guiding to 2026 and '27. We certainly are very encouraged at the growth in our book of business. I couldn't be more positive about our backlog and awarded orders. And on our end, I think there was a bit of a glitch when I was talking about the $298 million of backlog, which is approaching records again. So I believe that the metrics that we've laid out remain very strong. Of those the metrics that we talked about in terms of the various strategic pillars, the BESS opportunity is the one that we believe has the opportunity to significantly exceed what we laid out a year ago. And so I will pause on that because Brandon will talk more about that. Brandon Moss: Yes. Julien, it's a great question. Let me maybe give a big picture view and then step through some of the growth pillars. I think holistically, revenue -- the revenue generation is exceeding plan and what we laid out in our Investor Day, effectively almost a year ahead of what we've said at Investor Day. So we are very excited about that. Our core focus here has been to protect and grow our core market, return that to growth. The utility scale solar business, as Dominic mentioned, is operating at record levels. Our backlog and awarded orders fantastic at $720 million. I'm really excited when we can have a record revenue quarter and have a book-to-bill of 1.4x. That is fantastic execution by our commercial team. So I feel really good about our core business. As it relates to our pillars of growth and our diversification strategy, I think all are performing at or above our expected ranges. Our CC&I business, if you think about that alone, we're up 36% year-over-year. So that is performing at very solid rates of growth. Our OEM business, expanding substantially. As you guys are aware, we have a core customer in that product portfolio that is also expanding, and we are partnering and growing with them, and we're excited about that. Our international business, shipping 3 projects in a quarter is great for us. That probably has not happened in the existence of Shoals. We're excited about the 2 projects in LatAm and one in Australia. Our pipeline is very strong there, and we are building a team out to really focus on that Australian market so -- and New Zealand. So great things to come there. As Dominic mentioned, couldn't be more excited about our battery energy storage program. The 2 MSAs for us in the quarter are big. As well as starting to really see some proof points in that business in those MSAs driving data center and grid scale opportunities. So we are very excited about that. Our team, commercial team with operations, driving a substantial amount of new product development this year. And quite honestly, that's what is -- what's driven some of the international growth. The 3 international projects that we've started shipping this past quarter all have new products as part of those projects, which is very exciting. And really finally, from an operations standpoint, our consolidation is underway. We are excited. We are actually sitting in our new facility today. Our SG&A team, our salaried staff, this is probably the first time in the history of the company since maybe it's beginnings that we have all been in one building. And so we're excited to build that sense of community and culture within the organization. From an operations, a true operations standpoint, just to commend the ops team. We started our planned consolidation in Q3. We actually moved out of one of our facilities. As we previously disclosed, we sold a building in Q2, I believe it would have been, and we moved out of that building. For perspective, our team moved 540 truckloads of material out of that facility and still met record production levels in Q3. So a fantastic job by them and obviously a confidence boost for us as we complete this consolidation as we can make moves in buildings and produce at record levels at the same time. So I'm excited about how the company is executing for the future. Matthew Tractenberg: Julien, did you have a follow-up? Julien Dumoulin-Smith: It's excellent to hear. Can you quantify any of these? Yes. Can you just quantify real quickly just within the backlog addition, some of these MSAs? And/or any of the BESS or data center wins with system integrators? Brandon Moss: Yes. So in our awarded orders for the quarter, we had $18 million. A vast majority of that is driven by the MSAs. I can say probably since quarter close, we have moved a significant portion of that $18 million to backlog and have signed purchase orders. I would think of it maybe in the range of 3/4 of that $18 million. So we do have now signed purchase orders, which we're excited about. And again, we'll begin production in Q2. Dominic Bardos: And perhaps I could help just on the MSAs themselves. Unlike the MSAs where we've announced specific targets for volume, these MSAs do not give a specific target for volume. It's the partnership. It has all the terms and conditions so that we can move with haste when purchase orders are ready to go. So I don't want -- there is no additional backlog and awarded orders beyond where we actually have those orders, as Brandon mentioned. So nothing else from the MSAs would impact our record BLAO. Matthew Tractenberg: Thank you, Julien. Charlie? Operator: Of course, our next question comes from Philip Shen of ROTH Capital Partners. Philip Shen: I wanted to dig into the margin topic a little bit more. Can you give us a little more color on the tariffs? Were they the Section 232 inclusion for aluminum on electric cabling that adversely impacted you? I think that came out in August. And as a result, would you expect that to be relieved? Or would you expect to be able to pass that along? Because that was a very sudden kind of inclusion, right, of electric cabling. And so do you think that tariff can be passed along in the near term to your customers? And then as a result, that 100 to 200 basis point operational improvement that, Dominic, you highlighted can then be realized perhaps partially in Q4? Or is it more in first half of next year? So I wanted to see if you could map out how that might play out. Brandon Moss: So Phil, that's a great question. Section 232 aluminum tariffs obviously have impacted us and others in the marketplace. Think about that specifically, almost in equal parts with the country-specific tariffs. We've got a pretty diverse supply chain. And the way those tariffs are calculated for wire specifically is interesting. You can sort of parse out the aluminum piece of that on 232, you can also parse out the country-specific tariffs there. So I won't get into the granular detail of that specifically on the call here today. But what I would say -- and as Dominic mentioned, we have the ability to pass on tariffs to many of our customers that requires tariff documentation, things like that. And we are doing so, and we'll continue to do so into the future. What Dominic specifically mentioned around the 100 to 200 basis points was part of our material cost-out savings initiatives that we put together in our annual operating plan. And material cost is very important to us. It drives the profitability of our company, quite frankly. And we had great cost-out savings projects identified. And as Dominic mentioned, you switch a supplier and then that supplier is potentially impacted by a tariff that eliminates any potential savings we may have baked into our business plan. So if the tariff landscape change or if these tariffs are ruled unlawful and we would potentially get reimbursed for tariffs paid, you [Audio Gap] through our income statement and impact us positively. Dominic Bardos: Yes. And the point, Phil, about are they passed along? If it's something that comes along and there was an unexpected tariff, we do work with the customers. But we typically look at our market-based pricing for the products as we're quoting going forward. And if we know that something is going to be tariff, it is going to be baked into the prices that we're quoting. So ultimately, our material costs will drive our profitability there, and that's why the material cost out savings are so important to us. It's probably 70% of our cost of goods sold. So it is a very important initiative for the team. We'll continue to focus on that. Philip Shen: Got it. So looking ahead, can we expect an improvement in the first half of next year on margins? And then can you share what the margins in your recent bookings might be as a comparison to the Q3 levels? Dominic Bardos: Yes. So Phil, if you want to come to a staff meeting here, that would be great. We'll talk about those internally. I can't obviously discuss that. We do have -- it's too early to guide for 2026. As I've said before, our margins are -- have been consistent and within the range that we've been talking about, about mid- to upper 30s. We are -- I think Christine asked the question, are we incurring new facilities expense? And yes, we did incur rent in September, the last month of the quarter for our new facility and the depreciation all starts impacting us. And we're not fully operational yet. We haven't received the cost-out savings there from a labor standpoint. So we will guide to 2026 margins if that's really where we need to focus. My preference would be to talk about the growth of our business segments, our excitement around our new growth opportunities, our strategic pillars and continuing to drive our operating cash. And that's what we're really after. But we'll guide next quarter. Matthew Tractenberg: Thank you, Phil. Charlie, next question, please. Operator: Our next question comes from Brian Lee of Goldman Sachs. Brian Lee: I guess just on the BESS opportunity again, you guys obviously are sounding more bullish, have said that of all the different growth verticals here, that's probably the one that's tracking ahead of expectation more so than others. So can you guys maybe provide a bit of an updated TAM for us in terms of the BESS opportunity with the products that you have? And then how much of that is data center tied? Are you able to kind of quantify for every 100-megawatt data center opportunity amounts to x dollars worth of revenue potential for Shoals given the product set? And then maybe any thoughts around margin implications as well? And I had a follow-up. Brandon Moss: Sure, Ron. I'll take that. I think when we when we initially launched the BESS opportunity at Investor Day last year, we had approximately $360 million as an available market to us in the solar plus storage space. We've since added data centers and grid firming as 2 market opportunities. We have internal estimates. These markets are changing rapidly, as you can imagine, particularly driven by the data center AI space. And the applications of our products within some of these system architectures is proprietary. And so a 100-megawatt data center in a specific situation may result in one use of our product, which drives significantly higher ASPs up to maybe $100,000 a unit. And in other architectures, we may use a smaller product, a 1,200 amp product that may carry a $25,000 ASP. So it's going to vary architecture to architecture. What is exciting for us is specifically our engineering team is engaged with customers to design specific products for their architecture, and we are building prototype products, shipping prototype products to be vetted by these customers. So we are excited about the potential opportunity. As everybody knows, if you watch the news or read a newspaper, the size and scale of these data centers is changing almost on a daily basis as is our total available market. So more to come in coming quarters about the actual size of the market. Brian Lee: Okay. Fair enough. We'll look forward to hearing more. Maybe just a follow-up on that. You mentioned the $18 million of BESS bookings this quarter and then starting to monetize that in Q2 of '26. It's about 3% of backlog today. Is that sort of the sales cycle and sort of the rev rec cycle we should be thinking about on these projects? And if that's the case, are we talking sort of like a mid-single-digit type of revenue mix from this opportunity next year? Because presumably, all the MSAs aren't going to ship in Q2. They just start to ship in Q2. So assuming more bookings coming in, maybe you get to like mid-single-digit percent of mix next year and then it grows beyond that? Just trying to understand where we should be budgeting expectations on this. Dominic Bardos: Well, sure. So while we haven't specifically guided to 2026, and it is early for us to try to do that, you're right in that we're ramping up. This is an emerging -- these use cases are emerging. Now keep in mind that we have had battery energy storage solutions sold all year long. It hasn't been to the magnitude of what these 2 new use cases are bringing to us. And so that's why we're excited to share with you the $18 million and the fact that those were driven by the MSAs that have been signed with the alternative use cases. So we haven't guided yet, but clearly there will be some cabinetry and recombiners sold all year long just in our traditional channels. And then we will ramp up these others as the year goes. We will try to provide more color going forward next year. We actually are in discussions about how much we can share, but our expectation is that this is an area of interest, and we want to be as transparent as we can. Brandon Moss: Brian, maybe just some color around the sales cycle. We can speak to that a bit. As Dominic mentioned, we've had -- while not significant, we have recognized some revenue on BESS all year. A C&I solar and storage job would have a pretty quick sales cycle. I mean, we may book and turn on order inside of 6 months, whereas a larger grid firming or data center project, they probably follow more of a traditional sales cycle that would look at like a utility scale solar site. So we could be engaged a year, 18 months before we're shipping unit 1 to those individuals for inspection and validation. So longer, probably obvious, smaller sites, shorter sales cycle, larger opportunities, longer sales cycle. Dominic Bardos: And once we've gotten the actual designs firmed up for certain customers, the sales cycle will shorten. We've been working on these projects for the vast majority of the year. And we're just excited now here sitting in November to share with you that we've got purchase orders and revenue will start coming next year. But once we've actually landed that, if we continue -- if they continue to win business and award more business to us, those designs have now been approved and vetted and tested out. So then the sales cycle would shorten. Matthew Tractenberg: Thank you, Brian. Charlie? Operator: Our next question comes from Jon Windham of UBS. Jonathan Windham: You made some comments earlier about LatAm and Australia. I was wondering if you could just give a little bit more color on how the international business is progressing in terms of specific products being sold, margins, long-term growth? Just any color you have on that. Appreciate your time today. Brandon Moss: Thanks, John. We're excited about the international business. We've carried roughly 13% of our backlog and awarded orders has been tied to our international business. I think we're probably 10%, 11% now of our BLA [indiscernible] is tied. So excited to be shipping these first 3 projects. I think of our international business really in 2 buckets, an organic growth bucket in our specific targeted regions, which 2 of the 3 projects are entering in LatAm and Australia. And then I think of our -- the rest of the business in an export bucket. And so the margin profiles for those 2 buckets will look slightly different. Our organically developed markets where we're playing in region, we may be building products outside of the United States, which we actually did on these 3 projects. The margin profile will be slightly lower than our norms. That being said, our export business, which constitutes the greatest portion of our backlog and awarded orders, and we expect projects to begin releasing in next year, and we've got a very strong backlog there. Those projects, for the most part, are funded by the U.S. EXIM Bank, and they need to be manufactured in the United States. And the margin profiles of those jobs will look, by and large, like a domestic utility-scale solar job, maybe minus some shipping costs here and there, but largely the same. So we are excited about the growth of the international business. As I mentioned maybe in the prepared remarks, we're focusing heavily on Australia. There's been a mandate there to add 40 gigawatts new solar in this decade, which we're very excited about. So we've hired an experienced leader, and we're building out a team in Australia to capitalize on that. Australia is also a very, very strong BESS market, arguably probably stronger than the United States at this point. And we believe there's some opportunity for us from an international perspective on our BESS product line. So they're tracking as planned and excited that some of these export projects will finally begin to materialize in 2026 and also excited about the growing pipeline there. Matthew Tractenberg: Charlie? Operator: Our next question comes from Dimple Gosai of Bank of America. Dimple Gosai: As electrical balance of system players and inverter OEMs kind of push into this BESS opportunity, can you talk a little bit more about what differentiates Shoals' architecture and go-to-market model? Like where is your moat as the market scales? And separately, who are you having conversations with mostly today? Is it more of the alternative chemistry players and so forth given the [indiscernible] overhang? Brandon Moss: Yes. Dimple, that's a great question. So I guess there are inverter companies that are highly engaged in data center architectures. I would say, in conjunction with the products that we sell, to create potentially some alternative architectures that work more efficiently for data center, specifically AI architecture to try to maybe balance and smooth power frequencies in those larger data centers. So we don't think of them -- we don't think of the inverter companies maybe as competitors. We think of them as partners in the system architecture. So I think that probably answers the first question. Dominic, can you… Dominic Bardos: Yes. I was just going to say that in some of these cases, Dimple, what we're doing is we're actually engineering the solutions in partnership with these innovations out there. So part of that is something that some of the larger electrical companies are not going to be interested in doing. So when we're working with these integrators, it's very important that our engineers can go work back and forth and come up with custom solutions. So being first in and driving that value for them is very important to us. And the chemistry, we are agnostic to the chemistry. So yes, if lithium is challenging and someone uses alternative long-form battery discharge power, that's fine because we're agnostic to that. We are still focusing on the DC coupled side of things with our solutions. Brandon Moss: Yes, that's great add on, Dominic. And to be more specific about your questions, are we talking to folks that use alternative chemistry technologies? Yes. I mean, we certainly are. So we've got a wide opportunity and quote funnel for this particular end market, and we are very excited about the growth potential. Matthew Tractenberg: Charlie, next question. Operator: Our next question comes from Praneeth Satish of Wells Fargo. Praneeth Satish: Maybe just sticking on the data center BESS opportunity, just kind of 3 quick ones here. First, maybe if you could help us understand how the sizing is trending on some of the quotes that you're looking at? Is it kind of in that 50 to 100-megawatt range? Or are you seeing potential for some larger installations? You did mention hyperscaler as well. So I assume that's kind of in the gigawatt range. And then maybe as a follow-up to that, are there meaningful differences in terms of the competitive landscape at each of those different size tiers? And is there kind of a sweet spot for you where there's less competition? And then finally, the third one here is in addition to kind of the TAM for data center, new data centers, is there an opportunity maybe to displace some of the diesel generators and drive kind of an expanded TAM from that perspective as well? Brandon Moss: Absolutely, and a great line of questions. I think the simple answer to probably those 3 questions are yes, yes and yes. So there is a difference. I think you're talking about float size, what are we seeing? Do we see 50, 100-megawatt scale opportunities? We do. Do we see significantly larger opportunities in that? We do. So we've got a product set, one that is standard and configurable that lends well to maybe the smaller data center opportunities that, as I mentioned, I think it was Brian's question, you think of that as more quick turn C&I business. And then the larger opportunities where we're partnering and designing a specific product for their proprietary architecture is also an opportunity for us. So the competitive landscape varies. As Dominic mentioned, we've got experience here with DC power. I think that plays well. We've got experience in really building engineered-to-order highly configurable solutions at scale. That is probably our core competency if you really boil down what Shoals does well, we are able to build engineered-to-order products at scale. That's what we do every single day in the solar market, and that lends well into this BESS data center opportunity. So we can provide both product sets. As it relates to can these architectures potentially at some point eliminate or reduce diesel backup, yes, potentially. I think there's probably a lot of information out there, white papers, for instance, that talk about different data center architectures, and that's certainly something we've got our eye on. Matthew Tractenberg: So Charlie, I believe that's the last question that we have time for today. But Brandon, you had some final comments before we close out, and I'll finish this off. Brandon Moss: Yes, absolutely, Matt. I think, look, at the end of the year and even the end of the quarter, it's always important to reflect a bit, and I'm very proud of what this company has delivered and the transformation it is making over the past couple of years. Big picture, we have navigated a complex warranty issue. And during that warranty issue, we've maintained customer relationships along the way, potentially strengthen customer relationships throughout that. During that period, we have self-funded that $70 million remediation project, self-funded that project and the legal costs associated with the ongoing Prysmian litigation. And while that's a great accomplishment on its own, we've also invested heavily in our business during that time. If you think about this year alone, we'll invest probably 3x on a normal CapEx rate. And while, hey, it's great to spend that money, we also have to implement that CapEx. And so we are creating a sustainable operations platform for the future, and I'm very, very proud of what we're building. Additionally, during the period, a $25 million share repurchase, and we've paid down $50 million of our debt. So I believe this company is very well positioned for the future. We've got a leading market position with a blue-chip customer base. We've got a very strong balance sheet and the ability to generate strong free cash flow. Our diversification strategy, as we mentioned on this call, is meeting or exceeding plans, and we're excited about the new end markets we're entering. We've built a fantastic, fantastic management team here that's going to guide this company into the future. And very exciting for both our salaried and hourly staff. We've got one heck of a nice new facility to support our growth for the future. So it's a fantastic time to be with this organization. I'm excited about the market backdrop we have. We look forward to fantastic results in the future. So I want to thank everybody that has joined our call today and supports this company. Thank you. Matthew Tractenberg: And I just want to remind our audience that before we let them go, that we have a very active IR calendar throughout the end of the year. We announced those events a few weeks back via press release. They're listed on the Investors section of our website. So if you're attending any conferences through November and December and you'd like to meet with us, please let us know. We'd love to speak with you. If we can help you further, please reach out to investors@shoals.com with any questions. Have a good day, everyone. Brandon Moss: Thanks all. Dominic Bardos: Thank you. Operator: Thank you all for joining today's call. You may now disconnect your lines.
Operator: Good day, and thank you for standing by. Welcome to the Q3 2025 Great Lakes Dredge & Dock Corp Earnings Conference Call. [Operator Instructions] I would now like to hand the conference over to your first speaker today, Eric Birge, Vice President of Investor Relations. Please go ahead. Eric Birge: Thank you, Arie. Good day, and thank you, everyone, for joining us. Welcome to Great Lakes Dredge & Dock's third quarter 2025 financial results conference call. Before we begin, please note that certain statements made during this call are forward-looking in nature and are subject to various risks, uncertainties and assumptions. These factors may cause actual results to differ materially from those anticipated. For a detailed discussion of these risks, please refer to our filings with the Securities and Exchange Commission. We will also be discussing certain non-GAAP financial measures, including adjusted EBITDA. Reconciliations of these measures to the most direct comparable GAAP measure can be found on our earnings release or on our Investor Relations section of our website at investors.gldd.com. Along with other supplemental operating information. Joining me on today's call are Lasse Petterson, our President and Chief Executive Officer; and Scott Kornblau, our Senior Vice President and Chief Financial Officer. Lasse will begin with a review of our quarterly key developments, followed by Scott, who will provide a detailed overview of our financial performance. Lasse will then conclude with commentary on the business outlook and market trends. With that, I will now turn the call over to Lasse. Lasse Petterson: Thanks, Eric. Following strong financial results in the first half of the year, the momentum continued into third quarter with high utilization and strong project performance through the execution of complex port deepening and coastal restoration projects, leveraging the capabilities of our team and our fleet. We ended the quarter with revenues of $195.2 million and adjusted EBITDA of $39.3 million. Our dredging backlog remains strong at $935 million, with 84% in capital and coastal protection projects, plus an additional $194 million in awards and options pending. During the third quarter, we were awarded new projects totaling $136 million. Our successful bid strategy from last year resulted in a large number of projects wins, which resulted in a high-quality backlog, which will support full utilization and revenues for the remainder of 2025, as well as providing a good base and revenue visibility for 2026. Our current backlog includes 3 major port deepening LNG projects, the Port Arthur LNG Phase 1 project, the Brownsville Ship Channel project, part of next decade Corporation Rio Grande LNG initiative; and Woodside Louisiana LNG, which is expected to commence dredging early 2026. We have seen no interruption to our business during the current government shutdown. Our operations remain unaffected, and we continue to conduct the business as usual, maintaining full schedules, both in bidding, awards and we received payments on time. Our support to the core would proceed without disruption, and our backlog of projects are fully funded. During the third quarter, our offshore energy team commenced rock placement operations on Equinor's South Brooklyn Marine Terminal. And during the fourth quarter, installation of armor rock commenced on Empire Wind 1, utilizing a chartered vessel until delivery of the Acadia in Q1 of next year. At the end of October, we completed the refinancing and upsizing of our revolver credit facility, increasing capacity to $430 million and extending the maturity to 2030. With the increased capacity, we elected to repay our $100 million second-lien term loan. Scott will provide more details later on. Moving on to our new build program in the third quarter with the delivery of our sixth hopper dredge, the Amelia Island, marking a significant milestone in our dredging new build program, which is now complete. Leaving us with the largest and most advanced hopper dredge fleets in the United States. Upon delivery of the shipyard, the Amelia Island was straight to work and is performing extremely well. The Amelia Island and a sister-ship to Galveston Island have been specially designed for shallow and narrow waters in the United States Coast lines and our effective tools for us to work on coastal protection projects such as beach restoration, wetlands improvements and Barrier Island construction. The final vessels in our newbuild program, the Acadia, the first U.S. Flagged Jones Act compliant subsea rock installation vessel is also currently under construction and hit a key milestone with a launch from the dry dock in July. Delivery is expected in the first quarter of 2026, at which time she will go straight to work on Empire Wind 1. The target markets for the Acadia include domestic and international offshore work protecting critical subsea infrastructure such as oil and gas pipelines, power and telecommunication cables and offshore wind installations. I'll now turn the call over to Scott to further discuss the results of the quarter, and then I'll provide some commentary around the market and our business. Scott Kornblau: Thank you, Lasse, and good morning, everyone. I'll start by walking through the third quarter, which resulted in revenues of $195.2 million, net income of $17.7 million and adjusted EBITDA and adjusted EBITDA margin of $39.3 million and 20.1%, respectively. Despite having 3 dredges at the dock at various times during the quarter, undergoing regulatory dry docking and repairs revenues of $195.2 million increased $4 million from the prior year's third quarter as every active dredge was working for the majority of the quarter in addition to the newly delivered Amelia Island, which commenced work in August. Current quarter gross profit and gross profit margin increased to $43.8 million and 22.4%, respectively, compared to $36.2 million and 19%, respectively, in the third quarter of 2024. The increase in gross margin is primarily due to improved utilization and project performance and a large number of capital and coastal protection projects, which typically yield higher margins. These projects accounted for over 85% of our third quarter revenue. Current quarter's operating income of $28.1 million increased $11.4 million compared to the prior year's quarter's operating income of $16.7 million. The year-over-year increase is driven by higher gross profit and lower general and administrative expenses. Net interest expense of $4.6 million for the third quarter 2025 was down slightly compared to $4.9 million in the third quarter of 2024, and net income tax expense of $6.1 million increased from $3.2 million in the same quarter of 2024 due to the stronger results. Rounding out the P&L, net income for the third quarter of 2025 was $17.7 million, up from $8.9 million in the prior-year quarter. Total capital expenditures, including capitalized interest for the third quarter were $32.8 million made up of $8.3 million for the completion of the Amelia Island, $18.6 million for the construction of the Acadia with the remaining $5.9 million for maintenance and growth CapEx. Full year CapEx guidance of between $140 million and $150 million, including capitalized interest remains relatively unchanged from the prior quarter. Turning to our balance sheet. We ended the quarter with $12.7 million in cash and nothing drawn on our revolver. And as Lasse mentioned earlier, on October 24, we upsized our revolving credit facility to $430 million and extended the maturity out to October 2030 at lower borrowing rates than the previous facility. With the increased capacity, we elected to immediately repay our $100 million second-lien notes in full reducing interest expense by almost $6 million per year. Our balance sheet is in great shape with a trailing 12-month net leverage ratio of 2.5x liquidity of nearly $300 million, no debt maturities until 2029 and a weighted average interest rate on our total debt now under 6%. For the first 9 months of this year, we've had positive free cash flow of $52 million despite the new build payments. And as our new build program will be substantially complete at the end of this year, we expect to be significantly free cash flow positive starting in 2026. Looking forward to the fourth quarter, we expect to end the year on a high note, even with 2 hopper dredges in the shipyard undergoing the regulatory dry dockings as every other active dredge will be working the majority of the quarter, including a full quarter of utilization for the Amelia Island. With the strong fourth quarter, we're on pace to achieve, our expectation is that 2025 will be the highest EBITDA year in company history by a large margin. With that, I will turn the call back over to Lasse for his remarks on the outlook moving forward. Lasse Petterson: Thank you, Scott. Our business operations continue without disruption during the current government shutdown. We remain fully operational, maintaining regular project schedules. We're responding to ongoing bid activities, receiving the contract awards, and we receive timely payments. All current and upcoming projects in our backlog are fully funded. Our $935 million backlog includes a robust mix of large and complex projects in the beach restorations and port deepening markets, enabling us to continue operations on a very busy 2025 and provides clear revenue visibility extending well into 2026. As we predicted at the beginning of the year, the 2025 dredging bid market has been normalized after coming off a very strong port-deepening bid market in 2023 and 2024. We expect the 2025 bid market to come in about $1.8 billion more focused on coastal protection projects, which are funded by the 2023 Disaster Relief Supplemental Appropriations Act and dredging maintenance projects funded by the U.S. Army Corps of engineers. As we look ahead, we're beginning to see meaningful progress on the next phase of port deepening projects, including New York, New Jersey, Tampa and New Haven and Baltimore, amongst others, with work most likely to commence in 2027. Turning to the U.S. offshore wind markets. In May, we saw the reversal of the temporary pause from the Bureau of Ocean Management and Empire Wind or Equinor's Empire Wind project has resumed in accordance with its original schedule, which is part of our offshore energy backlog. Between Empire Wind 1, Ørsted's Sunrise Wind and the additional scope for Sunrise Wind we were awarded last week. We have secured full utilization for the Acadia in 2026. In response to early signs of potential delays in the U.S. offshore wind market, we proactively adjusted our strategic outlook for the Acadia. Over the past couple of years, we have looked at and include for the safeguarding of critical subsea assets, including oil and gas pipelines, power transmission lines, telecommunication cables, and international offshore wind farms, increasing our opportunity into a broader range of services that we now refer to as offshore energy. The Acadia is engineered to precisely deposit rock for the protection of subsea infrastructure against environmental forces, such as weather and potential acts of sabotage or hostile entities. We are actively pursuing engagement across these sectors and are making good progress in securing full utilization of the Acadia in 2027. In conclusion, building on strong performance in the first 9 months of 2025, the company continues with great momentum and expects to achieve outstanding results for the remainder of 2025 and continuing into 2026. This success is a result of excellent project execution, the strength of our modernized fleet and our competent and excellent teams. And with that, I turn the call over for questions. Operator: [Operator Instructions] Our first question comes from the line of Julio Romero of Sidoti & Company. Julio Romero: I wanted to start on just thinking about bidding trends and the trajectory of orders for dredging expected for the remainder of '25 and '26. And kind of given the end of that capital project cycle, just talk about your expectations about bidding and winning coastal protection orders through '26 to help you kind of bridge you to the next East Coast deepening cycle expected in '27? Lasse Petterson: Yes. As I said, we are under a CR that is now extended to November 21 to see what happens when Congress get together. Probably we get an extension of the CR to the end of the year and into -- maybe into 2026. And under the CR, the core can bid out the same amount as they had for the previous years. The only change is that new stock projects cannot start up, and there hasn't been that many new start projects. So we expect bidding to continue as normal for maintenance dredging projects and for coastal protection and restoration projects. As I said, the bid market for 2025 is a reduction from '23 and '24. That was very active with port deepening projects, but it's getting back to more normal mid-market size. Julio Romero: Understood. And congratulations on upsizing and expanding your revolver a few weeks ago. Going forward, does cash interest expense and GAAP interest expense converge? And if so, what's your estimation of kind of a good quarterly run rate to use going forward? Scott Kornblau: Yes. So as I mentioned, just taking the 2L out, putting on the revolver, that by itself, say $6 million of cash interest a year. as you know, Julio, and I'll kind of walk through the next few quarters, we're still capitalizing interest, while the Acadia is being finished up. So when I look forward to fourth quarter, we will have a onetime noncash expense to interest, and that's for the extinguishment of the financing costs on the 2L. We ended up paying it off 3.5 years early. So you see about a $7.5 million charge. Again, I reiterate noncash -- in addition to that, we will start seeing interest coming down. We'll probably have, in addition to that $3.5 million of interest expense down from about $4.5 million as we'll still be able to capitalize, but we have the reduced rate. So looking at probably about $11 million of interest expense in Q4 at about $3 million to $3.5 million being the noncash, excluding the noncash charge. Looking forward to Q1, we're probably in about the $3 million interest expense then the Acadia gets delivered. So going forward, that is when cash interest and interest expense will be the same. But as we've talked about on prior calls, our priority next year is to start paying down the revolver. So the $6 million savings that we're seeing, I expect to increase quarter-over-quarter as we pay down and eventually pay off that revolver balance. Operator: Our next question from the line of Joe Gomes of Noble Capital. Joseph Gomes: Congrats on the quarter. Maybe you can just walk me through this just because it's different from a number of other companies that I cover that are in the government space, understand the whole continuing resolution stuff. But with the shutdown, many the other government services companies are saying they aren't getting paid that because so many of those people in those offices have been laid off or not coming to work. So maybe just clarify how you guys are getting paid? Lasse Petterson: Yes. You have to realize that the Corps of Engineers has about more than 30,000 employees and only 1,000 of those are furloughed. And that is a consequence of that only 3% of the U.S. Army Corp of Engineer workforce is funded through annual appropriations. Most of the Corp staff is funded through project-based accounts. And you can see that the -- this works out. We have not had any issues. We're getting paid. We -- ongoing projects are being executed as normal. And we also see the bidding going on at a reduced rate because of the reduction in the overall bid market. But yes, we have not been affected by the shutdown, and we don't expect to be up either going forward. Joseph Gomes: Great. And much appreciated. Lasse, what -- kind of early days, but what are you seeing as the '26 bid market. I know you said 25% is coming back to a more normalized rate, but what do you think your '26 outlook is looking for? Lasse Petterson: That's a good question, and it depends on a lot of things. We have a CR that is ongoing. Congress is discussing whether to extend that to the end of the year, some wants to extended into 2026, some are predicting extensions all through 2026. Anyway, under a CR, the budgets are remaining the same as it was in 2024, which was at a high level. So the core is funded and can bid out work. There is more maintenance related. But the only thing we don't -- we cannot see is new starts going forward. So what I expect to happen is that we continue the CR into 2026. And then towards the end of 2026, these new port deepening projects that have been in -- in study phase up to now, will probably be bid out and then with operations starting in 2027. We will see a lot of coastal protection projects being bid out that is not affected by the CR as along with more maintenance strategy. Joseph Gomes: Okay. And then 1 more. We've talked about this in the past certainly Acadia got '26 fully booked, '27, we're working on with some of the other markets that you talked about the new cables for power of transmission, telecom, oil and gas. Have you had success, I mean, contracts signed with those other non-wind oriented customers for the Acadia or is this still more of a work in progress? Lasse Petterson: It's still work in progress, but we have, as I said, for the last 2 years, been very active in Europe because we saw a reduction in activity in the United States. And there is a market for cable protection in Europe, which is expanding as a consequence of the kind of the political uncertainties surrounding us. And then the offshore wind market is continuing in Europe. We have bid several projects for execution in '27 and '28 and onwards. But in Europe, this market is a more mature market. So contrary to what we saw here in the United States, where the developers wanted to secure capacity very early on and so, our contracts on Empire and on Sunrise. In Europe, it's a more mature market. So the time between contract award and execution is shorter more like 6 to 9 to 8 months to a year. So we have not -- we have did a lot of work, and we are waiting for the outcome of those bids, but none awards as to now. Operator: Our next question comes from the line of Adam Thalhimer of Thompson Davis. Adam Thalhimer: Congrats on a great quarter. Scott, I can't help myself. You sounded so good on Q4. I'm just curious, maybe you can compare your expectations for Q4 to the high watermark for the year of Q1? Scott Kornblau: Yes. I knew, if somebody tried that, it would be you, Adam. Adam Thalhimer: I'm glad I didn't disappoint. Scott Kornblau: You didn't. I mean, again, as you know, I mean the Q1 we had was one of the best, if not the best in company history. Q4 is going to be extremely strong. Now again, I did say we do have 2 hopper dredges in dry dock during the quarter. And you know the impact of that, the additional cost and of course, the 0 in the revenue line. We did not have the same cadence of dry dockings in the first quarter on those type of vessels. That being said, just as we typically do the book in quarters are really, really strong Q1 and Q4, and we're going to see that again in the fourth quarter. Adam Thalhimer: I'll take that. And then the next one, I'm a little -- so you started booking offshore energy revenue in Q3. And your backlog has grown -- grew in Q2, grew again in Q3. for the offshore. It seems like that work is starting earlier. You talked about leasing a vessel to get to work. Is it starting early or maybe you can just level set what's going on there? Lasse Petterson: Well, what -- it's going on as scheduled. We were planning to use the Acadia for executing the work this year, but the delay at the shipyard resulting in -- to perform the scopes that is our scope on Empire Wind 1. We have chartered in a vessel, and that work is ongoing right now. Scott... Scott Kornblau: Yes. And in addition to the work that's ongoing on Empire 1, the third and the fourth quarter, we did right at the beginning of the third quarter when an additional scope of work for Equinor and it's on the South Brooklyn Marine terminal. So that we began executing again with a chartered vessel. That was never contemplated to be the Acadia, but it is to support the Empire Wind project. So that's the revenue that you're seeing in the third quarter, that project will continue into the fourth quarter, along with the commencement of the armor layer of work on Empire 1. So you will see Q4 revenue on offshore energy increase from the third quarter. So the increase that you saw in backlog is related to that South Brooklyn Marine terminal, which was not in Q2 backlog. Adam Thalhimer: Okay. And does it -- so next year, does it stay at that Q4 rate, Scott? Or is there a further step up? Scott Kornblau: Well, no, next year -- you say on a quarterly basis, yes, I mean it runs around that because we will then take delivery of the vessel. We will go straight on to Empire, do some work there. Then we'll go straight on to Sunrise. And then you may have heard Lasse mention post quarter end, so it's not in the backlog. We did win a little additional scope on Sunrise. So that is what fills out 2026. Adam Thalhimer: Okay. Last 1 for me, just high level. What are you seeing in the coastal protection market and potentially upcoming bidding opportunities? Lasse Petterson: Yes. We see a number of beach restoration and coastal protection projects coming out to bid as we go into Q4 and into Q1 next year. It's different funding streams, as I mentioned in my brief remarks. So it's a funding stream that is different from the normal appropriations to the Army Corps of Engineers and that's why it continues during the CR. As you know, we like to do these complex and difficult projects because we perform well under those circumstances. And then we see the maintenance dredging being bid up from the U.S. Army Corps of Engineers. I just want to say that also part of what we've been able to do is to diversify our client portfolio. So we are now 50% private and 50% federal government funded the work we do, and that gives us a good balance in our backlog. Operator: Our next question comes from the line of Alex Rigel of Texas Capital Securities. Alex Rigel: Yes. Sorry about that. Very nice quarter. Can you talk a bit about your very strong cash flow as we look into 2026 and beyond? And maybe what some of the uses of the cash flow is going to be? Scott Kornblau: Yes. I mean, so as I mentioned, even this year despite writing some really big checks to finish the new build program, we are cash flow positive and that will grow even more so next year as the new build program is over. Priority 1 right now look at it, is to delever that we just did one of the maneuvers, which was to take out the second-lien and greatly reduced interest expense by putting it on the revolver, we have the flexibility to pay that off when we want as cash flow from operations come in. So priority next year, finish the Acadia, used the excess cash to start paying that down and then would just be left with the $325 million notes. Those will mature until '29 and they've got a fixed interest rate at $5.25. Operator: Our next question comes from the line of Jon Tanwanteng of CJS. Jonathan Tanwanteng: I was wondering, if you could talk a little bit more about Q4. I think you guys mentioned ending the year on a high note. Maybe give us a little bit more color on what is currently scheduled to revenue from a backlog perspective and then given the dry docking schedule and how margins are likely to compare to Q3? Scott Kornblau: Yes. Again, I'm not going to give specific guidance, but I'll reiterate every vessel is working majority of the quarter with the exception of the 2 hopper dredges that we'll spend part of the quarter within dry dock, but they work up until the dry dock and then when they come out, typically, and I don't see the fourth quarter being really any different. We are starting to work on some environmental window work, and those usually do come with higher margins. So revenue will be extremely strong despite having the 2 vessels in dry dock and margins will be extremely strong based on the work that we plan to be executing during the quarter. Jonathan Tanwanteng: Okay. Great. That was helpful. And then just in Q3, can you help break out the offshore margin contribution so that maybe we can back into the dredging margins? Scott Kornblau: Yes. And again, we're not going to give or ever give project by project, and there was only 1 project being executed, $6 million of revenue. Again, we just commenced the project. And I'll just tell you, it's the expectations we had going into this market, which were really healthy margins that this project did not disappoint. Jonathan Tanwanteng: Got it. So we shouldn't expect a change in the margin profile as you bring the Acadia online, if that's the case, is that fair to say? Scott Kornblau: That's correct. Jonathan Tanwanteng: Okay. Great. And then last 1 for me, just given the outperformance this year at an EBITDA level and maybe the changes in mix as you head into next year, is it possible to meet or beat the EBITDA that you're generating this year in '27 with 2 new ships coming online? Or is that going to be hard to do with the mix coming off and the hard comp from Q1? Scott Kornblau: Yes. I mean -- so yes, we're -- we definitely have entered this year with well over $1 billion of backlog. We're still going to enter next year with healthy backlog. And the mix of projects are still going to be strong. What we have in backlog now, the $934 million post quarter end, we've had some additional awards. There's also about $190 million in low bids and options pending. One of those options -- 2 of the options are on the LNG projects, which have very high margin. Our expectations are those do get exercised, sometimes next year, and we'll execute those. So I do think when we look at 2026, we will have a similar mix of revenue like we saw this year. So again, I'm not going to give you guidance as to how next year compared to this year, but we see no reason why next year won't be an extremely strong year as well. Operator: I'm showing no further questions at this time. I would now like to turn it back to Eric Birge for closing remarks. Eric Birge: We appreciate the support of all our shareholders, employees and business partners. I want to thank everybody for joining the discussion today about the developments and initiatives of our business. We look forward to speaking to everybody next quarter. Thank you. Operator: Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.
Operator: Ladies and gentlemen, thank you for standing by. Welcome to CPI Card Group's Third Quarter 2025 Earnings Call. My name is Janine, and I will be your operator for today. [Operator Instructions] And now I would like to turn the call over to Michael Salop, CPI's Head of Investor Relations. Sir, please go ahead. Michael Salop: Thanks, operator, and welcome to the CPI Card Group Third Quarter 2025 Earnings Webcast and Conference Call. Today's date is November 4, 2025. And on the call today from CPI Card Group are John Lowe, President and Chief Executive Officer; and Jeff Hochstadt, Chief Financial Officer. Before we begin, I'd like to remind everyone that this call may contain forward-looking statements as they are defined under the Private Securities Litigation Reform Act of 1995. These statements are subject to certain risks and uncertainties that could cause actual results to differ materially from those expressed in the forward-looking statements. For a discussion of such risks and uncertainties, please see CPI Card Group's most recent filings with the SEC. All forward-looking statements made today reflect our current expectations only, and we undertake no obligation to update any statement to reflect the events that occur after this call. Also, during the course of today's call, the company will be discussing one or more non-GAAP financial measures, including, but not limited to, EBITDA, adjusted EBITDA, adjusted EBITDA margin, net leverage ratio, free cash flow and net sales growth, excluding the impact of the accounting change implemented in the second quarter. Reconciliations of these non-GAAP measures to the most directly comparable GAAP measures are included in the press release and slide presentation we issued this morning. Copies of today's press release as well as the presentation that accompanies this conference call are accessible on CPI's Investor Relations website, investor.cpicardgroup.com. In addition, CPI's Form 10-Q for the third quarter will be available on CPI's Investor Relations website. For today's call, all growth rates refer to comparisons with the prior year period unless otherwise noted. The agenda for today's call can be found on Slide 3. After our remarks, we will open the call for questions. We can start on Slide 4, and I'll turn the call over to John. John Lowe: Thanks, Mike, and good morning, everyone. As we come closer to wrapping up the year, I'm going to spend some time updating you on our strategic initiatives, where we are making great progress growing our core businesses and diversified, including in our digital solutions. But first, let me touch on the highlights of our third quarter performance. Overall, the third quarter results were largely in line with our expectations. Our Software-as-a-Service instant issuance business once again delivered strong growth and Arroweye continued to perform well. In our Debit and Credit segment, we believe we gained market share as contactless card volumes increased nicely. Card revenue, though, was impacted by a mix shift to higher volume orders and lower average selling prices. This mix, combined with tariff impacts and other in-year investments has continued to impact margins. Overall, sales increased 11% for the quarter due to the addition of Arroweye compared to a very strong level in the prior year, which benefited from strong growth across our portfolio. Adjusted EBITDA decreased 7% in the quarter, primarily due to the unfavorable sales mix and tariff expenses. We continue to work on various initiatives to counter these margin pressures in 2026 and beyond, including key supplier negotiations, driving automation and operational efficiencies in production, achieving Arroweye synergies and general overhead cost management. We have already obtained future savings on key components in our supply chain and our new Indiana facility is now fully operational with all work moved over from the previous facility, which should aid efficiencies in 2026. For 2025, we have updated our full year outlook to low double-digit to low teens net sales growth and flat to low single-digit adjusted EBITDA growth as we expect margin impacts in debit and credit to continue in the fourth quarter, and we anticipate certain prepaid orders may move into 2026. Our prepaid business remains a clear market leader. And as the pace of package innovation rises to combat fraud, order timing has been a bit uneven. That said, more prepaid complexity, including the potential for the use of chip technology is a positive over the long term as this increases values and demand for our solutions. We still expect strong year-on-year growth in the fourth quarter for both net sales and adjusted EBITDA with levels significantly higher than the third quarter. Jeff will give you more details on the quarter and our outlook in a few minutes. But first, I want to update you on our strategy execution. Our vision and strategy can be seen on Slide 5. With everything we do, our organization is focused on the customer, quality and efficiency, innovation and diversification and our people and culture as we strive to be the most trusted partner for innovative payment technology solutions. We have made great progress on multiple strategy initiatives in 2025, including our efforts to expand our addressable markets to enhance growth for the future, and I'll highlight some of the most recent developments on Slide 6. We are starting to provide tours to customers in our new Indiana production facility, and we believe we should be able to leverage our innovation and automation investments across our debit and credit portfolio to drive share gains and do so even more efficiently. We are continuing to expand and cross-sell our Arroweye solutions and are very excited about the initial progress and interest from new and existing customers. We believe our Software-as-a-Service instant issuance business is headed to a record year with growth in new verticals and from additional financial institution penetration. The value proposition of our integrations into the U.S. payments ecosystem continues to drive our share growth and is starting to show realization in our other digital solutions, too. Although revenue in our other digital solutions is small today and will still take time to build, we continue to sign more issuers and build out even more integrations to broaden our addressable market. When we provide our full year 2025 results, we look forward to sharing more on our higher-margin digital solutions performance. Health care payment card expansion is also progressing with share gains of additional programs with existing customers and advances into new areas. Our value-based metal card offerings are also generating good interest with incremental sales again in the third quarter. In closed-loop prepaid, we are now in production and expect shipments in the fourth quarter. We've also invested in go-to-market for the space to expand beyond existing program managers we work with for open loop and are in discussions with several potential new customers. As I mentioned before, complexity continues to rise for open loop packages, which not only further solidifies our position as a market leader, but also benefits our go-to-market plans for closed loop. And our most recent expansion initiative builds on this growth in prepaid complexity as we have entered into a strategic relationship with Karta, an Australia-based prepaid program manager and digital technology provider. We will be Karta's exclusive U.S. supplier of its digital card validation solution, producing contactless prepaid cards with chip technology embedding Karta's SafeToBuy [ applet ]. Karta's solution eliminates the need for data to be printed on cards, significantly reducing the risk of prepaid fraud. As a reminder, prevention of prepaid gift card fraud can be accomplished through more complexity in packaging or through the adoption of chip technology and prepaid gift cards. CPI is uniquely positioned in our markets with deep expertise in both areas, we believe this can be a great complement to our secure prepaid solutions and will provide more choice for prepaid customers in the market. We are already piloting the solution with a large national retailer in the U.S. and look forward to further developing our relationship with Karta. Many of these growth initiatives are starting to yield tangible results, and we look forward to continuing to update you on the progress as we move forward. I will now turn the call over to Jeff to cover the third quarter results and 2025 outlook in more detail. Jeff? Jeffrey Hochstadt: Thanks, John, and good morning, everyone. Let's start on Slide 8 with the third quarter results. Third quarter net sales increased 11%, which was primarily driven by the addition of Arroweye and growth in our instant issuance business, partially offset by a decline in prepaid sales. Debit and Credit segment sales increased 16% as Arroweye contributed $15 million of sales and our Card@Once instant issuance business delivered strong growth, led by solution sales. Contactless card sales were flat in the quarter compared to a very strong prior year sales level, which includes some large eco-focused card orders. Contactless volumes increased, but average selling prices were down due to sales mix. Personalization services were also flat in the quarter, an improvement from the first half trend. Prepaid sales declined 7%, largely due to timing and comparisons to large sales in the prior year period. Similar to the second quarter, gross profit margin in the third quarter decreased from 35.8% in the prior year to 29.7%, driven by unfavorable sales mix resulting in lower average selling prices and increased production costs. Production costs in the quarter included $1.6 million of tariff expenses and $1.7 million of increased depreciation, which was primarily related to the Arroweye acquisition as well as the new Indiana production facility. SG&A expenses in the third quarter, including depreciation and amortization, increased approximately $1 million from the prior year, primarily due to acquisition and integration costs of $1.8 million and the inclusion of Arroweye operating expenses, partially offset by reduced employee performance-based incentive compensation and lower severance costs. Our tax rate for the quarter was 38%, which brought our year-to-date rate to 34%, higher than anticipated coming into the year due primarily to nondeductible expenses related to the Arroweye acquisition. For the full year, we expect an effective rate between 30% and 35%. Net income increased 78% in the quarter as the prior year quarter included debt retirement costs related to the full redemption of our previous senior notes and replacement of our previous ABL revolving credit facility. Third quarter adjusted EBITDA decreased 7% to $23.4 million and margins declined from 20.1% to 17.0% as the impact of higher sales was offset by unfavorable sales mix and tariffs. Year-to-date results and variance explanations can be found on Slide 9. Year-to-date variances generally reflect the same factors that impacted the third quarter with year-to-date reported sales also negatively impacted by the revenue recognition change implemented in the second quarter, which primarily affected the prepaid segment. Prepaid sales decreased 5% through the first 9 months on a reported basis, but increased 8%, excluding the accounting change. A reconciliation of the accounting change impact on sales can be found in the exhibits of our earnings press release. Turning to segment results on Slide 10. Income from operations for the Debit and Credit segment decreased for the quarter and year-to-date as sales growth, including the addition of Arroweye, was offset by lower gross margins and increased SG&A expenses, including the impact of additional headcount from the Arroweye acquisition. Debit and credit gross margins were impacted by sales mix and higher production costs, including tariffs, which primarily impact the debit and credit segment and increased depreciation related to Arroweye, the new Indiana production facility and other capital equipment purchases. Prepaid debit segment income from operations decreased in the quarter and year-to-date due to decreased net sales. On a year-to-date basis, the decline was a direct result of the revenue recognition accounting change. Turning to the balance sheet, liquidity and cash flow on Slide 11. Our cash flow generated from operating activities for the first 9 months increased from $16.7 million last year to $19.9 million in the current year, driven by lower working capital usage. As we have discussed previously, 2025 has been a major investment year, including spending for our new Indiana production facility and other advanced machinery to support operating efficiency, capacity expansion and new capabilities such as closed-loop prepaid. Year-to-date, our capital spending has increased almost $10 million compared to prior year, resulting in free cash flow of $6.1 million in the first 9 months of this year, down from $12.5 million in the prior year. Following the third quarter, as John mentioned, we finalized a strategic relationship with the Australian prepaid technology firm, Karta. This relationship also included an equity investment of $10 million to acquire 20% of the company, which is also backed by the Commonwealth Bank of Australia. For the investment, we paid $2.5 million in upfront cash with the remaining $7.5 million expected to be settled through performance of commercial arrangements as we work together to bring new digital technology to prepaid cards in the U.S. market. Turning to the balance sheet. At quarter end, we had $16 million of cash, $47 million of borrowings on our ABL revolver and $265 million of senior notes outstanding. As we mentioned last quarter, in July, we exercised an optional redemption feature on our 10% coupon senior notes and retired $20 million of notes at a redemption price of 103% of par value. We have utilized our $100 million ABL facility to help fund the Arroweye acquisition and the senior notes redemption and plan to pay down borrowings over time as we generate cash flow. Our net leverage ratio at quarter end was 3.6x, which we also plan to work down as cash flow is generated. Before we move on to our 2025 outlook, we have provided the latest U.S. cards and circulation trends from Visa and Mastercard on Slide 12. For the 3 years ended June 30, cards in circulation in the U.S. increased at a 7% CAGR. Large issuers have continued to report card and account growth in their latest earnings reports, which indicate card issuance remains healthy. I will now turn to our 2025 outlook on Slide 13. We have updated our 2025 outlook to reflect sales mix in our debit and credit segment and timing of orders in our prepaid segment. Our net sales outlook is now low double-digit to low teens growth, which compares to low double-digit to mid-teens growth in our prior outlook. Adjusted EBITDA outlook is now flat to low single-digit growth, down from our previous range of mid- to high single digits due to the margin impact of sales mix trends. Our current outlook reflects existing tariff rates and does not reflect potential impacts from the proposed semiconductor chip tariffs, which have not been enacted and details on implementation timing and exemption criteria remain unclear. I'll now turn the call back to John for some closing remarks. John Lowe: Thanks, Jeff. Turning to Slide 14 to summarize before we open the call for Q&A. The third quarter was largely what we expected with good sales contribution from Arroweye and good demand from our core solutions, while we still face margin pressures, which we are working to counter. We have updated our outlook, and we expect strong sales and adjusted EBITDA growth in the fourth quarter. We continue to execute our strategy and are pleased to have transitioned our new Indiana production facility and advanced multiple long-term growth initiatives, including entry into closed-loop prepaid and our agreement to bring new prepaid chip-enabled technology solutions to the U.S. prepaid market with Karta. We have faced many challenges this year, but we are confident in our core business growth moving forward and are excited to see many of our growth initiatives begin to yield results. Operator, we will now open the call up for any questions. Operator: [Operator Instructions] Our question comes from the line of Andrew Scutt from ROTH Capital Partners. Andrew Scutt: First one for me is just if you could provide some more details around the impact of tariffs. I know this is kind of tough for you guys to parse out. But following your previous call, you guys said you expected around $5 million in charges on the year. I believe it was a $1 million headwind to EBITDA in the second quarter. So any further details around that in the third quarter would be great. John Lowe: Andrew, I'll let Jeff cover that. Jeffrey Hochstadt: Andrew, yes, we said $1 million, you're right in Q2 -- in Q3, we mentioned about $1.6 million of tariffs. So -- and we did think in Q2, it's going to be closer to $5 million. China -- we did get a reduction in the China rate to 45% recently. And just -- we're still trying to push back every single day on our suppliers to some of that tariff impact. So we're actually thinking more in the range of $4 million to $5 million now. We're hoping it's closer to $4 million. But every day, we're trying to push back on our suppliers to try to reduce the impact to us. And then I would just say that started in April. I'm not -- we're not giving color for next year, but obviously, that would probably grow a little bit into 2026 just because you got a full year impact next year. Andrew Scutt: Yes. Understood. And I appreciate the color. Second one for me, and then I'll hop back in the queue. Your prepaid segment, you guys have added a bunch of additional programs now, health care, some payroll cards and whatnot. So previously, kind of analyzing the segment, it was just gift cards. So can you kind of give us the puts and takes in prepaid among your kind of different sales verticals? John Lowe: Yes. Let me cover the kind of overview of what we're doing in prepaid because it has changed a little bit, and Jeff can give any color on the numbers for Q3 and the rest of the year. Our prepaid business, just as a reminder, we're the market leader in prepaid packaging solutions in the United States. And so as fraud rises within the prepaid market, the complexity of what our customers are asking for, what we're innovating with our customers continues to rise. That's actually created lumpiness in orders, I would say, for this year within our open loop packages. But that's a good thing. It creates kind of greater value over the longer term of what we're producing. And then we're also investing in closed loop, which is operational. We expect to have orders shipping in Q4. And that's again because fraud impacts are bleeding into the closed loop side of the prepaid market. But additionally, I think you saw the announcement a couple of days ago, we issued a press release. We talked about it this morning on the call. We invested in a kind of innovative technology company based in Australia. They're a program manager. They're backed by the largest bank in Australia as well. That's another one of their big investors. And they've got unique technology that we're working with our program managers to actually chip-enabled payment cards in the prepaid space. We're already piloting that with a large national retailer in the U.S. So you look at the prepaid space, you look at our unique position to both lead in the packaging side, lead in our unique chip capabilities. And we believe our strategic initiatives entering into closed loop as well as expanding our capabilities in the open loop side are going to benefit us over the longer term. So we're happy about the prepaid performance, but definitely this year, a little bit lumpy on the revenue side. Jeffrey Hochstadt: Yes. And Andrew, I'll just add a little bit color on the revenue side. Last year, there was a lot of -- our clients were looking to increase the security of the packaging. So we did a lot of innovation. We actually rolled out some new security measures, fraud prevention packaging last year, and you saw a pretty really strong growth here last year, especially in the second half. So as John said, it can be a little bit lumpy, but we do have pretty strong comps to grow over this year. I mean we still feel really good with the prepaid business that does, especially in the second half, have some strong comps year-over-year. Operator: [Operator Instructions] We have a question from Jacob Stephan from Lake Street Capital Markets. Jacob Stephan: First, I just wanted to ask on the Visa and Mastercard data. Obviously, the graph in your chart or in your presentation shows prepaid actually decreasing but credit being up. And most recent guidance here talks about timing of prepaid shipments. I guess maybe kind of help us think through what the timing in prepaid, what that portion of guidance was? And maybe do you expect that in 2026? Or are these pushed out indefinitely? John Lowe: Jacob, let me comment on that first, and then I'll let Jeff add color. The credit side actually went up quarter-to-quarter. The debit side, not prepaid actually reduced a little bit. That said, it's 1 quarter. You look back over the last 3 years, your CAGR is still 7%. What we're seeing within our markets, what we're hearing from banks opening new accounts, we continue to see growth. So we're pretty confident on card growth and what we hear from our customers, we're still seeing growth in new programs coming on board. This year, our card volumes are actually up, so we're winning share. So winning share in a growing market, we're happy about it. Jeffrey Hochstadt: Yes. And I would just say I don't think that is correlated necessarily to delay in orders. Just as John mentioned, the prepaid ordering can be lumpy at times. And if something does get pushed off to early 2026, it would be more delayed to early 2026, not necessarily going away. So it's really -- we're just talking about the timing. Is it going to hit really in December? Is it going to hit in January, February? That's kind of more of what we're talking about. Jacob Stephan: Okay. That's helpful. And then also wanted to touch on Karta a little bit. I guess my perception of them is that they're kind of a credit card provider. I know they have kind of a travel -- a premium travel card launch, but help us kind of think through the safe to buy technology. What -- overall, I know fraud preventative packaging has been a big growth driver for you. But what is adding the chip capability to -- for you in prepaid along with the fraud preventative packaging? John Lowe: Well, let me cover the first part. I think you're mixing them up with another company that has a similar name based in Southern Florida. That's a different company than we're investing in. This company is based in Australia. They're a prepaid program manager there. But just to touch on why the capability is unique and why it will benefit our markets as well as our company over the long term. They have the ability to essentially enable chips in a payment card and create a payment card where [ the PAN ], the 16-digit number is constantly changing. So your fraud and ability to kind of pull that 16-digit number off of the card, deal it, if you will, significantly reduced through putting their technology onto a chip into a payment card. Why that's good for a market is because the fraud volumes, the amount of fraud has significantly increased in the prepaid market, it hurts the reputation of our customers, hurts the reputation of those retailers out there, the 100,000-plus points of distribution that have to deal with it every day. But additionally, if you think about our debit and credit market and you think about the transition in our debit and credit market from mag stripe to chip-enabled cards and now fully to contactless, the value grows. And that's exactly what we're starting to see hints of in the prepaid market, and we want to be on the front end of it. So that's why we made this investment. We have a right to buy a majority share of the company if we choose to. They're great partners of ours. And like I said, we're already piloting this with a large national retailer. So to the extent that this is successful and to the extent that the market moves more towards chips and prepaid payment cards, not only does it help our customers, help our market, but it also rises the value of what we're selling into that prepaid market and benefits our prepaid business. Jacob Stephan: Very helpful. Maybe just kind of a quick last one. Adding the chip to prepaid, how significantly does that change kind of the ASP? John Lowe: Yes, I wouldn't comment on the exact ASPs, but just for context, if you're on the debit and credit side, mag stripe card versus a chip-enabled card, I mean, the chip-enabled card is generally more than 2x the cost. It's a little bit different on the prepaid side, but the price is higher. We'll try to put more pen to paper and give more color as we give more color on how the pilot is going when we released in March. Operator: Our last question comes from the line of Peter Heckmann from D.A. Davidson. Peter Heckmann: I had some follow-ups. In terms of thinking about the potential for tariffs on semiconductors and thinking about your suppliers and whether or not they have manufacturing facilities in the U.S. I guess any additional thoughts and then how you're positioned, how you might be positioning inventories ahead of this? And potentially, depending upon the timing and whether it's retroactive or a date in the future, do you think there's the potential to pull forward some larger projects ahead of a tariff implementation? Jeffrey Hochstadt: Yes. Fair question. Everything we hear today in the market about semiconductor, we thought we would hear something late summer. It hasn't happened. The administration really hasn't come out with anything new in the last several months that we've been aware of. Our providers are pretty confident that if there was a tariff that they would be exempt just because of their -- like you said, their production facilities in the U.S. and their investment in the U.S. No one can be certain at this point. We also know if semiconductor tariffs do go into effect, it's going to affect the entire industry equally. So we're aware of that. We're really hoping either they're exempt or it doesn't impact the industry. But we'll just see. We're just waiting like everyone else. So we don't really have any more color than we did 3 months ago. But with that said, if you look at our balance sheet, we did we did have a high inventory balance. So we've been buying chips at a little bit higher rate than we normally would have, just knowing what could potentially happen. I mean that could help us for a little bit of time if we had a higher balance of inventory. It's not completely sustainable, but it would help us in the short term. So we have been purchasing chips at a higher rate so far this year. We do expect just the timing of chips, that inventory balance may come down a little bit in Q4. But we do have a higher-than-average amount of chips on hand right now. So we've been taking a little bit aggressive approach on keeping that balance relatively high. Peter Heckmann: Sorry, yes, I was on mute. I was going to say just as regards to the instant issuance business, in terms of thinking about other use cases there outside of the financial institution channel, you talked about a public sector customer last quarter. Any additional thoughts there in terms of opportunities to roll that out? And remind us, that subset of revenue for 2025, would you expect Card@Once grows faster than the overall company? John Lowe: Yes. Card@Once, our instant issuance business is growing faster. Just as a reminder, Pete, it's a higher-margin business than the rest of our business. It goes hand-in-hand with our other digital solutions. And the value proposition there is really the solution, the technology and the fact that we're integrated to most all processors and cores that support banks across the payments ecosystem. That's the exact same value proposition that we're using to win with our other digital solutions where we've been signing a number of issuers and growing, again, with higher-margin products, but our other digital solutions are fairly small right now. That said, our instant issuance business, we're on track to have a record year. You're exactly right, there's a value proposition not only in the [ FI space ], but in any location where you'd want to issue a payment card on spot. And so we are continuing to kind of push to expand that market and diversify. And we're happy with our instant issuance business performance. They've done a great job this year, and we expect them to have a record year and then look forward to what they're going to do in coming years. And just as a reminder, we said this in the call, our instant issuance business historically has been roughly 10% of the business. That's a little bit more now. Our digital solutions that we're adding continue to add to kind of our broader digital solution suite, if you will. And so we plan more on the performance, more metrics, if you will, when we release in March going into next year. So I look forward to sharing more on those businesses and especially given the value they create for CPIs [indiscernible]. Operator: As there are no further questions in the queue, I would now like to turn the call over back to John Lowe for closing remarks. John Lowe: Thanks, operator. As we head into the holiday season, I want to thank all of our CPI employees for their contributions and dedication to the company and our customers and wish everyone a safe and happy holiday. Thank you all for joining our call this morning, and we hope you have a great day. Operator: Thank you for joining the call today. You may now disconnect.
Operator: Good day, and thank you for standing by. Welcome to the Q3 2025 Sealed Air Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I'd now like to hand the conference over to your first speaker today, Mark Stone. Please go ahead. Mark Stone: Thank you, and good morning, everyone. This is Mark Stone, Sealed Air's Vice President, Investor Relations. With me today are Dustin Semach, our President and CEO; and Kristen Actis-Grande, whom I'm pleased to welcome as our new Chief Financial Officer. Before we begin our call, I would like to note that we have provided a slide presentation to supplement today's discussion. This presentation, along with our third quarter earnings release is available to download from our Investor Relations page on our website at sealedair.com. I would like to remind everyone that during today's call, we make forward-looking statements, including our outlook or estimates for future periods. These statements are based solely on information that is currently available to us. Please review the information in the forward-looking statements section of our earnings release and slide presentation. These sections also apply to this call. Our future performance may differ due to a number of factors. Many of these factors are listed in our most recent filings with the SEC. Additionally, we will discuss financial measures that do not conform to U.S. GAAP. Information on these measures and their reconciliation to U.S. GAAP can be found in our earnings release or the appendix of our slide presentation. I will now turn the call over to Dustin and Kristen. Operator, please turn to Slide 3. Dustin Semach: Thank you, Mark, and good morning, everyone. Thank you for joining Sealed Air's Third Quarter 2025 Earnings Call. Let me begin by welcoming Kristen Actis-Grande to Sealed Air. Kristen joined in late August and brings a proven track record of driving transformation, optimizing complex manufacturing and distribution networks and instilling operational rigor. She's already hit the ground running, and I'm looking forward to partnering with her and the rest of the team to further accelerate our ongoing transformation. In a few minutes, Kristen will give color on our third quarter results and set expectations for how we anticipate closing the year. But first, I will provide an update on the progress both businesses are making to navigate the macro environment. The macroeconomic trends from the second quarter continued throughout the third quarter. These trends include softer global growth outlooks, muted industrial production and a consumer that while still resilient, has decreasing purchasing power, particularly in North America within the lower to middle income households. These factors, combined with lower consumer sentiment, persistent inflation and picking up unemployment numbers are contributing to increasing uncertainty around the consumer, particularly in the U.S. Considering that backdrop, our team executed well in the quarter, continuing to focus on controlling the controllables by putting our customers first, executing with discipline, driving productivity and reducing costs across the business. In this market environment, we are focused on leveraging our core competitive strengths to find new sources of growth across both businesses. We are accelerating productivity initiatives to offset potential further market weakness while our transformation continues to take hold across the business. I will share more on those opportunities for each business, starting with Protective. Our Protective turnaround remains on track. Our performance in the third quarter continues to demonstrate improving fundamentals despite market indicators, whether it's overall box shipments or industrial output pointing to a subdued demand environment and a cautious consumer. Sales sequentially improved with material volumes inflecting the growth for the first time since 2021. While we remain cautious on the consumer and the macro environment, we are expecting materials to continue to stabilize in the fourth quarter, offset by a weaker outlook for equipment driven by timing and continued market pressures. The North American business has stabilized further and is performing relatively in line with the market. In the early stages of the transformation, we focused on minimizing churn and rebuilding our overall go-to-market strategy. We increased the number of sellers and improved customer and distribution partner engagement. In parallel, we also focused on resetting our large account strategy and value proposition, which we knew would take time as this customer segment has a longer sales cycle. Our approach is beginning to yield results with the team recently landing multiple 7-figure competitive wins at national accounts. As the transformation in North America is taking hold, we are beginning to increase our efforts in EMEA and APAC. While those businesses were less impacted by volume pressure than North America, the same value unlock exists to upgrade talent, create more efficient go-to-market strategies, enhance distributor relationships and invest in our field teams to accelerate growth. More to come as we progress on this. As we mentioned during our last call, with the go-to-market transformation well underway, we are shifting to other areas of the business to ensure they are fit for purpose, meaning streamlined and driving better business outcomes. As part of this, we have focused on improving the effectiveness of our R&D efforts, ensuring the organization is connected to our customers while taking a more balanced approach between internal and external solution development. While still early in this aspect of the transformation, this approach is already producing better solutions with stronger product market fit, increasing our speed to market and helping to accelerate the build-out of our substrate agnostic portfolio. Recent proof points include the newly launched AUTOBAG brand 850HB Hybrid Bagging Machine, which processes poly and curbside recyclable paper bags with high-speed precision and print on bag capability. Our fully fiber Jiffy and [ BUBBLE ] padded mailer and our upcoming ProPad Mini, a new innovative tabletop paper system. We are excited about our pipeline, and I will keep you updated. Finally, I would like to highlight one other area of focus as part of our fit-for-purpose strategy, network optimization, where we are evaluating our footprint for opportunities to improve our cost positions and better serve our customers. Historically, we incrementally rationalized the footprint, but our current planning efforts are taking a holistic approach, working backwards from our end markets, analyzing each of our products and then driving improved unit economics through a combination of facility, asset and logistics optimization. The transformation of this scale, progress is generally expected to be nonlinear. With that said, I am pleased to see the improvements we are making week after week, demonstrating incremental progress towards our goals. Now turning to Food. The segment's performance was resilient this quarter despite continued market headwinds. The overall market dynamics discussed in the second quarter accelerated throughout the third quarter and into the fourth, where in North America, the consumer continued to rotate into value grocery as their purchasing power wanes. The rest of the world continue to perform well. This dynamic in our retail end markets results in trade downs to private label, different pack formats and away from higher-priced fresh counter items into prepackaged solutions. These are all trends our portfolio serves that change the mix of products. As an example, during the third quarter, we saw consumers here in the U.S. continue to move from the fresh sliced deli counter, a shrinkback application into pre-sliced deli meats. While we are capturing a portion of the trade down, it's a roll stock type application with a lower margin profile. Within foodservice markets, the U.S. was flat as many quick service restaurants and fast casual operators are leaning into value offerings and new products or promotions to help spur traffic. The rest of our international foodservice markets continue to be resilient. Despite the U.S. market headwind, our focus on service quality and driving growth in dairy within Liquibox resulted in the fluids and liquids portfolio growing volume above expectations. Retail and foodservice continue to represent key growth areas for the food business, given higher growth rates and overall opportunity to take share. As we expand further into those end markets, we will smooth out the volatility that comes from our exposure to supply side dynamics within industrial food processing end markets. On the supply side, U.S. beef harvest rates were lower than anticipated in the quarter, down approximately 10.5% compared to the prior year, following a mid-single-digit decline in the second quarter. During the third quarter, the number of days that cattle spent on feed lots remained above historical averages. The steeper-than-anticipated decline in beef production is pressuring our industrial exposed volumes. The U.S. cattle rebuilding is expected to persist into 2026, be relatively flattish in 2027 and return to growth in 2028. We now expect this year's beef slaughter to be worse than 2024 by mid-single digits. Outside of the U.S., beef production remained strong in Australia, while other regions saw tempered rates. We are more intentionally making a rotation into retail and foodservice end markets by applying the transformation playbook we developed in Protective to our food business. Like Protective, we are initially focused on our North American business due to its size and current market pressure. We are in the process of rewiring the organization to connect our end markets in retail and foodservice throughout our commercial, R&D and supply chain teams. This alignment will support a mix of go-to-market changes, new innovations and network asset optimization. We will continue to upgrade talent to ensure we are building a team that's growth-oriented, externally focused, highly accountable and operating with urgency and pace. This is where I have been focusing my energy and effort, and we have made progress over the past couple of months. We are planning to make all the necessary foundational changes by the end of this year so we can hit the ground running in 2026. When you pull everything together, we continue to focus on controlling the controllables by extending the protective transformation across other geographies and down into R&D and supply chain as well as executing a growth transformation within our food business that will leverage an existing playbook, allowing us to move more quickly, starting in North America. In parallel, we are advancing our productivity initiatives across the areas previously discussed as well as procurement and continued back-office improvements to further streamline our cost structure and position us well for stronger profitable growth when market conditions improve. As we progress in the fourth quarter, we will have more visibility around where the consumer is headed, the resulting impact on next year's demand environment and more clarity on the timing of the benefits from our transformation initiatives. The combination of these factors will shape our outlook for 2026. I'm now going to turn it over to Kristen to give an update on our business performance and our updated outlook for 2025. Kristen, over to you. Kristen Actis-Grande: Thank you, Dustin, and thank you to the Sealed Air team for the warm welcome and support over my first 2 months. This is an exciting time to join given where we are in our transformation journey. The transformation opportunity, along with the strength of the underlying brands in food and protective are a large part of what drew me here. I look forward to partnering with Dustin and the team to accelerate our efforts. Now let's turn to Slide 4 to review Sealed Air's third quarter performance. Despite persisting market headwinds, our teams executed above expectations, delivering sales of $1.35 billion, up 0.5% as reported or down 1% on a constant currency basis. Adjusted EBITDA in the quarter was $287 million, up 4% as reported or 3% on a constant currency basis. Adjusted earnings per share was $0.87, up 10% as reported or 9% on a constant currency basis, driven by higher adjusted EBITDA and lower interest expense. Our adjusted tax rate was 23.9%, which was relatively flat compared to the prior year. Our weighted average diluted shares outstanding in the third quarter was 148 million. Moving to Slide 5. During the third quarter, volumes were down less than 1% with Food and Protective performing above expectations. Food volume was relatively flat in the quarter as the decline in our shrink bag business was offset by growth in our foodservice portfolio, which outperformed the market across all regions with volume up 4% year-over-year. Protective volume was down less than 2% in the quarter as our industrial portfolio showed modest growth year-over-year and the fulfillment portfolio continued to improve, led by strength in auto bag solutions and specialty foam. We reached another key milestone in our transformation in the third quarter as protective materials grew for the first time since 2021, 1% year-over-year. This was offset by lower equipment volumes. Price was essentially flat in the third quarter on relatively stable resin markets and a tariff landscape that didn't change meaningfully within the quarter. Although these are two areas we continue to watch heading into 2026. Foods pricing was 20 basis points better than the prior year, while Protective declined 1%. Third quarter adjusted EBITDA of $287 million increased $11 million or 4% with a margin of 21.3%, up 80 basis points year-over-year. The strong adjusted EBITDA performance was primarily driven by lower operating costs, including favorable productivity savings and cost control actions, partially offset by slightly lower volumes and negative net price realization, which was mostly driven by inflation on labor and nondirect material costs. Moving to segment performance on Slide 6. In the third quarter, food net sales of $910 million were consistent with last year on a constant currency basis, with both volume and pricing relatively flat. We are seeing continued consumer softness in North America, resulting in trade downs and trade-outs. On the supply side, beef production declined at a faster pace than was previously anticipated. Though market headwinds were partially offset by positive volume in our fluids and liquids portfolio. From a regional perspective, volumes were up in all regions outside of the U.S. with low to mid-single-digit growth in EMEA, Latin America and APAC. Food adjusted EBITDA of $215 million increased $9 million or 3% in constant currency compared with the prior year. Adjusted EBITDA margin was 23.6%, a year-over-year improvement of 70 basis points. The increase in adjusted EBITDA on a constant currency basis was primarily driven by productivity and cost-out savings, partially offset by negative net price realization. Protective sales were $442 million in the third quarter, down $12 million or 3% on a constant currency basis. Volumes were down less than 2%, demonstrating once again continued improvement sequentially as the disciplined execution of our go-to-market strategy continues to yield iterative progress. Protective adjusted EBITDA of $78 million in the third quarter increased approximately $3 million or 3% as reported and 1.5% in constant currency compared with the prior year. This represents our first year-over-year adjusted EBITDA growth in this segment since the first quarter of 2024. Adjusted EBITDA margin in Protective was 17.7%, up 80 basis points year-over-year. The improvement was driven by productivity gains, which were partially offset by negative net price realization and lower volume. Turning to Slide 7. Through the first 9 months of the year, free cash flow was a source of $201 million compared to a source of $323 million for the same time period a year ago. We generated $120 million in free cash flow during the third quarter, up 4% from the same quarter last year. At the end of the quarter, our total liquidity position was $1.3 billion, including $282 million in cash and the remaining amount in committed availability under our revolver. Last week, we closed on the refinancing of our 5-year revolving credit facility and as a part of the facility, incorporated a new delayed draw term loan. The committed delayed draw structure will act as a backstop to refinance our 1.573% senior secured notes maturing in October of 2026, which allows us to continue to take advantage of the low coupon of the existing notes until maturity. Our net leverage ratio was 3.5x, and we remain on track to reaching a net debt to adjusted EBITDA leverage ratio of approximately 3x by the end of 2026. Shifting gears to the update of our full year outlook on Slide 8. We see market pressures accelerating in the fourth quarter, resulting in volumes lower than anticipated, particularly in North America Food, along with further competitive pricing pressure in both businesses. These dynamics will be partially offset by further tailwinds from a weakening U.S. dollar. In addition to the macro factors discussed earlier, we are monitoring the near-term implications of the U.S. government shutdown, specifically as it relates to funding the Supplemental Nutrition Assistance Program, or SNAP. We don't yet know the impact the delay in funding the program will have on our U.S. business, but anticipate it to be transitory. In the short term, the shutdown may continue to exacerbate the trade downs we are seeing as lower-income households would stretch their dollars even further. At this time, we continue to target the $5.3 billion midpoint of our tightened full year sales range. We are raising the adjusted EBITDA expected range to $1.12 billion to $1.14 billion, up $5 million from the prior midpoint, implying $274 million in the fourth quarter. Our Q4 adjusted EBITDA outlook reflects continued operating discipline and ramping productivity initiatives that will be partially offset by lower volume and unfavorable net price realization. Given the strong year-to-date performance on adjusted EPS, we now expect the full year to be between $3.25 and $3.35 per share. This assumes full year shares outstanding of approximately 147 million and an updated full year tax rate of 26%. Finally, we are reaffirming our full year free cash flow to be approximately $400 million. As a reminder, we seasonally ramp down inventories in the fourth quarter, which drives stronger cash generation toward the end of the year. We have lowered our full year capital expenditure projection to $175 million, reflecting increased rigor around capital deployment and refocused priorities guided by our transformation efforts. As we progress through the remainder of the year, we will better understand where the consumer is headed, particularly in the U.S. and its impact on next year's demand environment. We will also gain greater clarity on the timing of our transformation and productivity initiatives and how the combination of these factors will shape our outlook for 2026, which we look forward to sharing with you in February. And with that, Dustin and I welcome your questions. Operator, we would like to begin the Q&A session. Operator: [Operator Instructions] We will now begin with the first question. This is from George Staphos from Bank of America Securities. George Staphos: I guess my question is really around food. Dustin, you talked about maybe beef production in North America picking up, I guess, by 2028. And I don't want to put words in your mouth. But can you give us a bit more detail in terms of the sources that you're using in terms of navigating this bottom in terms of cattle on feed and beef production, recognizing it's not the only thing that drives your food business. And the question behind the question is, we've seen some commentary from industry sources that suggest maybe '26 is really the plateau and we should start seeing an uptick in cattle on feed '26 or '27. Kind of what informs your view and what should we be mindful of? Related point, and this may be just a punt to '26 and we understand, given the productivity initiatives that you have underway in food, do you expect that at least directionally, EBITDA should be up next year for Food as you put all of the pluses and minuses together, and obviously, we'll get more detail next quarter. Dustin Semach: George, and again, I appreciate the commentary and the question. So a couple of things that talk about the U.S. beef cycle. As you kind of noted at the beginning of this year, we actually started the year on a stronger note in the first quarter of 2025. And as we've gone throughout the year, the cattle cycle has really steepened. And we talk about the supply side dynamics, but really, it's an interplay between the demand side, right, where you don't have a consumer there that can really continue to purchase high-end beef. And that's why I think you're seeing this precipitous change where you're beginning to see higher [ F ] retention and a steeper decline, which was steeper, obviously, in the third quarter. And then we're actually guiding it now in the fourth quarter until you see that steepening. But just as a reminder to everybody, it's a combination of where the consumer is at and then obviously supply side dynamics. So how we see it playing out as today kind of based on the latest forecast that happened and the change in Q3 and our expectations for Q4, as you would expect '25 now down kind of in the 5% range over holistically. But keep in mind, that's with a stronger Q1. And then you would expect a similar dynamic, George, which is in line with industry expectation around that same 5% to 6% going into 2026. And then the point is that you're seeing it really steepen right now in Q3 and then steepen further in Q4. You'll see that shallowing out in Q1 and Q2 of next year, and you would see it come back out of it, which actually leads '27 to be flattish right now based on current indication and '28, you actually revert back to positive growth. And so that's -- that's the dynamic we see playing out, which is also why you see our commentary around how we're really focused on rotating into retail as well as foodservice as those areas provide an offset, which is actually what you would have seen in our Q3 results as we talked about the strength of our overall foodservice portfolio. And then going back to your question on '26. Right now, as Kristen and I both commented in the script, it's really a combination of those factors that we're looking through because a lot will determine how '26 shapes up based on where the consumer is at in the overall U.S. economy. And as we mentioned, right now, uncertainty is increasing. We've seen some of those macroeconomic trends weaken in the third quarter and intimating right now going into the fourth. And so we don't want to kind of comment right now on exactly where we land because it's that combination of where the market is at, which I would say is the biggest area of uncertainty in combination of what we're doing on the transformation side as it relates to food specifically, what benefits are we going to get from our initiatives in retail as well as foodservice and then the combination of productivity. But those are all the variables that we're managing right now, and we'll give you a more fulsome update in February when we come back. Operator: We'll now take our next question. This is from Ghansham Panjabi from Baird. Ghansham Panjabi: Welcome also. I guess just following up on George's question on the Food segment. If we could just kind of switch to the EMEA segment, a portion of that segment. Can you just touch on the operating environment there? Is it any different than the U.S. baseline? And then I think you cited share gains in the region. Give us a bit more color as to what drove that, which specific businesses, et cetera, that would be helpful. Dustin Semach: Thank you, Ghansham. And the question as it relates to our EMEA region, our European region and the food business. Those dynamics are still playing out, Ghansham, the region has been the strongest performer within the overall Food segment holistically. The operating environment is still very strong there and the share gains that really started in the back of 2024, it kind of rolled through '25, and that business has continued to perform very well from an overall margin expansion as well as share gains. It's really across the entire portfolio. So there, obviously, in our EMEA region, you actually have less shrink bag penetration as you do relative to industrial markets. You have a bigger focus on retail just due to the dynamic in the European region holistically just as a region relative to our other regions. So it's less cycle driven than if you think about Australia, Latin America as well as the U.S. And so that dynamic is continuing to play out. We will -- I will say that there is some cautiousness now kind of creeping into that market as it relates to broader global growth outlook. But as far as we're kind of anticipating closing out the year in 2025, we anticipate the European region to close out very strong. But it's on the back across all those portfolios, whether it was what we're doing in Liquibox, whether it's the rollstock applications, which for us, particularly a product called [ DM5 ] as well as shrink bags. It's really kind of broad-based strength across that portfolio and across that region. Operator: And the next question is from Phil Ng from Jefferies. Philip Ng: Congrats on another strong quarter in a tough environment. I guess, Dustin, well, first of all, welcome, Kristen, really looking forward to working with you going forward. I guess a quick question out of the gate. I guess your implied fourth quarter guide implies seasonal counter seasonality, certainly, you called out some headwinds on food in particular. So I guess, number one, have you seen the correction in demand already, whether it's the consumer protective in terms of your order patterns weakening in the fourth quarter? And then you called out some price degradation as well. Have you seen that kind of soften already going into the fourth quarter, whether it's food or Protective? Kristen Actis-Grande: Yes. I'll start by jumping in and just give you some perspective broadly on Q4, and then I'll let Dustin add some specificity around Protective and a couple of the other points you raised. So let me start by just framing the big picture Q4 and really what we are carrying in from Q3. We mentioned in the prepared remarks that the team is really executing well against the challenging backdrop, and there's a lot of focus here internally from the teams on making sure we're controlling what we're able to control. So if you think about the progress that we're making both on the growth initiatives, the transformation initiatives, all the things that contributed to the Q3 performance, we absolutely expect all of that to continue. But what you're really hearing from us quite broadly is concerns around a softer macro environment sequentially moving into the fourth quarter. And we touched on like industrial production index, various points around consumer sentiment and uncertainty. And all of that broadly speaking, again, total enterprise on the top line is bringing us down in volume relative to the prior guide, about 2.5 points. And a couple of areas I'd point out where that's concentrated is in NAM food and that's specifically in industrial processing. As you mentioned, there's a little bit of negative price coming in, in the fourth quarter, and that really has to do just with the challenging volume metric environment that we're seeing. But I will point out it's being offset by currency. So it really doesn't net out to being a very volume-driven story. But the teams are going to continue to do all the things they did in Q3 to deliver against that. And Dustin, maybe you want to put a finer point on some of the questions on Protective. Dustin Semach: Yes, absolutely. Well, Phil, going back to the question you ask specifically as it relates to food, -- what I would tell you is that in Protective in both cases, the order entry patterns are seeing the -- we are seeing that dynamic play out, particularly in industrial volumes in terms of industrial processing within food. And so that's the area that we talked about the downward pressure you saw in Q3. There was offsets there that helped offset in Q3. But in Q4, because it's steepening even further, you're seeing that pressure, and it's absolutely coming through in our order entry, albeit the dynamic is still yet to play out. And so we're going to be cautious as we go through fourth quarter, but it's -- we're seeing it already. Operator: Next question is from Matt Roberts of Raymond James. Matthew Roberts: Dustin, you spent a lot of time talking about that commercial playbook. So maybe more specifically, what could you borrow from the Protective playbook you've already executed on? Or maybe what needs to be done in terms of either customers' R&D spend or KPIs you measure within the sales force? And how does the shift to food impact capital allocation in coming years? And to the point you just talked about as well, despite those headwinds, 3Q still came in good as did the margin, I think an unfavorable mix of margin from those end markets, and you discussed the price headwinds, but how are you able to preserve margin in food in 3Q? And could you expect to hold margins year-over-year in 4Q despite those incremental beef headwinds? Dustin Semach: Yes. So a couple of things, Matt. Again, thank you for that multipart question. So the first comment I would make is really related to the overall commercial playbook, right? And so if you think about what we've done in Protective and you talk about -- if you take a step back even when we went through the kind of the reconstitution of both Food and Protective as overall segments, a lot of that playbook in Protective was really around changing our reactive sales approach to a proactive sales approach. And we talked about putting investment in the field, we talked about simplifying our go-to-market structure, overhauling incentives as well as really focusing on the strategies we have in each segment. And to give you an example, in Protective, what that largely meant was simplifying the engagement model we have with our distribution partners and stepping up overall engagement. That same approach is coupled with sales performance management. And again, what I would say is for leading indicators, everything from managing activity at the field level from how many calls per week, visits per week, managing customer satisfaction, managing pipeline, all those areas are applicable to our food business, which is -- has been historically been more exposed to industrial volumes, which has a different type of sales approach than you would see relative to retail and food service, right? So it's really tailoring that go-to-market model, working from our end markets back, focused on our strategy and connecting that through R&D and supply chain. But it starts in our biggest region, North America and food being roughly 50% overall holistically and then being able to work in North America first from a commercial perspective. But even more importantly, in food, that connection back, how you connect it into R&D as well as supply chain matters even more, particularly as you want to rotate into these other segments further. As it relates to the overall margin profile that you discussed, yes, we feel really good about where we're at from how we executed in the quarter. As we've talked about beforehand in Q2 as well as in Q1, recognizing there may be some potential demand weakness in the year, controlling the controllables, taking a more proactive approach, we really put a lot of energy and effort as a management team driving productivity across the business. And you're seeing that come in and really offset some of the -- again, net price realization that we see picking up in the fourth quarter and coming in to offset that particular piece. And then as it relates to capital allocation changes, I'm going to turn it to Kristen and give her an opportunity to comment on that part of your question. Kristen Actis-Grande: Yes. Thanks, Dustin. I appreciate it. So broadly speaking, what we're really trying to focus on with our capital expenditures is how we're choosing to invest in things that are accretive to ROIC, which has really been a focus of ours since the Liquibox acquisition. And if you think about deployment of CapEx, really, whether it's to food or it's Protective, it really links back to the transformation priorities. And those priorities are absolutely going to inform what investments we're making and the timing of those investments. And I do think that there's a lot of interesting things ahead of us with respect to food transformation specifically that we can do to continue to drive profitable growth in the business. Specifically what those are or how much we're going to spend on them, we'll come back to you in February with more color on the '26 guide, and we'll elaborate a bit more on the CapEx side as well. Operator: Next question is from Edlain Rodriguez from Mizuho. Edlain Rodriguez: Welcome, Kristen. In terms of Protective, Dustin, again, you've seen an inflection in material volume in there. Like what drove that? And do you believe that's sustainable going forward? And do you still expect to see the overall volume inflection in that segment as we go into 2026? Dustin Semach: So great question. So again, I'll just start by saying, look, we're really pleased in the third quarter, right? It's obviously a major milestone for us in the Protective transformation to inflect the material volumes in the third quarter. What drove that as we talked about in the second quarter, our industrial portfolio flipped positive and you see continued strength there. Notable areas that performed better would be Instapak, AUTOBAG, but we also had many other areas like our Korrvu, which is our suspension films, inflatables. So you had more, I would say, parts of the portfolio that grew this time than we've seen historically. You saw continued improvement in fulfillment. And as we talked about some of the wins we had in national accounts, those are largely in the fulfillment space. And so that area should be able to -- as those sales kick in and roll through, that's largely a benefit that you'll see rolling through 2026. As it relates to -- so I'll pause there to say, yes, very strong Q3 that we feel really excited about relative to the journey that we've been on, obviously inflecting since 2021. We already intimated in the script that we are going to see further stabilization in material volumes in the fourth quarter. And then as you get into 2026, against what we're looking is the same combination of items that we discussed earlier, which is as it relates to growth specifically, take productivity aside is where are we going to be from an overall U.S. economy is that will obviously drive a lot of the market -- underlying market lift or downward pressure. And so we're very cautious there and is looking through that. And so our Q4 will inform a lot about how we view 2026 as outlook. But what I'm really confident in is what we're doing in terms of being able to change the game going back to Matt's question around that playbook and how that transformation is really playing out in Protective. So I'm really excited about where we're headed, and I'll have more to update you on as we understand that market dynamic in combination with the benefits and timing of our transformation initiatives and some of the wins we've been able to knock down this year. Operator: Next question is from Jeff Zekauskas from JPMorgan. Jeffrey Zekauskas: I was hoping that you would talk about your SG&A costs in that they came down about $10 million sequentially on higher sales. And so I was wondering if there was anything unusual about your SG&A number this quarter? Or is it sustainable? I take it most of your restructuring has to do with your food business in that the food operating profit kind of matches the change in SG&A. Is that true? And for next year, is there another $50 million or $60 million in charges? Or are we done? Dustin Semach: So a couple of things, Jeff. I appreciate the question. So look, we're really pleased, as we've talked about over the past couple of years, we've really been very intentional about bringing down our overall SG&A. And keep in mind that as we've gone through what we call the CTO2Grow program over the past couple of years since we initiated it back in 2023, we've been able to consistently drive down that number. There's nothing unusual about the third quarter other than it's just reflective of timing related to some of those overall initiatives. And as you see -- or you will see in our Q3 disclosure, we're kind of formally closing the CTO2Grow program, but we will have continued restructuring initiatives cascading into next year. The [ TBD ] relative to how much payments that we think will be there, we've already intimated, again, as we talked about in the prepared remarks, that there's continued back-office restructuring. And keep in mind that while we're in Food and Protective, our overall SG&A, take the sales and marketing out to the site, but our G&A footprint, whether it's legal, whether it's finance, whether it's HR, those are all corporate functions that really support both segments. So as you continue to rationalize that G&A footprint through transformation, and we've highlighted some of those initiatives in the past, like our office in Manila that if you go back to the beginning of the year, we really had -- we just stood up the site. And as we sit here today, we're over 300 employees strong, right? It's the second largest G&A facility we have in our entire fleet. And so there's -- a lot of those vehicles continue to be sustainable relative to 2 things: one, streamlining our back-office operations, but more importantly, driving better business outcomes as we've seen in IT. And to give you perspective, IT, where we've really modernized our overall infrastructure, we've also done that while at the same time, bringing down our IT cost into the high double digits. So really pleased with those outcomes. I think there's more opportunity ahead, but we'll give you more clarity on the timing of restructuring payments when we come back in 2026. Operator: Next question is from Anthony Pettinari from Citi. Anthony Pettinari: I'm wondering if it's possible to give the maybe updated bridge items for the full year EBITDA guide in terms of net price, volumes, FX cost saves. And then apologies if I missed this, but you're reducing the CapEx for the full year, but your free cash flow estimate is unchanged. I don't know if you had any comment there in terms of the offsets. Kristen Actis-Grande: Yes. Yes, I'm happy to take that. And maybe I'll just actually start with free cash flow, work back into the full year EBITDA bridge question. So we are guiding to a midpoint still of $400 million on free cash flow. To your point, we did bring the CapEx number down about $25 million. And then of course, we're bringing EBITDA up. So both of those would be tailwinds to the free cash flow number. One of the reasons that, that's not flowing through and causing us to raise the midpoint is really around reductions in accounts payable, and that has to do with some of the mix of raw materials relative to what we were forecasting in the last guide. And just to put a finer point on the fourth quarter cash flow generation, too, just keep in mind that we're very Q4 weighted on cash generation, and that has to do with inventory management at year-end, which we do historically see and we're laser-focused with the teams on how we're operationally creating that inventory reduction for the fourth quarter. So that's a little bit of color I'd give you on the guide around cash flow. And then going back to your first question, which was on the updated EBITDA bridge on a year-over-year basis, I think you had asked for that on a full year basis. Yes. So let me give you Q4 and then happy to go through full year, too. So 4 buckets I'll give you on the fourth quarter EBITDA year-over-year bridge. The first is volume, which we've talked quite a bit about, largely market-driven, again, concentrated in North America food and industrial processing. And then the second year-over-year change is continued negative net price realization, which is largely stable to what we've seen through the first 3 quarters of the year. And then productivity, we continue to generate high levels of productivity. The fourth quarter benefit, there is a little bit under $30 million. And then the rest of the change is really 2 things. It's improved FX, and it is lower incentive compensation payments in Q4. Dustin Semach: And then to step in and give you some color just on the full year numbers, you're talking about approximately $20 million year-over-year in terms of benefit from an EBITDA perspective. That's true that's a negative $51 million or 50-ish relative to volume, negative $75 million on net price realization, which is a $10 million step-up that we alluded to earlier, which is concentrated in the fourth quarter. That's a change from our third quarter guide. And then you see roughly $150 million, I would say, restructuring combined with cost control and cost containment. That's obviously a step-up, as we mentioned, to come in and offset some of that price impact in the fourth quarter and the rest of it being associated with other incentive comp payments. Operator: Next question is from Anojja Shah from UBS. Anojja Shah: I just wanted to go back to that comment that you made on network optimization and evaluating your footprint. Can we get a little more detail on that? And also, does that relate to both segments or just one? Dustin Semach: It's a great question. So network optimization, if you go back over the past 3 years, has been a continued focus, right? So if you look at it, we've talked a couple of times around areas where we either consolidated sites or in other examples like our Lakeland facility in the Protective segment, where we opened a new site that's obviously benefiting even in 2025. What I would tell you is that comment relates to both segments on a go-forward basis, but the primary point of it is we are taking a holistic approach right now and looking at the entire footprint, where historically, we've been opportunistic relative to, I would say, incrementally rationalizing the portfolio. We're not at a point in time where we want to talk about specifics. But as we continue to progress our planning efforts, and we'll come back out and talk about that into -- in the beginning of 2026 and as we progress throughout 2026 because that, as you can imagine, and this isn't necessarily leaning towards just pure site consolidation. This is really a mix, as we talked about in that holistic approach around, logistics optimization or freight optimization as well as asset optimization. Going back to some of the questions around capital deployment, which we're being very intentional on, particularly on the growth capital side and then obviously, the sites themselves. But as we progress, it is in both areas. So the comment in the script was primarily focused on Protective, but it's both areas, and we'll give you more clarity once we get into February. Operator: Next question is from Chris Parkinson from Wolfe Research. Christopher Parkinson: Dustin, now that things kind of are beginning to stabilize and inflect and you're clearly making substantial progress on the cost front, is now the right time to further assess the portfolio? I know there's been kind of this willingness to see kind of where you want to be ultimately in the future, especially on the food side of it. But as far as Protective is concerned, given the progress there, is there any reason to believe that now is the right time to further assess that? Or is it still really too early? Dustin Semach: Yes, Chris, great to hear your voice. Thank you for the question. A couple of comments I would make to that is, as we mentioned before in the past, we're always looking for opportunities to maximize shareholder value. Right now, we're heads down in our transformation, really focused on making the impacts we need in each segment. What we focused on is really bringing both businesses back to long-term sustainable profitable growth. While we're really pleased with the progress we made in both segments, we still think there's a lot of opportunity right now to optimize and drive us to a place where we're achieving that long-term goal. And so that's where we're really focused right now. But with that said, we're always looking for opportunities to maximize shareholder value. Operator: Next question is from Mike Roxland from Truist Securities. Michael Roxland: Congrats on another strong quarter despite the backdrop. And Kristen, congrats on the new role. Look forward to working with you. On Protective, Dustin, you mentioned the reset in terms of the large account strategy. You said you recently landed a few 7-figure wins. It sounds like they mostly came in fulfillment. Can you confirm that? And can you also comment on maybe the EBITDA impact you're expecting from those wins in 2026? And for Kristen, you've been in the seat for about 3 months now. Given your background driving transformations across complex manufacturing and distribution businesses, what do you think Sealed Air is doing right? And where do you see incremental opportunities at Sealed Air for -- to affect further change? Dustin Semach: Mike, again, great question. Yes, we referenced kind of winning some large 7-figure accounts, which are big actual deals for our Protective segment because typically, relative to food, you have smaller kind of order size per customer. And it is largely fulfillment. If you think about national accounts, you're thinking about distribution networks. And so you're largely helping them facilitate their distribution. And the margin right now, it's really a mix. It depends on the -- really, if you drive margin within these particular businesses, it's really on the mix of different products that you're selling into each one. And one of the benefits that we have in terms of where we sit as a market leader in the Protective segment is really the breadth and depth of our portfolio. The strength of that portfolio has given us the opportunity as well as the strength of our distribution relationships has given us those opportunities to get in there and win again. So really excited about it. We're not at this point in time, quantifying what that impact is in the next year because we're still going to be working through the ramping of those new wins and what does that mean. But again, I would tell you, it's really about the mix of products, which across the board is a different set for each individual account because they're not -- no 2 deals are kind of alike. Kristen Actis-Grande: Yes. Thanks for the question, too. I think I just crossed like the 60-day mark last week. It's been a really great 60 days and enjoying it so far. It's a great business. I think we commented -- yes, we commented this in the prepared remarks, but it's really the transformation opportunity that was one of the big things that drew me here. And what I would say, first of all, what I've observed so far about the transformation is it's really one of the most well built-out transformations that I've seen given where we are in our sort of stage of maturity around transformation. It's really better than I even expected to be once I got in the door. And what I mean by that is sort of the breadth and depth of the transformation opportunity, but also the specificity of it, the amount of initiatives that are laid out in a very data-driven and actionable way, and that gives me a lot of confidence both in being able to continue to deliver on what's in motion right now, but also on delivering the road map if we look out 1, 2, 3 years. So that's been really positive. I think where I can help and where we have opportunity to continue to mature the transformation opportunity is really in some of the management systems you've heard Dustin talk about. In the background that I come from, we refer to that more as the operating system. And we don't really have a very mature operating system here. If you think about how we sort of structure accountability through the business, how we coach our people, how we think about executing initiatives through leading indicators, really like holistic continuous improvement efforts. Those are all areas where I think we can make a lot of improvements. And we've put some things in motion already since I've been here, but that's a really big opportunity for us. And then broadly speaking, too, I think we're always looking to make sure that as we're going through this major change and this major transformation that we have the right talent in all parts of the organization to support that. It is a big change. We are evolving a lot of things in the company, including the culture, and that really requires us to make sure that we have the right leaders on board to drive that change over the next several years. Operator: Next question is from Stefan Diaz from Morgan Stanley. Stefan Diaz: Welcome, Kristen. So foodservice volumes, I think you said in your prepared remarks were plus 4% this quarter, which is very nice to see, especially given the pressure consumer in the U.S. Can you just speak to some of the strength there and if you expect to continue to gain share in the quick service space and maybe some of the things that are driving that strength? Dustin Semach: Yes. So a couple of things I would talk about, which is, one is, particularly within foodservice, we're continuing to see more and more opportunities because as a reminder, one of the big portfolio that supports foodservice is really our fluids and liquids portfolio, which has demonstrated the ability to grow for a long period of time. We've talked about new products we brought to the market like FlexPrep, [ Zero Prep, ] which are really designed for that specific QSR segment and we continue -- and the whole thesis there, combined with Liquibox is this displacement or this conversion from a pack type from rigids into flexibles. And so we continue to see the opportunity in that space. And if you think about it, it's really the same value proposition that if you go back to our industrial side relative to the combination of equipment, material science and technical service. And really what that does is increase the throughput and maintain uptime for our customers in the Industrial segment. That same thesis applies really into the Foodservice segment, where really what you're doing is optimizing around labor. As you know, in foodservice, labor is very challenging and has continued to be really ever since post-COVID. QSRs are under more pressure now than ever. So this gives the ability to maximize yield in the products. So think of this as like sauces, condiments and areas like that, that are newer segments for us. But also within Liquibox, we had a rotation where we've already serviced QSRs, but we've made an intentional rotation into dairy and we're continuing to see a lot of uptick and uplift there. And so in both those areas, we're continuing to see opportunity to grow. We're obviously very pleased with the result we had in Q3, and we see the opportunity continuing ahead of us, albeit right now a smaller segment for the overall business because you're talking about roughly $0.5 billion in size. Operator: And the next question is from Gabe Hajde from Wells Fargo. Gabe Hajde: Kristen, looking forward to working with you. Two unrelated questions, Dustin, I hate to revisit it, but I'm looking in, I guess, the filing, it shows 102 facilities, 15 of which are kind of co-located or serving both segments. You've done a lot of work to, what I'll say, disentangle the support and the commercial approach over the past 18 months. If we see you next year taking moves to kind of continue to disentangle those operations, would that enable you to kind of then evaluate other avenues for maximizing shareholder value and meaning outside of simply just improving the financial and operational performance? And the second question, completely unrelated, I apologize. $75 million of price nondirect material headwinds in 2025. Again, you guys have made a lot of changes on the commercial approach. Does this cause you -- I mean, our view, and we're spending a lot of time thinking about this, maybe a paradigm shift in sort of these tangential or frictional costs, as I call them, inflating every year, maybe revisiting pass-through mechanisms to capture some of these other costs that you incur. Dustin Semach: So Gabe, I'm going to start with your first question and then come back to that point. So just keep in mind that this year, as you think about overall net price realization, right, a lot of that cost is -- if you look at where we see the inflation, the primary input cost in that negative $75 million is really labor inflation. And the offset to that, to give you an idea in net price realization of negative $75 million, about $60 million of it is labor inflation, which has been moderated since -- if you go back go back to 3 years ago or so when you're up into the 90s range. So you're seeing labor inflation continue to moderate, which is one a positive. The second thing is, historically, we've been able to demonstrate that we drive productivity every individual year within -- and this is not associated with restructuring per se, but just general productivity within our business that offsets that inflation. That's how we target that every individual year. And so we don't see that as a structural difference, albeit I would state that you're probably seeing lower inflation in those areas kind of going forward than we've seen historically because you've seen it continue to moderate. It's TBD a little bit on the nondirect material side, particularly as it relates to tariffs because the tariff impact, as everyone knows, relative to August 1, you're going to see a lot of that be capitalized on balance sheets and those pricing dynamics play out in 2026. So we're still kind of, again, working through what does that outlook look like next year in combination with the resin markets overall holistically. So -- but as it relates to your comment around -- so that's the cost base I would put in that category. As it relates to pricing, again, our business has a mix. We've talked about this in the past where in our food business, a big portion, roughly half of it has largely been on formula pricing that's predominantly in North America. And it does capture -- those formulas capture a wide range of different kind of input measures relative to how you price in the marketplace beyond just raw materials. And the second piece that I would say to that is if you look over the past 5 years and you look at net price realization holistically across both businesses, they've really been able to demonstrate strong pricing power even as it relates to inflationary costs. And this is really without even bringing into frame the discussion that we had around productivity. If you think about going forward for pricing environments, when we came into 2025, we really expected the overall polyethylene markets to be kind of slightly inflationary, which as we discussed in the past, would be a more ideal kind of environment for flexible packaging manufacturers to operate within. And so it's TBD. I mean, right now, if you look at commodity resins holistically, they're kind of -- they're right now sitting on the floor. And so it's TBD where that heads into 2026, but that would be, to me, the catalyst if you see any type of repricing in overall segment from a market standpoint. Going back to your original question around the overall segments, et cetera. Look, I mean, the reason we went down the road of putting the businesses back into Food and Protective, as we've talked about before, is they have very different end markets, very different routes to market in terms of whether it's distribution or direct sales, different products, applications, et cetera. And this was really to give each business the ability to drive towards a long-term strategy that's tailored to that specific business. And that's what we're focused on. As it relates to shared facilities, a lot of what you're talking about there specifically as it relates to shrink films and stretch overwrap films, those are the same asset base that produce both of those product categories. And that's really a legacy coming back from the days we acquired CRYOVAC back in 1998, where that asset base was acquired there. So our shrink films in the market, even though we sell them in the Protective segment because they're a protective application, they're originally a CRYOVAC technology and those assets actually produce both. And so right now, we're really focused on, as I mentioned beforehand, continuing to effectuate the strategies for each of those segments. And we're still, as Kristen said, while we've made a lot of progress over the past 3 years and keep in mind, we've been in this new structure for about a year now. We're really kind of wrapping. This is actually around the same time last year that we went back into Food and Protective. And we still think there's runway here to continue to really optimize each individual segment and their overall outlook and particularly as we head into 2026 and beyond. Operator: And the last question today is from Arun Viswanathan from RBC. Arun Viswanathan: Congrats on the strong results, and welcome, Kristen, looking forward to working with you as well. So I guess my question is just on the volume side and organic growth side. I guess I think you mentioned that your outlook now embeds maybe 2.5 points lower of volume growth in Q4. Is that just maybe relative to what you saw in the last month or so? When did you start to see that kind of weakness materialize? And do you expect that to kind of last through the first half of next year as well? And maybe you can just break that down how that looks in both segments. Dustin Semach: Yes. So a couple of comments. So yes, if you look at our fourth quarter guide, what it embeds is a lower outlook for volume about 2.4 points. But in total, that brings the volume to down 4% in the quarter. That's primarily in food and more concentrated within North American food, as we've talked about the rest of the world performing relatively strong. And so -- and it relates primarily to the dynamic we're seeing with this rotation from the consumer into value grocery, right? And so that rotation into value grocery is bringing down volumes holistically and then is compounded by, like I said, this interplay between consumer dynamics and that driving the beef cycle itself. That steepening of the beef cycle, as Kristen alluded to earlier, was we did not anticipate it to be as steep as it has become. And that's really, again, driven by that overall weakness within the consumer and the uncertainty surrounding it. So as you think about that cycle and how it plays out, going back to one of the comments and questions that we had earlier in the session today, that really what you would expect is that to continue to deepen in the fourth quarter, you would expect that weakness to persist at a minimum through the first half of 2026. Now to what degree and to what extent, that's what we're working through, but you would expect that to continue to cascade through. And then it's kind of right now TBD on the second half of '26. And some of that's also just in terms of what's within our control relative to the initiatives we can drive. So what I'm really speaking to is overall market dynamics. If you go to Protective itself, Protective, just as a reminder, is a very short-cycle business, right? So where I believe going back to Chris in terms of maturity of operating systems, we're better today than we have been in the past relative to understanding competitive intelligence, market intelligence, it still gives us -- we still have limited visibility in that business about -- think of it as one quarter at a time in terms of really understanding where we're at, how orders will go through because volumes can shift quickly from our customers' perspectives, and that would obviously have a knock-on effect in our volumes. And so we're really looking at the fourth quarter to understand we're still forecasting some seasonal strength in that number. And so relative to the prior year and looking to see how the quarter plays out to begin to rethink and then the combination of the wins that we've made to really understand how it's going to shape our outlook in 2026. But what I would leave you with is we are -- as we made in the comments in the prepared remarks, we are seeing some uncertainty continue to increase dynamics play out relative to the market in terms of lower market demand. And that really goes back to some of those upfront comments around industrial production is still very muted really ever since. You've seen kind of growth outlooks across the globe lower since the tariff announcements back in March. And then you've seen really where you see the consumer begin to weaken is that lower kind of middle-income households. And the middle-income household is actually relatively new in terms of a dynamic that's played out over the past quarter, where before that, you would have seen at the lower levels in areas like SNAP, which we believe to be transitory to what degree that plays out could obviously have an impact. So what we're trying to signal is that we're very cautious about how we're going into the fourth quarter and cautious about 2026, and we'll have a lot more clarity no different than we did over the past 90 days as we progress into February. And at that point in time, we'll be able to give you a better update on how 2026 will shape in the combination of the 3 factors we outlined earlier. Operator: And I will now turn the call back over to Dustin for closing. Thank you. Dustin Semach: Thank you for joining us this morning. Kristen and I look forward to coming back in February to discuss how we finished the year and our expectations for 2026. More importantly, I want to reiterate that as a company, we are focused on maximizing shareholder value and are leaving no stone unturned. And a sincere thank you to all of our customers, our channel partners and our employees who are at the center of what we do and are driving our transformation here at Sealed Air. Thank you. Operator: Thank you. This concludes today's conference call. Thank you for participating, and you may now disconnect.
Operator: Good morning, and welcome to the ADM Third Quarter 2025 Earnings Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded. I'd now like to introduce your host for today's call, Kate Walsh, Director, Investor Relations for ADM. Ms. Walsh, you may begin. Kate Walsh: Welcome to the third quarter earnings conference call for ADM. Our prepared remarks today will be led by Juan Luciano, Chair of the Board and Chief Executive Officer; and Monish Patolawala, our EVP and Chief Financial Officer. We have prepared presentation slides to supplement our remarks on the call today, which are posted on the Investor Relations section of the ADM website and through the link to our webcast. Some of our comments and materials may constitute forward-looking statements that reflect management's current views and estimates of future economic circumstances, industry conditions, company performance and financial results. These statements and materials are based on many assumptions and factors that are subject to numerous risks and uncertainties. ADM has provided additional information in its reports on file with the SEC concerning assumptions and factors that could cause actual results to differ materially from those in this presentation and the materials. Unless otherwise required by law, ADM assumes no obligation to update any forward-looking statements due to new information or future events. In addition, during today's call, we will refer to certain non-GAAP or adjusted financial measures. Reconciliations of these non-GAAP financial measures to the most directly comparable GAAP financial measures are available in our earnings press release and presentation slides, which can be found in the Investor Relations section of the ADM website. I will now turn the call over to Juan. Juan Luciano: Thank you, Kate. Hello, and welcome to all who have joined the call. Please turn to Slide 4. Today, ADM reported adjusted earnings per share of $0.92 and total segment operating profit of $845 million for the third quarter. Our trailing 4-quarter adjusted ROIC was 6.7% and cash flow from operations before working capital changes was $2.1 billion year-to-date. With a challenging industry-wide operating environment, we remain flexible, adapting plans where needed, taking action on what is in our control and investing for long-term growth. A key part of this dynamic environment relates to the status of highly anticipated U.S. biofuel policy. We believe progress on this front will drive significant biofuel and renewable diesel demand and lead to elevated pricing, volumes and margins across several of our key operating areas, which we expect will set up a constructive environment over the long run. But based on the current short-term environment, our AS&O business is significantly impacted. Against this backdrop, we have made good progress with our self-help agenda. We made strides in improving our plant efficiency. We've entered into numerous strategic transactions, which advance our portfolio optimization objectives, and we are accomplishing cost savings through several targeted streamlining initiatives. These actions have generated robust cash flow this quarter and strengthen our business going forward. Our strong balance sheet, driven by a disciplined capital allocation process, give us flexibility to invest for growth and continue to return value to shareholders. Following our second quarter earnings call, we announced our 375th consecutive quarterly dividend. Please turn to Slide 5. Let me share some specific examples of how our team continues to drive simplification, optimization and execution excellence across our segments through our self-help agenda. For Ag Services and Oilseeds, results for the third quarter were sequentially in line and aligned to the expectations we set out in our second quarter earnings call. The team continued to focus on operational excellence, which was reflected in crush volumes increasing 2.6% sequentially and 2.2% compared to the third quarter of last year, albeit in a lower-than-expected margin environment. Our Ag Services subsegment executed a robust export program during the quarter, supported by strong corn and meal programs. We achieved the best total export volume for the month of September since 2016, which helped offset some of the weakness we experienced in our crush business. For Carbohydrate Solutions, the business delivered sequentially steady results overall with lower global demand for sweeteners and starches, offset by strength in ethanol pricing and exports. We achieved a key milestone in our decarbonization strategy, connecting our Columbus, Nebraska dry corn mill plant into Tallgrass's Trailblazer CO2 pipeline and are commencing CO2 injections. This marks the second ADM facility that is reducing its carbon footprint by CO2 sequestration. And for Nutrition, the team drove another quarter of sequential improvement, led by our Flavors and Animal Nutrition portfolios. Flavors North America achieved record quarterly revenue in the third quarter and Flavors internationally recently won a notable contract that is connected to a deep AS&O customer relationship. We're engaging directly with major customers of AS&O and Carbohydrate Solutions on our Nutrition portfolio, highlighting the power of our interconnected value chain. Our Specialty Ingredients subsegment is expected to benefit from the Decatur East plant being back online and consistently producing white flake. During the quarter, we announced network simplification in Specialty Ingredients to streamline our production footprint, and we expect results to improve as this takes hold and we build back our third-party sales business. Within our Animal Nutrition portfolio, our turnaround continues to deliver better results with more progress to come. In Q3, we announced plans for a North American animal feed joint venture with Alltech to further transition our Animal Nutrition business into higher-margin Specialty Ingredients, and we expect this JV to commence operations in 2026. Through these efforts and several other initiatives we have undertaken this year, we remain on track to achieve our targeted $200 million to $300 million in cost savings in 2025 as well as our aggregate cost savings of $500 million to $750 million over the next 3 to 5 years. Strong cash management allows us to continue to invest in areas of innovation where we see attractive growth potential. For example, we are developing the next generation of flavor systems for our growing energy drinks portfolio. Our cutting-edge energy emulsion technology provides enhanced product stability, consistent quality and a simplified supply chain. Additionally, there is a strong demand momentum behind our natural colors portfolio, and we are exploring accretive opportunities to expand both products and geographies in this business. Another area of attractive growth for us is postbiotics, where ADM is investing in innovation. Recently, we were honored with an innovation award at a global premier trade event for our proprietary postbiotic formulation designed to support human immunity and digestive wellness. We also launched our second pet-focused postbiotic. These are examples of the diverse in-house research and development expertise we've developed in the biotics space. We're also underway with advancing ethanol production performance improvements. Through close collaboration between R&D and operations, we've implemented advancements that are delivering improved yield gains. Rollout to additional plants is in progress and further enhancements are in testing designed to drive ongoing optimization across our facilities. We're also investing in side stream valorization as part of our continuous efforts to optimize our production processes and add value to our byproducts. As we close out 2025, we will continue to action our self-help agenda while adapting to evolving trade policy and remaining flexible to offset the impact of challenging dynamics to the best of our ability. Given the deferral in U.S. biofuel policy and other global movements, it is difficult to predict the timing of when we will see a structural increase in biofuel demand. As a result, we are lowering our expectations for full year 2025. We now expect adjusted earnings per share to be between $3.25 to $3.50, down from the approximately $4 per share as we discussed last quarter. Monish will review this in more detail. Overall, the recent progress with the trade deal with China, coupled with our expectation of gaining U.S. biofuel policy clarity within the next several weeks or months is an encouraging setup for next year. We expect 2026 will offer a more constructive environment for both the industry and the American farmer, and that should create both positive economic opportunities and drive additional long-term investment throughout our business and the agricultural sector. With that, let me hand it over to Monish to share a deeper dive into third quarter financial results and our full year 2025 outlook. Monish Patolawala: Thank you, Juan. Please turn to Slide 6. AS&O segment operating profit for the third quarter was $379 million, down 21% compared to the prior year quarter. The deferral of U.S. biofuel policy and the evolving global trade landscape continued to impact demand for AS&O, primarily in our Crushing and Refined Products businesses. In the Ag Services subsegment, operating profit was $190 million, representing an increase of 78% compared to the prior year quarter. The increase was driven primarily by higher export activity in North America with support from our operations in South America. South America improved year-over-year as the prior year quarter was negatively impacted by higher costs related to logistics take-or-pay contracts. Additionally, there were net positive timing impacts of approximately $54 million year-over-year. In the Crushing subsegment, operating profit was $13 million, down 93% from the prior year quarter. Both global soybean and canola crush execution margins were significantly lower than the prior year quarter. Both soybean and canola crush margins were down most significantly in North America, driven by global trade evolution and reduced biofuel production. There were net positive timing impacts of approximately $41 million in the third quarter of 2025 compared to the prior year quarter. Partially offsetting the net timing benefit year-over-year were insurance proceeds of $24 million in the prior year quarter. In the Refined Products and Other subsegment, operating profit was $120 million, down 3% compared to the prior year quarter as positive timing impacts helped offset lower biodiesel and refining margins. There were net positive timing impacts of approximately $12 million year-over-year. Equity earnings from our investment in Wilmar were $56 million for the quarter, down 10% compared to the prior year quarter and excluding specified items. We typically record our share of Wilmar's financial results on a 3-month lag basis with the exception of material transactional events that occur during the intervening period that materially affect the financial position or results of operations. During the third quarter, we recorded $163 million charge related to the penalty imposed on Wilmar by the Indonesian Supreme Court and for our AS&O segment, have presented this as a specified item. Turning now to Slide 7. For the third quarter, Carbohydrate Solutions segment operating profit was $336 million, down 26% compared to the prior year quarter. In the Starches and Sweeteners subsegment, operating profit was $293 million, down 36% compared to the prior year quarter, primarily due to a decline in global S&S demand, which impacted both volumes and margins. This is a continuation of consumer buying trends we have been experiencing throughout 2025 with softness in demand in sweeteners and a reduction in starches demand primarily from less consumption of packaged goods and corrugated paper. Additionally, in EMEA, S&S volumes and margins continue to be impacted by persistent high corn costs related to crop quality issues we discussed in the last quarter. Global wheat milling margins and volumes were fairly stable in the third quarter relative to the prior year quarter. Additionally, the prior year quarter benefited from approximately $45 million of insurance proceeds. In the Vantage Corn Processor subsegment, operating profit was $43 million, up from a $3 million loss in the prior year quarter, driven by strong export activity, coupled with industry downtime for scheduled maintenance, decreased ethanol inventory stocks and strengthened pricing. Overall, ethanol EBITDA margins per gallon for the quarter were approximately double and the volumes were roughly flat compared to the prior year quarter. Now turning to Slide 8. In the third quarter, Nutrition segment revenues were $1.9 billion, up 5% compared to the prior year quarter, including foreign exchange gains that accounted for approximately 2% of the increase. Human Nutrition revenue increased by 6% and the Animal Nutrition revenue increased by 3% compared to the prior year quarter. Foreign exchange gains accounted for approximately 2% of the increase in Human Nutrition revenue and approximately 1% of the increase in Animal Nutrition revenue. Nutrition segment operating profit was $130 million for the third quarter, up 24% compared to the prior year quarter. Human Nutrition operating profit was $96 million, up 12% compared to the prior year quarter as a result of strong Flavors growth and an uptick in biotic demand. The third quarter of 2024 also benefited from approximately $25 million of insurance proceeds as compared to $10 million in the third quarter of 2025. Animal Nutrition operating profit was $34 million for the quarter, up 79% compared to the prior year quarter as a result of the combination of an increased focus on higher-margin product lines, disciplined cost control and progress with ongoing portfolio streamlining initiatives. Turning now to Slide 9. The strength of the ADM model is that we generate strong cash flow through multiple commodity cycles. For the first 9 months of the year, ADM generated cash flow from operations before working capital of approximately $2.1 billion, down by $254 million relative to the prior year quarter as a result of lower overall total segment operating profit. We continue to maintain a solid cash position and have made good progress in improving our working capital efficiency. For example, we reduced inventory by $3.2 billion year-to-date compared to $1.2 billion during the prior year period, largely driven by sharpening our inventory management practices. We continue to be very disciplined in the areas in which we invest. During the first 9 months of 2025, we invested $892 million and maintain our expectations of full year 2025 CapEx to be in the range of $1.3 billion to $1.5 billion. Year-to-date, we have distributed $743 million in dividends. The last point I'll mention on this slide is that our net leverage ratio as of the end of September was 1.8x, improved from last quarter and in line with our previously communicated year-end target ratio of approximately 2x. Now turning to Slide 10. We have provided details on our revised 2025 outlook. Earlier today, as Juan mentioned, we revised our full year 2025 adjusted EPS expectations. Taking into account our year-to-date results and the continued softness primarily in crush margins, we now expect adjusted earnings per share to be in the range of $3.25 to $3.50 per share for full year 2025, down from the approximate $4 per share guide we provided during our second quarter earnings. I will now provide some color on several assumptions that are underpinning our revised guidance range. First, with our self-help agenda, we remain on track to deliver between $200 million to $300 million in cost savings for 2025. Second, for AS&O, as we have previously discussed, as we move through each quarter, we increasingly lock in our book of business for the upcoming quarter. Based on the portion of our business already booked plus our view of the market, we are expecting continued softness in global soybean crush margins, which is a step down from our expectations last quarter when we were expecting global soybean margins to be in the range of approximately $60 to $70 per metric ton. Our Ag Services subsegment is expected to benefit from the robust harvest season we are having in North America. But given trade dynamics, results are projected to be weaker than we had forecasted at the time of our second quarter earnings, and the team will continue to progress our advancements related to plant uptime, manufacturing efficiencies and working capital improvement. We expect insurance proceeds of $10 million in the fourth quarter as compared to $50 million in the prior year quarter. Thirdly, for Carbohydrate Solutions, on the Sweeteners and Starches front, we expect a continuation of the same pressure from softer demand trends that we have experienced throughout 2025 and expect high corn costs to persist in EMEA. Ethanol export flows are projected to drive similar sequential demand throughout the fourth quarter. However, margins are expected to be lower than the highs we experienced during third quarter. Ethanol EBITDA margins for fourth quarter 2025 are expected to be roughly 10% lower than the fourth quarter of 2024 EBITDA margin. We expect insurance proceeds of approximately $20 million in the fourth quarter of 2025 as compared to approximately $40 million in the prior year quarter. And lastly, for our Nutrition segment, we continue to take action on our portfolio optimization and are making sequential progress in network streamlining and cost improvements. In Human Nutrition, Flavors typically experience seasonal softness in the fourth quarter given our product concentration in the beverage categories. This is expected to be partially offset by improvement in Specialty Ingredients now that our Decatur East plant is returning to planned utilization rates. In Animal Nutrition, we will continue to pursue our ongoing turnaround actions, which includes the transition into higher-margin specialty ingredients. We expect insurance proceeds of approximately $5 million in the fourth quarter of 2025 as compared to $45 million in the prior year quarter. Insurance proceeds at the segment level for fourth quarter 2025 are expected to be funded roughly half by a captive insurer and half by third parties as compared to third parties funding the vast majority of insurance proceeds in the prior year quarter. As Juan mentioned, we have continued to make good progress on our self-help agenda, focusing on strategic portfolio optimization, cost reductions and improved working capital management, all of which are strengthening our cash flow. Further, we have refined our digital strategy and are pivoting away from large global implementations and are directing our resources to prioritize regional and more agile projects and accelerating our data journey while continuing to invest the appropriate amount in cybersecurity and network and application resilience. To conclude, I want to take a moment to thank all our ADM colleagues for their focus, adaptability and contributions to the company's long-term success. These efforts are integral to our ability to navigate the current dynamic environment. Back to you, Juan. Juan Luciano: Thanks, Monish. Let me wrap up by saying, overall, we will continue to drive operational excellence and strong cash flow through our focus on manufacturing efficiencies, portfolio simplification and cost streamlining. In AS&O, our team is positioning our asset network to maximize opportunities from the expected improvement in market conditions, primarily as a result of global trade evolution and the pending U.S. biofuels policy. In Carbohydrate Solutions, we will continue to drive operational excellence and closely monitor softening consumer demand trends and broader economic signals while maintaining momentum around our decarbonization strategy, which we expect will open value opportunities in low carbon solutions. And for Nutrition, we expect steady progress across our portfolio with additional opportunities in natural colors. With that, we'll take your questions now. Operator, please open the line. Operator: [Operator Instructions] Our first question for today comes from Ben Theurer of Barclays. Benjamin Theurer: So first of all, on crush and the outlook, obviously, a lot of things have changed. But can you help us reconcile a little bit the sequential decline in the third quarter for crush versus what you had in the second quarter and to a degree in the first quarter when actually the crush environment was, I would say, lower, but I mean, more stable, but at a lower level. So just help us reconcile like how much was like maybe locked in, carried into it and how we should think about crush sequentially, just crush on a stand-alone basis into the fourth quarter, just given the uncertainty that you've mentioned on biofuel. And then I have a very quick follow-up on those insurance numbers. Juan Luciano: Sure, Ben. Listen, as you remember, soybean board crush rally sharply post the RVO announcements. And if you recall, at the time of our last earnings calls, board crush was about like $2.25. Then after that, it has moved lower because of a variety of factors. We had a little bit of a decrease in acres in the U.S. Then there was this chatter about the trade deal with China that made a pickup in beans basis here. And certainly, we have the uncertainty about biofuels policy. There was a large amount of SREs granted in the period with the supplemental proposal to at least partially relocate that, but it is in common period until the end of October and now a little bit delayed because of the government shutdown. So then in the period also, Argentina has a tax holiday that create the potential for increased crush in October, November, December period. So we saw that $2.25 turning into something like $1.20 and now currently bounce back to about $1.50. So in Q4, we expect board crush to remain in the current range, if you will. And as we are here today, we're probably booked about 80% of Q4. So certainly, the $4 range is out of range right now with no extra policy. And so that's what we're seeing at the moment. So the plants are ready to crush harder. We still see with optimism 2026. The team has executed well in everything they could do in this environment, especially in the inventories when Monish reported $3.2 billion lower in inventory helping our cash position. That was basically a lot of that is the heavy lifting of the AS&O team trying to make improvements out of a difficult condition. So we still feel very strong about 2026. All these things that are under in motion right now, whether it's the RVO finalization, the RVO is positive for domestic feedstocks and certainly, the trade deal potentially to have more sales to China is also positive. But all those things need to be finalized during the next 60, 90 days or something like that, then we will have more clarity about where margins will move. Benjamin Theurer: Okay. And then, Monish, just real quick on those insurance gains, you said half and half to come from. So that half that's kept us that's somehow then reflected in the other segment. Just wanted to confirm that. Monish Patolawala: That's right, Ben. And similar to last year. So last year, our total insurance proceeds in the fourth quarter were $135 million. Most of that was funded by third-party insurance. This year, it's, give or take, $35 million. Half of it right now is funded by captive, and we assume that the other half will be funded by third party. Operator: Our next question comes from Manav Gupta of UBS. Manav Gupta: My first question is on your September announcement of forming a JV with Alltech. Help us understand how this came together and help us understand the benefits of this JV and how it helps ADM. Juan Luciano: Yes. Thank you, Manav. Listen, if you recall, our strategy in Animal Nutrition has 2 phases, if you will. One is what we call fit for growth, and that has been driving operational improvements. And we have seen, I think, sequential improvements in operations for the last like 8 consecutive quarters in Animal. But the ultimate objective was to execute a pivot toward more specialties in Animal Nutrition. And so we basically combine here the compound feed businesses of ADM, one of the leaders of the market, which is Alltech and combine really 2 powerhouses here, combining decades of experience and unparalleled capability with production expected to come in 2026. And with that, the ADM part that remains is more concentrated on Specialty Ingredients or premixes. And basically, we're going to be playing a little bit the Human Nutrition playbook, which is to have a specialty pipeline that can grow faster than maybe the big commodities that we have put in the joint venture. So we expect big synergies from that joint venture, big operational improvement, and we expect then the remaining Animal Nutrition in ADM to be a high-margin, high-growth type of segment, if you will. Monish Patolawala: Manav, I would add to Juan's piece on -- one is you asked for the JV, but I also want to just look, credit Ismael and Ian and the team on the progress they've made in general on Animal Nutrition. You can see the results showing from the operational side, which is the fit for growth that Juan mentioned. So overall, really good progress by that team on execution. Manav Gupta: Perfect. Sir, my quick follow-up is, and I understand there's a lot of policy non-clarity here. But the pieces which are on the table and not fully solved are a much higher RVO, a scenario in which there is no production tax credit for imported renewable diesel only 50% RINs for imported feedstocks and the possibility of removing that indirect land use penalty clause, which will make soybean oil very competitive in terms of production tax credits with tallow and other waste oil. So when you put all these things together, eventually when the policy comes around, you see a very, very strong '26 and '27, whereby you will have to make more renewable diesel in the U.S. and make it more with domestic feedstocks and more like domestic soybean oil. If you could talk about all those policies which are on the table, I understand they're not finalized, but they create a very strong momentum for you if they do come together. If you could talk about that. Juan Luciano: Yes. I think that you highlighted it correctly. All those pieces came very favorable, as I said in my initial remarks to domestic feedstock. So we expect as these policies are enacted and finalized. And again, there are many aspects of that, that needs to be finalized. We need to have the final RVO numbers. We need to have the treatment of the SREs. So there are many of those things that needs to be enacted. But when all that is finalized, you can see a scenario in which RINs will probably pop first. So it's going to be a gradual improvement. But the way we have seen it in the past is RINs need to climb to allow renewable diesel plants to have margins for them to run. That in line will pull on more demand for soybean oil. That, in turn, will demand for us to crush more and to run our assets harder, which increases crush margins. And then as demand stabilizes and times go by, you can see margin coming up into biofuels as well. So that's kind of the way we see it running through our P&L. You have to remember that in crush, the big problem we have is this oil leg that is relatively soft right now that will be addressed by the RVOs whenever they are ready. In the other leg, meal has been very strong. Growth in meal has been like globally like 8.5%. We're expecting at about a very strong 6% still for next year. U.S. continues to be very competitive meal and meal continues to buy themselves into Russian. So most of the customers of meal in the protein sector are showing profitability and good times. So that side of the leg is strong. If we can strengthen the RVOs and bring more clarity there, we expect strong crush margins going forward. And that's why I think if you remember last quarter, we said that we were setting up our footprint of plants to make sure that we will be able to run harder, and we are demonstrating that. So we are pleased with the setup. It's just from here to there, there is a lot of clarity that needs to happen that doesn't depend on us. We like to talk more about the things that we can do to improve. We have improved the company in terms of cost, in terms of cash, in terms of portfolio. We've been running this CCC that we call it cost, cash and capital since 2014 when we launched it. And I think the organization has this memory that we need to act into that. They quickly go and help us with the cost reduction targets, with the cash targets. And certainly, we make consistent and steady improvements in our portfolio optimization. So we look at '26 with optimism. We just don't know if it's 12 months of '26 with optimism or 9 months of '26 with optimism because that depends on the government. Operator: Our next question comes from Heather Jones of Heather Jones Research. Heather Jones: I wanted to go back to crush, Juan. And I understand all that you were saying as far as the crush curve, et cetera. But in the U.S., real basis was pretty strong throughout Q3 and has been stronger than expected in early Q4. And just based on our data and anecdotal reports, cash margins were strong for much of Q3 and into early Q4. So given the performance you'll put up for Q3 and crush and then the outlook for Q4, just wondering if you could just break out where you think the big differences were? Was it -- did you have like most of your physical meals sold before the rally? Were you all short beans? Or just -- I was just hoping you could help us understand reconcile the 2, if you could. Juan Luciano: Yes. I think it's a little bit of both. But for the most part, when we get into the quarter, by the time we do earnings calls, we are like 75% sold for the next quarter. So we probably were sold before that rally. And then the rally didn't last that much -- that long, to be honest. So then today, where we are booking is very much similar in Q4 to what we booked in Q3. So -- so I don't see a significant improvement. There is a lot of variability. And I think that when I look at the performance of the commercial team, they've been -- they've done very well. So I can't pinpoint to one thing that we really regret in the business. I would say Ag Services was a little bit softer, but not much. I think that we have a good meal and corn program exporting from the U.S. Of course, we didn't have any beans going to China, but the volumes kind of held, if you will. In -- there was the difference that we didn't have the take-or-pays in Latin America that impacted us last year. So that was a little bit of a compensation for the lack of maybe exports to China. But in crush, we are seeing, again, an environment for us, for our business in Q4 kind of similar to what we booked in Q3. But maybe Monish can give more granularity on the numbers. Monish Patolawala: Yes, sure. So Heather, what Juan said is absolutely correct. So there was a period of time, if you look at when we had earnings last time and board was high, replacement margins were high at that point, too. And then as the quarter progressed, which is when we do a lot of our books for Q4, you actually saw replacement margins come down. And that's why crush margins right now, what we are seeing is flat to slightly up depending on the geography you look at. I think North America, you're seeing crush margins will be slightly higher than Q3. But then you've got to remember, we got a global business. So then you've got all these other business -- other regions. And depending on how basis plays out in those, you would actually see a lower number. So net-net, when we put it all together, Heather, we are saying it's somewhere flattish to a little higher. We'll see where it actually lands. As Juan said, we are decent-sized booked coming into Q4. But of course, there are spot deals still available for the balance of the book. And as I know Greg and the team, they're going to take every opportunity to get what they can. And so that's what we are going to work on. But nothing changes from the fact that the team is very focused on driving value, driving inventory, driving cost out. And as Juan has mentioned, when the crush comes, our plants are ready. And he talked about that, too, is we are seeing plant operations better. So hopefully, as all these things come together, the team can continue to keep executing and keep driving more than where we are right now. But that's where we see it right now, and that's why we're calling it as is. Juan Luciano: Yes, Heather, one thing that I noticed, and I've been running ADM for like 10 years, is that right now, both farmers and customers are very reluctant to book long. So farmers are kind of selling reluctantly and buyers are kind of hand to mouth, if you will. So that doesn't allow for a full orderly flow of the chain, if you will, that we normally see. And because of all this uncertainty, nobody knows exactly what's going to happen with soybean basis and all that based on the trade deal and nobody knows exactly what's going to happen with the oil leg because of the policy uncertainty. So everybody is like trying to go hand to mouth. And that makes it a little bit more difficult for us to reflect some of the conditions in the P&L. That may be one thing I noticed from the past. Heather Jones: That's helpful. And just my quick follow-up is just as we extrapolate forward, I know the hope is that we get a finalized RVO before the end of the year, but I think prudence would say it's probably coming in Q1. So just wondering how are you thinking about replacement margins for Q1? And like you said, farmers and customers are hand in mouth. But as much visibility as you do have, what are you seeing on that front? Monish Patolawala: Yes. So Heather, I'll take a stab at this. So Juan, when Manav asked the question on how he sees policy play out, again, it depends on timing of clarity. So whether it's a 6 months or 9 months. But sitting today, since we still don't have clarity, the book that we are booking at for Q1 right now is, I would say, flattish to Q4. But again, we are open. So it's not like we have already booked all of our Q1. But I think the timing of when the policy comes in will actually have an impact. You're seeing right now, I think, the oil leg leaking with the current where soybean prices have gone up, but let's see how that plays itself out. So to answer your question succinctly on Q1, right now, we haven't seen a big pop in margins. But hopefully, post regularity clarity, you will start seeing that to move up. The question is whether you see it for the first quarter, you see it for 2 quarters. It will all depend on the timing of the policy and also what's in that policy. Operator: Our next question comes from Andrew Strelzik of BMO. Andrew Strelzik: I wanted to start by asking about your outlook for Ag Services. And the third quarter was stronger than we anticipated. You mentioned the trade deal with China, but you're talking about 4Q maybe being a little bit softer than you had originally anticipated. So I guess, was there a timing dynamic in the third quarter? What else has changed for the fourth quarter? And as you think about maybe that bit more subdued outlook, is that really a 4Q issue? Or does that linger as well into '26? Juan Luciano: Listen, I think Ag Services, it was higher in Q3, as you noticed. And I would say versus last year, we had good volumes in North America when you consider our export of meal and of corn, our system worked well. And last year, we had the problem of the take-or-pay in Brazil that we sold for this year. So that has a delta there. As we look forward, I think that the market right now is all about -- so we also have good destination marketing operations and our global trade operated well. We expect those things to continue, but margin opportunities are more difficult right now. I would say we really need this clarity on the trade deal. But although on the surface, it is possible, it is positive for ADM and for grain in general. We haven't seen yet a joint document highlighting the details of this. So we really -- it's a big difference whether the 12 million tons of soybeans will happen in calendar year or in marketing year, of course. And whether that's counted the material that is sold versus the material that is shipped at what prices that will happen. So a lot of that is still in the air. So that's what I was telling Heather before that there's a lot of people going hand to mouth and the farmers as well. If you look globally, farmer selling has been slow when you compare to historical average, probably with the exception of Argentina when they have the tax holiday because farmer wants to see what's happened next. And I think that at this point in time, the 2 big events that will move commodity prices will be clarity on the China trade deal and regulatory clarity on the biofuels policy. And until then, things are going to be a little bit hand to mouth for a while. Monish Patolawala: Andrew, I would just add one more on AS&O and across the business is execution. So that was the other thing in 3Q. Greg and his team continue to drive good cost control, very good job on inventory management, as you can see from the results. And that cost control or the self-help that Juan has mentioned was across all the businesses. So when you put all that together, that's how we came in with the adjusted EPS of $0.92. And I would say we continue that journey on self-help, including in the fourth quarter. So to answer -- you had a second part to your question, which is, is this just a fourth quarter issue or not. So as I think about it, good execution in 3Q. Once policy clarity comes in, in 2026, that sets us up great for '26 and '27, as Manav also said. And so this is just that transition quarter, and the team will continue to drive every self-help idea they can operationally to keep getting better. Operator: Our next question comes from Pooran Sharma of Stephens. Pooran Sharma: Sorry to just belabor on this point, but maybe wanted to just talk about some of the moving pieces here for clarity in the biofuel policy. I think you have the SRE kind of comment period out of the way. And I know you have some noise with the government shutdown. But we've been hearing reports that the EPA has prioritized the RVO through the shutdown and that maybe you could see something in the hands of the OMB by early to mid-December, which then could set the 2025 compliance date towards the end of Q1. And if you think about what the industry would do like the obligated parties would then need to shore up their 2025 books. So do you kind of see a -- from a timing benefit as it stands right now, this being kind of an early to mid-Q1 event? Or how should we think about kind of the moving pieces here? Juan Luciano: Thank you, Pooran. Listen, let me tell you what we know. We know that EPA is aligned with the agricultural industry to support American agriculture and energy dominance through strengthening of the domestic demand for domestic feedstock and prioritizing that. I don't want to speculate on who's working on what at the EPA. I think that the EPA is committed to that. And as quickly as they can, they're going to resolve that because they know the industry needs that and the agricultural industry needs that. So our role is to be prepared, and we will be prepared. You will see, as I explained before, in the gradual improvement of these, whenever the market will detect that there is movement, you're probably going to see RINs popping up. And then eventually, we're going to see crush margins popping up. And so we're ready to do that. Other than that, I will be speculating and I have no basis to do that, Pooran. So I will leave it there. Pooran Sharma: Okay. Great. I appreciate the color there. Maybe just shifting over to Starches and Sweeteners. I think we're approaching that time of the year where you get into contracting season. And just was wondering how we should think about the moving pieces here. I think you have buyers pushing for lower prices amid a larger carryout. And I think you and others have noticed -- noted some softness in demand in the industry. But at the same time, you have really good export volumes. So I was just wondering if you could tell us how negotiations have been faring? And do you think there's the potential for this contracting season to get stretched out like it did last year? Juan Luciano: I would say we are maybe 20, 30 days away from knowing what happened in the contract season. So negotiations are happening right now. So I won't comment on that. I would say corn is plentiful and the U.S. will have a very large crop based on good yields and higher acreage. I think that Brazil will have a record crop. Argentina will have another 50 million ton crop. So I would say raw material will be plentiful, but there has been good demand for corn around the world. Corn, I think, is being used in many ways, of course, in feeding, but also in biofuels policy. And if you think about the U.S. is competitive to -- in ethanol to Brazil, and Brazil has E30. There are governments out there that are enacting like E10 for next year. We have E15 all year rounds in California. So ethanol continues to be the cheapest oxygenate out there. So 2 billion gallons of export this year, maybe 2.2 billion, 2.3 billion for next year. So I think there's going to be a lot of corn, but demand is robust as well. As you said, in general, in the products in carb solutions, we have seen some softness, both in Sweeteners and Starches and -- and yes, in sweeteners and also in starches due to corrugated boxes and cardboard. So we'll have to see. Our team produces more than 20 products from the wet mills from corn. So we balance that equation as we go into the negotiating contracts. So we continue to feel good about the negotiation. As I said, we are doing it now. Contracting is coming along nicely, and we normally report this in February. That's where we finish every year. We have, as you heard me saying over the years, we have avoided the cliff that we used to have in which every contract will end at the same time. So we have a more balanced portfolio of contracts that makes us this time of the year less concerning for at least ADM. But as I said, I think that contract season is going normal. I wouldn't describe anything else, but we will have more to say in February. Operator: Our next question comes from Tom Palmer of JPMorgan. Thomas Palmer: I wanted to ask on the Nutrition business. You cited seasonality is, I think, the main quarter-over-quarter headwind to think about. But at the same time, I think previously, you had a bit more of a sequential improvement embedded in the outlook. So curious about what might have shifted and to what extent seasonality is normal versus maybe there are some extra factors this year? Juan Luciano: Sure, Tom. Yes. I think what we see in Nutrition is sequential improvement in operational capabilities of the Nutrition business. We've been fixing things, and now we're very happy that the East plant is back up. So -- and you saw Animal Nutrition continues to be sequentially improving. I think that Flavors is a big part of the business, of course, and Flavors, we are heavily tilted towards beverages and beverages sold more in the summer. So as the Northern Hemisphere faces the winter now and enters into the winter, we normally see about a 15% reduction in our volumes as we go into Q4. So that will be partially offset by the fact that we will have a full quarter, hopefully, of operations of the East plant that will bring our cost down as we are producing white flakes versus buying it from competitors. But we are in the process of recovering customers there. So you have those puts and takes. But I would say the business continue its path to improve to operational improvements. Thomas Palmer: Okay. And I did have a clarification question just on Ag Services. There was the export window in Argentina late in 3Q. To what extent was that a benefit in 3Q? And will there be -- just curious how the booking works, right, with shipments versus arrivals. Will there be a boost to think about in 4Q from that as well? Monish Patolawala: So the way it works is that we did get a piece of that export license. I'll have to go back and check memory, but some of our shipments did happen in Q3, and you're going to see some of that in Q4. But that will be -- that's already reflected in our export numbers and in our guide that we have given you, Tom. So no delta on there. Juan Luciano: And I would say we continue to watch that, Tom, in Argentina because, of course, after this holiday and after the election success, farmer have not been selling that much as there has been no devaluation in Argentina. So we will have to see how the commercialization will happen. We think it's going to be tight commercialization until the end of the year. So we're watching that closely. Operator: Our next question comes from Steven Haynes of Morgan Stanley. Steven Haynes: I was hoping you could maybe put a finer point on the crush outlook for 4Q. I think you mentioned before that the margins are going to kind of be stable and that volumes might be higher quarter-over-quarter. Maybe just to frame it versus last year would also help in terms of the actual segment dollars. I think it was around $200 million. Would you expect the fourth quarter to be above that or in line or maybe a bit below? If you could just help frame it that way, that would be helpful. Monish Patolawala: And just so I get your question right, Steven, you're talking about AS&O or crush? You're talking about crush, right? So if you look at crush, crush margins are going to be lower on a year-over-year basis. Just based on where we've talked about already about all the factors impacting it, where it's flat to slightly up from Q3, but still down on a year-over-year basis. So based on that, we would expect that crush on a year-over-year basis would definitely get impacted. Secondly, just remember that in our results, we normally mark-to-market our derivative positions at the end of every quarter. So depending on where crush margins or basis ends up being on 31st December, you could see a positive mark or a negative mark. At the end of the day, all that mark is doing is moving money between quarters, but it doesn't change the overall economics. So that's how we'll have to figure out and then figure out how board crush timing goes because that also has an impact. But if you just look at pure execution margins on a year-over-year basis, it is lower. And therefore, as a result of that, execution margins in crush will be lower in dollars also on a year-over-year basis, even though Greg and team are continuing to drive higher volume in the factories as can be evidenced by the work that you saw in Q3, where we have managed to have production greater than 2% on a year-over-year basis. I would also add canola into that same complex, Steven, just so that you know it's the same dynamic. Even canola is down on a year-over-year basis. So that will also have an impact. So it's both of those show up in crush. Operator: Our final question for today comes from Salvator Tiano of Bank of America. Salvator Tiano: I'm just wondering, you got a lot of questions about next year's crush margin and what could happen. I'm just wondering on trade dynamics and the potential new -- the higher demand, assuming the RVOs are approved as they're proposed right now, whether it's in Q1 or Q2, could we see the U.S. at that point becoming a net importer of soybean oil? And if that happens, given that we have a bunch of tariffs, assuming the same place, what kind of move could we see in domestic soybean oil prices that could go into your bottom line as a domestic producer? Juan Luciano: Yes. A lot of speculation in that question. We do, as you suggest, we run scenarios all the time, and there are many things that could happen. So let's chop it by pieces here. On RVOs, we know whenever the policy is enacted, we're going to be crushing more and soybean oil will be more demanded. We have the beans to take care of that today. But of course, you bring the possibility of 12 million to 25 million tons exports to China, and that moves the equation. If the 12 million tons is on a calendar -- a marketing year basis, it's a different pipeline that is a different carryout that we have in the U.S. versus if it's on a -- that needs to be shipped all in 2025. So all those things are put into the consideration. I would say markets tend to adjust. So there is going to be a strong crush in Argentina. There's going to be a strong crush in Brazil. If the U.S. has more demand than we can supply internally, then prices will come up, and we will attract other productions, and we could end up importing soybean oil. At this point in time, we are exporting the soybean oil. So it will be a significant change, but that significant change will be brought by policy and RINs popping up and the things that we described before. So it is a possibility. And before that, we're ready to crush very, very hard to supply domestically before imports come in. I think, Salvator, you need to reflect on the fact that we have improved our operations to supply exactly this kind of environment. I think our Ag Services and Oilseeds is ready to tackle any commitment that the U.S. or China will make in terms of exporting and ADM has a big percentage of all those exports and the capabilities to do so. And ADM has the plants ready to crush very hard and supply the policy -- the domestic policy that the EPA is supportive. So we got ourselves ready to do that. The company is in good shape from a cash and cost perspective, and we are continuing to adjust our portfolio. So we look at '26 and '27 with a lot of optimism. Operator: At this time, I'll now hand it over to Kate Walsh for any further remarks. Kate Walsh: Thank you all for joining the call today. If you have additional questions, please feel free to reach out directly to me. We appreciate your continued interest and support and wish you a great rest of your day. Operator: Thank you all for joining today's call. You may now disconnect your lines.
Operator: Welcome to the Waters Corporation's Third Quarter 2025 Financial Results Conference Call. [Operator Instructions]. This call is being recorded. If anyone has any objections, please disconnect at this time. It is now my pleasure to turn the call over to Mr. Caspar Tudor, Head of Investor Relations. Please go ahead, sir. Caspar Tudor: Thank you, Leila, and good morning, everyone. Welcome to Waters Corporation's Third Quarter Earnings Call. Joining me today are Dr. Udit Batra, our President and Chief Executive Officer; and Amol Chaubal, our Senior Vice President and Chief Financial Officer. Before we begin, I will cover the cautionary language. In this conference call, we will make forward-looking statements regarding future events or future financial performance of the company. Additionally, we will comment on the expected timing for completion of Waters' pending combination with the Biosciences & Diagnostic Solutions business, of Becton Dickinson & Company as well as the expected financial and operational impacts of this combination on Waters. These statements are only our present expectations based on information available to us as of today as well as the forecast and assumptions of Waters' management and are subject to risks and uncertainties, many of which are outside of Waters' control. Actual events or results may differ materially from the statements made on today's call. Please see the risk factors included within our Form 10-K, our Form 10-Qs, our other SEC filings and the cautionary language included in this morning's earnings release. During today's call, we will refer to certain non-GAAP financial measures. Reconciliations to the most directly comparable GAAP measures are attached to our earnings release and in the appendix of the slide presentation accompanying today's call. Both are available on the Investor Relations section of our website. Unless stated otherwise, references to quarterly results increasing or decreasing are in comparison to the third quarter of fiscal year 2024. In addition, unless stated otherwise, all year-over-year revenue growth rates and ranges given on today's call are on a comparable constant currency basis. Finally, we do not intend to update our guidance, predictions or projections, except as part of a scheduling -- a regularly scheduled earnings release or as otherwise required by law. On today's call, Udit will begin by covering our key messages for the quarter. Amol will then take you through our results and updated guidance in more detail, then we will open the phone line up for questions. With that, I'd like to turn the call over to Udit. Udit Batra: Thank you, Caspar, and good morning, everyone. Let me begin by saying, it is a true privilege to be on this journey with such dedicated and talented colleagues. As I reflect on my 5-year anniversary at Waters, I'm filled with gratitude. Over these years, our team has consistently delivered on our commitments and strengthened the foundation of this company. Today, we celebrate another quarter of outstanding commercial momentum. We marked another breakthrough innovation with Xevo CDMS, the next generation of mass spectrometry and prepared to combine with BD's Bioscience & Diagnostic Solutions business, ushering in an exciting new era for Waters. Now turning to our third quarter results. We are pleased to report another excellent quarter with top and bottom line results exceeding the high end of our guidance. This performance reflects the combined positive impact of innovation and execution, along with clear benefits from our strategic expansion into high-growth areas. It also reflects the dedication and hard work of our teams whose focus on customers, science and operational excellence continues to power Waters a success. We achieved strong results in the third quarter. Sales grew 8% as reported and 8% in constant currency. Instruments grew 6%, led by high single-digit growth in our LC-MS portfolio. Recurring revenue grew 9%, driven by 7% service growth and 13% chemistry growth. We grew non-GAAP earnings per share by 16% to $3.40, which was $0.20 above the midpoint of our guidance. A year ago, we signaled the start of a new instrument replacement cycle. Since then, sales activity has surged and our momentum has continued to build. We see meaningful runway ahead as customers progress through the multiyear process of replacing their aged instrument fleets. Instrument growth is currently tracking at a low single-digit CAGR versus 2019, reflecting steady mean reversion toward the long-term historical rate of 5%. Beyond replacement activity, customers are increasingly choosing Waters for new capacity investments, setting us up well for the years ahead. Our idiosyncratic growth drivers, GLP-1 testing, PFAS testing and India generics continue to perform very well. At the same time, our innovative products are also solving clear unmet needs in bioanalytical characterization and gaining adoption. As reported, instrument sales grew 11% quarter-over-quarter, representing the largest third quarter ramp in our company's history outside of the 2020 COVID year, with orders once again exceeding shipments. The strong sequential performance underscores the strong momentum in our business. Year-over-year, Alliance iS sales grew over 300% as the customer adoption of our flagship HPLC product remains a clear success. Xevo TQ Absolute platforms grew 30%, with continued strength bolstered by the launch of the new Xevo TQ Absolute XR earlier this year. GLP-1 testing-related revenue more than doubled, reflecting continued wins in development and manufacturing settings in the Americas and Europe, along with expanding demand from generic semaglutide manufacturing build-outs in India. PFAS growth remains robust with orders growing approximately 30%, similar to last quarter. We saw strength across all major regions, highlighted by strong demand in Japan as labs prepare for new drinking water regulations and continued momentum from U.S. federal, state and municipal labs. Our India team once again delivered excellent performance with revenue up high teens. This was driven by strong demand from generics manufacturers and CDMOs as we continue to benefit from volume growth trends tied to the ongoing patent cliff of blockbuster drugs. Further enhancing our core performance are the unique capabilities we've built to address unmet needs in large molecule workflows. We are seeing clear progress in bioseparations and bioanalytical characterization reflecting the success of our deliberate long-term strategy and the investments we've made, both organically and through our acquisition of Wyatt. In bioanalytical characterization, we saw strong growth of multi-angle light scattering instruments in pharma QA/QC applications as large pharma began new waves of instrument purchasing in quality labs. This was enabled by the recent launch of Empower onto Wyatt light scattering platforms. BioAccord LC-MS System sales also saw strong growth, underscoring the sustained momentum and expanding adoption of this platform in the bioprocessing domain as customers increasingly standardize on its proven performance and ease of use in routine large molecule workflows. In the quarter, chemistry grew 13%, fueled by the positive market reception of our newly launched SEC and Affinity Bioseparation Columns with strength that more than offset pull-forward dynamics from the second quarter. Bioseparations grew more than 20% with small molecule applications growing 10%. 5 years ago, Waters MaxPeak Premier Columns set a new standard of performance in reverse phase separations across both small and large molecule pharmaceutical applications. Today, this high-performance surface technology remains the benchmark for customers seeking the clearest peaks, maximum reproducibility and highest confidence in results. All of this helps accelerate analytical decisions across discovery, development and manufacturing. Since 2023, we have made further advances in combining the bio-inert benefits of MaxPeak Premier with our novel innovations in other chromatography techniques such as size exclusion chromatography and affinity chromatography, both critical to bioseparations. These products have an immediate success serving pre and post clinical development and manufacturing applications of novel large molecule therapeutics. New products launched over the past 5 years grew approximately 50% in the quarter and have been a key contributor to our 11% year-to-date chemistry growth. By end market, our results were led by pharma which grew 11%, driven by double-digit growth in Americas and Asia and high single-digit growth in Europe. In Asia, we saw particularly strong growth in China, where pharma sales grew by more than 20%, reflecting continued spending improvement amongst Chinese CDMOs and biotech customers. In our Industrial segment, sales grew mid-single digits, with the TA division returning to positive growth sooner than expected. In the Academic & Government segment, sales grew 1%, driven by stimulus tender wins in China and a lower-than-expected decline in the United States, where our teams delivered strong results at customers' fiscal year-end. Our growth strategy is delivering, driving exceptional performance and positioning us for sustained momentum ahead. At the same time, the external environment continues to improve across our key end markets, supported by more stable global trade conditions and a clearer policy backdrop for our pharma customers. With our strong third quarter performance, we are raising our full year 2025 guidance. We now expect constant currency sales growth in the range of 6.7% to 7.3%. This represents a 7% midpoint, which is an increase from our prior outlook. We are also raising our adjusted earnings per share guidance and now expect a range of $13.05 to $13.15, which represents double-digit growth. Looking ahead to 2026, we are well positioned to build on our momentum. The same growth drivers that have powered our performance this year, instrument replacement, higher service attachment and increased product adoption through e-commerce will remain key contributors. We also expect the innovation tied to our idiosyncratic growth drivers and our unique offerings within bioseparations and bioanalytical characterizations to deliver a sustained contribution to our growth. This puts us in a fantastic position to deliver strong performance again in 2026. Further reinforcing our outlook for next year, we are launching a wave of new products that build on our recent success. At the same time, our pending combination with BD's Biosciences & Diagnostic Solutions business represents a powerful catalyst for near-term synergy realization and long-term value creation. A few weeks ago, we launched our Xevo Charge Detection Mass Spectrometer, which marks a new era in mass spectrometry. It is a perfect example of how our team takes complex technology that meet clear unmet needs and turns them into simple and easy-to-use instruments without losing the sophistication of the measurement. Xevo CDMS represents a transformative breakthrough in bioanalytical characterization. It enables direct high-resolution measurement of largest and most complex therapeutics in high-volume applications. The system is a major advancement offering, faster results, easier operation and requiring much smaller sample sizes and traditional methods such as ultracentrifugation. It provides process development and lot release characterization insights up to 10x faster while requiring 1% of the sample volume, accelerating what was previously required days of analysis. This launch is relevant for 40% of the large molecule pharmaceutical pipeline and serves a total addressable market of approximately $350 million, which is growing between high single digits and low double digits. We also have exciting updates ahead for Empower, which has long set the standard for compliant informatics in pharmaceutical applications. It is used in more than 80% of novel drug approvals by the FDA, EMA and China's NMPA. Over the last several years, we have steadily expanded the value and reach of Empower, adding new detectors to the platform. Earlier this year, for example, we successfully launched multi-angle light scattering from our acquisition of Wyatt on to Empower. These advancements are helping us extend Empower's leadership from small molecule analysis into the faster-growing large molecule applications where biologics and complex modalities now represent more than half of the global pharma pipeline. Looking ahead, Empower will continue to evolve as a more complete panel for bioanalytical characterization across multiple techniques, including flow cytometry, creating a unified, compliant data environment for our customers' most advanced analytical workflows. In 2026, we will begin a significant release cadence introducing a series of premium features that will progressively evolve Empower into a modern, connected and more intelligent platform. These cloud-native features will leverage artificial intelligence and machine learning to reduce manual interventions, save analyst time and minimize compliance risks from human error, which are all key value drivers in QA/QC labs. They will also enhance instrument utilization and uptime through predictive maintenance and automated operational insights. The value add that these new features offer will answer our customers' unmet needs and will help accelerate our customers as transition from a perpetual license model to a subscription-based model where we are already seeing growing traction with several large pharma customers. This shift will unlock long-term growth accretion within informatics and deepen customer engagement across Waters' digital ecosystem. Further development could expand the opportunity ahead in bioanalytical characterization came last week as the U.S. FDA issued new draft guidance aimed at modernizing and accelerating the development of biosimilar drugs. The proposed framework will reduce the need for routine comparative clinical efficacy studies and instead rely primarily on advanced analytical characterization. This could represent a meaningful shift towards analytical testing becoming the primary gatekeeper for biosimilar approval which has the potential to increase demand for analytical instruments and compliance-ready workflows such as our BioAccord LC-MS System, multi-angle light scattering and flow cytometry. Taken together, these developments strengthen our confidence in the high-growth opportunity that exists in the years ahead across bio separations, bioanalytical characterization and large molecule compliant informatics. Now turning to our pending combination with BD's Bioscience & Diagnostic Solutions business. We have a compelling opportunity to create value for our shareholders and begin realizing year 1 synergies following completion of the transaction. Our goal is to hit the ground running and quickly apply the same execution and operational discipline that has defined Waters over the past few years. Integration planning is well underway and progressing rapidly. We've hosted 2 highly energizing integration summits at our Milford headquarters, bringing together 120 leaders from both organizations to establish a unified vision. We have refined our pre-day 1, day 1 and day 100 master plans and achieved alignment on operationalization of transition service agreements in collaboration with the BD team. And we are well on our way to readying our synergy delivery action plan, 6 big business unit work streams and 10 functional work streams are now fully mobilized and focused on day 1 readiness. We remain on track to complete the combination of BD's Biosciences & Diagnostic Solutions business with Waters Corporation around the end of the first quarter of calendar year 2026. I will now turn the call over to Amol to cover our financial results in more detail and provide further details on our guidance. Amol Chaubal: Thank you, Udit, and good morning, everyone. In the third quarter, we delivered sales of $800 million up 8% as reported and 8% in constant currency. Momentum remained strong with as reported sales increasing 4% quarter-over-quarter, while orders continued to outpace shipments leading to backlog growth. By end market, Pharma grew 11%, Industrial grew 4% and Academic & Government grew 1%. In Pharma, all major geographies grew high single digits or above led by low double-digit growth in the Americas and Asia. This trend reflects robust instrument replacement activity, key wins in greenfield CapEx projects, such as those related to our idiosyncratic growth drivers and new instrument system deployment in bioanalytical characterization. We also saw significant market uptake on our new chemistry products such as those serving bioseparations which grew mid-double digits. In Industrial, Waters division grew mid-single digits led by mid-teens growth in food and environmental testing where PFAS-related demand has remained a key growth driver. TA performed better than expected and returned to growth with sales up 2% as improving macro sentiment drove stronger customer spending. In Academic & Government, growth was led by China, which grew approximately 20% as we leveraged our local presence and new product innovation to capture stimulus tender opportunities. Meanwhile, the Americas saw a low single-digit decline as spending came in better than reflected in our assumptions. By region, Asia grew 13%, while Europe and the Americas, each grew 5%. In China, sales grew 12%, driven by double-digit growth in Pharma and Academic & Government. India grew in high teens, reflecting continued strength in Pharma Generics where we are benefiting from the ongoing patent cliff. By product line, instrument sales grew 6%, led by high single-digit growth in LC-MS System reflecting continued strong performance as we move beyond the first year of the instrument replacement cycle. Recurring revenues grew 9% with service up 7% and chemistry up 13%. Our strong chemistry performance was driven by price optimization and volume growth in small and large molecule applications and new product introductions, which more than offset the pull-forward dynamics from the second quarter. Adjusted earnings per share were $3.40, representing 16% growth. GAAP earnings per share were $2.50. Gross margin for the quarter was 59%, which was a 70 basis point sequential increase versus the prior quarter, reflecting normalization of tariff remediation costs. Adjusted operating margin was 30.3%. Our operating tax rate came in at approximately 14%. Free cash flow was $160 million after funding $25 million of capital expenditures and $14 million of transaction-related expenses. Our net debt stood at $948 million at the end of the quarter. Now I will share further commentary on our full year outlook and provide our fourth quarter guidance. Our growth strategy is delivering, driving exceptional performance and positioning us for sustained momentum ahead. At the same time, the external environment continues to improve across our key end markets, supported by more stable global trade conditions and a clearer policy backdrop for our pharma customers. With our strong third quarter performance, we are raising our full year 2025 constant currency sales growth guidance now to a 7% midpoint in the range of 6.7% to 7.3%. Net of currency translation, full year reported sales growth is now expected to be in a range of 6.5% to 7.1%. We expect full year 2025 gross margin to be approximately 59.2% above our prior outlook and adjusted operating margin is expected to be approximately 31%. Below the line, we expect $36 million in net interest expense and average diluted share count of 59.7 million and tax rate of 16.5%. With these updates, we are raising our full year 2025 adjusted earnings per fully diluted share guidance to the range of $13.05 to $13.15. This is approximately 10% to 11% growth. This guidance incorporates the expected impact of the current tariff structure on our business including the recent increases in tariff rates since our last update. Turning to the fourth quarter of 2025, we expect constant currency sales growth in the range of 5% to 7%. Net of currency translation, reported sales growth is expected to be 5.2% to 7.2%. At the midpoint, this guidance assumes a 16% quarter-over-quarter increase in the reported sales between the third and the fourth quarter, prudently below the seasonal pattern we observed last year. We also have one additional day in the fourth quarter versus the prior year, representing roughly 100 basis points tailwind to recurring revenue sales growth. We anticipate our fourth quarter adjusted earnings per fully diluted share to be in the range of $4.45 and $4.55, which reflects a year-over-year growth of approximately 9% to 11%. With that, I will now hand it back to Udit. Udit Batra: Thank you, Amol. So in summary, momentum in our business remains strong. We have continued to deliver high single-digit growth as we move into the second year of the instrument replacement cycle, driven by consistent execution and the positive impact of innovation across our portfolio. Reflecting this strength, our raised full year 2025 outlook now calls for high single-digit sales growth and double-digit adjusted EPS growth at the midpoint, underscoring the success of our global teams delivering on our long-term growth strategy. Looking ahead, we will enter 2026 with a robust cadence of breakthrough product launches, expanding adoption in large molecule applications and an exciting opportunity to unlock meaningful near-term synergies and long-term value creation through our pending combination with BD's Bioscience & Diagnostic Solutions business. I will now turn the call back to Caspar. Caspar Tudor: Thanks, Udit. That concludes our prepared remarks. We are now happy to open the lines and take your questions. Operator: [Operator Instructions] Our first question will come from Tycho Peterson with Jefferies. Tycho Peterson: Nice quarter. I'd love to unpack the pharma strength to start. America is up low double digits, China up over 20%. Can you maybe just provide a little more color on both those markets in the U.S., how much of this is on the back of the [indiscernible] announcements? And how are you thinking about kind of year 2 of the replacement cycle? And then durability of momentum in China, is this increased R&D investment? Is it a multinational activity? And how do you think about anti-involution there? It seems like that could be a tailwind in China going forward. And then lastly, just on chemistry up double digits. Can you maybe just provide a little bit more color on what's driving that? Because you are tracking above historical growth trends. Udit Batra: Look, very happy with what we're seeing in pharma. It grew double digits again this quarter. And as you mentioned, the growth is across all regions. Starting with the Americas. Look, I mean, double-digit growth overall. But if you just take U.S. and Europe as a combination. I mean the growth was driven by the success of our replacement cycle in large pharma and equally the traction of our new products, right? I mean you'll note now Alliance iS grew 300% versus last year. Xevo TQ Absolute start to enter the DMPK space, and that's benefiting the pharma growth in the U.S. and across Europe quite a bit. GLP-1 testing is doubled versus last year and increasingly our biologics characterization instruments as well as our bioseparations portfolio is doing extremely well with large pharma across U.S. and Europe. If you go to China, in China, same as last quarter, activities being driven by CDMOs supporting the local biotech industry. And again, here, our new product portfolio is doing extremely well, right? I mean these customers are supporting biotech customers who then have to transition many of these molecules globally, and they want the best characterization techniques, the best chemistry, and that's benefiting us quite a bit. and not to leave India out, I mean the India generics market continues to grow in the high teens. Now that said, there are still pockets of low growth, right? Like we mentioned in the past, China generics, pharma discovery and CROs are still a bit slower. So as those improve, the setup is extremely good as we go forward for pharma and as we look ahead. So great execution across U.S. and Europe and globally, great traction with new products and still some pending end markets or segments that are not yet growing. Now turning to your question on chemistry, right? I mean this is a real success story of our focus on innovation, especially in bioseparations. Like this quarter, we grew 13%. Year-to-date, the growth is 11%, and there is a significant contribution of our bioseparations portfolio, right? So we launched MaxPeak Premier roughly 5 years ago that created the bio-inert surface category. And on top of that, we've been step-by-step launching new products targeted to different types of novel modalities and large molecules. First came the SEC columns, basically helping us resolve large molecules that we can separate through porous particles. We launched Affinity Chromatography last year, again, with the MaxPeak Premier as a base and that is growing really, really nicely. Let me have Amol jump in just to sort of give you some help on the modeling as you think about this in the future and the contribution of new products. Amol Chaubal: Yes. And just to build on what Udit said, right? I mean, think of it this way. Our teams are pursuing critical customer unmet needs. So when they are able to solve those unmet needs, very quickly, the demand and the sales pickup on that new product and reach sort of $8 million, $10 million, right? And if you have 2 such launches in a year, you're quickly adding $20 million, $25 million in that year when it happens. And on a base of a little over $600 million of chemistry, that's like 300 basis points accretive in the year that happens. And then think of it from a BD vantage point, right, like BD just unlock 8 to 12 projects that were stranded that gives us a very meaningful runway in the next 5 to 7 years to unlock this accretive growth through bioseparations. Udit Batra: Look, I mean, at the end, the success in pharma, the success in bioseparations or chemistry is all due to sort of a deliberate focus that we put a few years ago on launching products that meet unmet needs across our customer segments. And we're seeing fantastic uptake of these products. Operator: Your next question will come from Jack Meehan with Nephron. Jack Meehan: Pretty strong results here. I had 2 questions for you. The first is on BD transaction. It sounds like there's a lot of efforts underway. Udit, I was curious on your latest thoughts on the revenue synergies and confidence to achieve that. And then my second question, I'll go on mute is, last week, there was an FDA update around biosimilars for analytical assessments with LC-MS. Just curious if you could help us understand what that might mean for Waters? Udit Batra: Thank you, Jack. I think your line was breaking up a little bit, but your first question was around BD, right? Look, a very busy few months since we last spoke. I've had the opportunity to visit several customers across bioscience and microbiology. Equally, we've had a lot of discussions with our future colleagues in workshops. So let me just give you some color on both of those, and then I'll let Amol comment on the immediate impact of different types of synergies. Look, from a customer standpoint, the FACSDiscover S8 and A8 are a significant advancement in the field of flow cytometry. I had the opportunity to visit academic customers, small pharma customers and large pharma customers. And now you couple this with a more stable CapEx environment going forward where customers are able to plan without many perturbations their CapEx. I mean, we see a very significant opportunity there to increase the uptake of FACSDiscover S8 and A8. I mean, this was fantastic to see with the customers myself. On the microbiology side, I had an opportunity to visit automated and manual laboratories. Now to just illustrate the difference between the two. In manual laboratories, you get hundreds of samples in a day and about 80 or so technicians will be in any laboratory basically doing a lot of these experiments manually. And if you compare that to an automated lab, you will need roughly 5 to 7 technicians to do the same throughput or even a higher throughput of experiments, right? So significant savings. And to put that in perspective, BD's Kiestra platform has roughly 10% to 20% growth in Europe over the last couple of years, whereas in the U.S., the penetration is at a very low level. So we think there's a significant opportunity there as well. So I'm thrilled to bits to see things that we had put on paper and really verify them with customers and meet new colleagues. Now in terms of integration planning. We've had roughly 120, 130 colleagues come to Milford, our headquarters, twice in the last few months. The last workshop really focused on day 0, day 1, day 100 planning. So there is no -- nothing lost in transition from one organization to another. And then we spent significant amount of time taking the synergies that we had signed up for and elaborating the plans with milestones and targets and assigning those to individuals across the 2 organizations and take a significant amount of progress made on that front. And I'll let Amol comment on which synergies will contribute rather quickly in the next year or so. Amol Chaubal: Yes. Just to build on what Udit said, right? I mean these 2 summits were fantastic. We got an opportunity to validate both our revenue synergy assumptions and cost synergy assumptions in a large group setting with leaders who will be responsible for delivering these synergies and working them out in the countries, in the market. And that gives us confidence that we will not only be accretive from an EPS point of view in the first 12 months, but also in the partial year that we will have in 2026, where we will get maybe 9 months in the year. And I mean what hits the ground running day 1 are things like improving service plan attachment, deploying premium service plans to our LCMS customers, getting into customers that we today don't serve with our LCMS in diagnostic offering, getting into DMPK labs, getting flow and PCR into process development labs where we have built strong channels across BioAccord and light scattering and implementing our pricing discipline algorithm, which even in today's settings is delivering like-for-like SKU, like-for-like geography, 200 basis points of year-over-year increase. Udit Batra: So I mean just to build on that, really looking forward to bringing the execution focus and it's being received extremely well with our new colleagues and a sharp focus on unmet needs as we unlock many growth areas for the future. Now to your question on biosimilars, really excited to see that the guidance is now guidance is now moving towards using analytical instruments and analytical testing instead of clinical studies to show equivalents between biosimilars and originators. This could provide a significant upside as we go ahead. And if you go back a few years, we've talked about this. This is -- this and being able to substitute one tool for another without having to redo process development and redo manufacturing submissions is the impetus for creating our bioseparations and bioanalytical portfolio. So this plays right into the hands of our strategy. And I'm really excited, a bit cautious, I mean, to see how fast the ramp will be. So I would not start modeling all biosimilars with bioanalytical characterization yet, Jack. Let's look at one or two customers adopting it and then we'll go forward. But I'm very excited to see this. Operator: Your next question will come from Puneet Souda with Leerink. Puneet Souda: First one on the 4Q guidance and then I have a broader follow-up. On 4Q, just wondering if you're expecting a budget flush in the fourth quarter. If there are any pull forwards in the third quarter that you saw you had a pull forward in 2Q in China, but you grew strongly again 13% in China, I believe. So wondering if you can clarify on the pull forwards. Or should we expect a normal seasonality in the fourth quarter? And fourth quarter contribution instruments versus chemistry, if you could elaborate? Udit Batra: So let me start, and then I'll pass over to Amol on the breakup. Look, Puneet, we -- I mean it's a very strong setup going into the fourth quarter, right? The drivers are the same instrument replacement cycle, idiosyncratic growth drivers, innovation, really kicking hard. So feel very good about what we are seeing going into the fourth quarter. I mean -- and as usual, we have maintained our guidance philosophy, right? So when you look at the full year guide, I mean, we basically said 7% at the midpoint, high single-digit growth, EPS double-digit growth. That means that Q4 is at 5% to 7%, right? And when you take that math at the midpoint of the guidance, it's slightly less than a 16% ramp from Q3 to Q4, which is substantially lower than what we've seen on average for Waters, which is roughly 22% and even lower than what we saw last year, which was at 18%, right? So that gives us -- and it is the same philosophy as we've had through the year, we will look at it in the rearview mirror and claim success, but I can simply say, I mean, there is a significant amount of prudence built into what we have guided for Q4. Amol? Amol Chaubal: Yes, just to add to that, right, I mean, as Udit outlined, the guidance is prudent 16% versus 18% last year, historical 22% ramp. And keep in mind, there's 1 extra day on the recurring revenue, which adds about 100 basis points. So the way it breaks down is chemistry roughly 6% because still some working down of the Q2 pull forward, service about 8% because it has one extra day and then instruments at 5%, sort of aggregating all to 6% midpoint. Udit Batra: I'm sorry, I didn't address your pull-forward question. No pull forward at all, right? Orders grew more than sales this quarter, and we've built a healthy backlog. So feeling very good about the overall momentum that we see going forward. Puneet Souda: Got it. Just a quick follow-up, if I may, on Empower. If you could outline for us, obviously, a very important core product for execution in QA/QC for Waters. With the subscription-based model, how should we think about the incremental upside here versus the prior Empower model? Udit Batra: Yes. Look, Puneet, I mean, really excited about what we're seeing from our software teams. And this Empower innovation model or as we call it internally, the Empower Superhighway, has 3 parts, right? I mean we want to take every analytical instrument that is used to characterize biologics and be compatible with Empower. So when our customers choose to take it into QA/QC, they have no reluctance, right? And you see that, as an example, with multi-angle light scattering on Empower, customers are moving that into QA/QC. You've already seen that with mass detection, capillary electrophoresis and we intend to do the same with flow cytometry and down the line with PCR as well. So that's the first part. The second is then taking our large installed base that you just referred to. There's roughly 450,000 users of Empower globally, right? And it is the compliant informatic software of choice for our pharma customers. We intend to give them more value-added services with a -- and applications with a cloud-ready software, right? So for instance, customers want to get utilization data, our system monitoring software already provides that, provided you have your products on Empower. Second, we're offering our customers a data viewer, which allows them to detect anomalies in their -- in different peaks, allows them to do integrations much, much more smoothly just leveraging their own data through advanced machine learning algorithms. And finally, the data intelligence software, which is the most exciting allows regulators and customers to determine where an audit trail might have been -- where we would -- where you might have deviated from an audit trail electronically, so they can focus on the exact challenge that they need to address in compliance. And put this all together, this then really gives customers an impetus to go from a CapEx and a service model to a subscription-based model, and that has significant benefits. It's too early to start quantifying exactly what that is. I can tell you that there are a significant number of customers who've already transitioned in small to midsize pharma. There are several large pharma customers, where we are in late-stage discussions and just to sort of give you an example, one customer transitioning their fleet across the globe can yield roughly low double-digit millions just very, very quickly in upside. So we'll start to quantify that as the runs come on the board like we usually do. But as you can intuitively see, this is a very significant opportunity. Operator: Your next question will come from Casey Woodring with JPMorgan. Casey Woodring: Great. I have two here. The first is on TA. You said that business came back faster than expected. I think you had previously assumed TA would be down 5% in the second half, and you grew 2% here in 3Q. So maybe walk us through your latest expectations as we exit the year in TA. And then on the instrument order funnel, you talked about orders exceeding shipments again in the quarter. Maybe walk us through what you're seeing from an order funnel perspective. And I would be curious to hear your thoughts on the replacement cycle runway. You've historically said that the cycle usually lasts around 2 to 3 years. But just wondering if this current cycle could last longer, just given the strength that you've seen here, coupled with new product launches, the FDA update, Jack referenced earlier, and perhaps any sort of reshoring benefit? Amol Chaubal: Thanks, Casey. So quickly on TA, right? I mean the thing that was causing sort of the pain in Americas was largely driven by the volatility around tariffs with some of our large industrial customers. And as that is starting to stabilize, these customers are coming back to business and releasing capital for projects that were stalled and then that, coupled with an interest rate outlook that is improving, opens projects that were stranded for last several quarters. So in general, we feel good that the business is tracking towards a good direction. And in terms of the funnel and the order book, I mean, a lot of things are going well, right? In the sense you have large pharmas and CDMOs in middle of a replacement cycle, the innovation that we've put out in the market across both LC and MS is resonating and solving critical unmet need. And that is further than amplified by bioanalytical characterization and bioseparations where we continue to make big headways. So the funnel is pretty rich and strong. Now having said that, 3 customer groups are still on the sideline, CROs, biotechs and branded generics in China. We start to see CROs come into the mix as we come towards the end of the year, which is great because then they add to the replacement cycle as we get into 2026 and there is still a significant runway left on both large pharma and CDMOs that positions us really well for the upcoming year. And then at some point, branded generics in China and drug discovery have to consider replacement because these instruments have aged far more than their typical useful life. Udit Batra: Excellent. Look, I mean, just maybe embellishing on 2 points that Amol has covered. One, the replacement cycle. I mean, if you look at the 6-year CAGR, we're still in the low single digits on instruments. So there's a long way to go. And I think you mentioned reshoring. Look, the recent clarity on MFN, as you see large pharma negotiating with the government, really it's been a relief, right, across our customers and across our company because it allows you to plan a lot more systematically, right? And I would not underestimate the benefit of being able to do that, that then allows the customers to adopt, as I mentioned earlier, BD's FACSDiscover S8, A8 much more confidently. It allows them to adopt our new products much more confidently as CapEx gets released. So we feel very good given that we have a differentiated portfolio that is meeting needs with the further clarity in the end markets. And that's sort of a side effect of the negotiations that have taken place on the MFN. Operator: Your next question will come from Doug Schenkel with Wolfe. Douglas Schenkel: Two questions. It was a really strong quarter. That said, when I look at our model, there's some interesting [ pacing ] dynamics. And I know you said there wasn't any pull forward or push out. But if I look at just our model and I think street models, you beat the quarter from a revenue standpoint, but you increased full year guidance by less than the magnitude of the beat. Secondly, margins were light, but you assume a big jump in operating margin in Q4 more than previously expected. And then tax rate was low in the quarter and really helped some of the EPS upside, but then you expect a big jump in tax rate in Q4. I'm just wondering how much weight we should put on some of these puts and takes when it comes to timing dynamics as they run through the P&L? Like should we focus much on those? Or is the bigger thing just to in your opinion, kind of say like, hey, there's going to be puts and takes in any quarter, but if you look at the year as a whole, you're tracking ahead of plan top to bottom. So that's the first one. And then really building off of that, you have some really strong momentum heading into next year. The downside to that is the comps are difficult. I just want to make sure, as we sit here today, are you still comfortable with us modeling something like 6% to 8% core growth at the top line even with these comparisons given the strength and something like 50 to 100 basis points of margin expansion? Amol Chaubal: Yes. Doug, thanks for the question. I mean, look, at the end of the day, you have to look at the full year, right? I mean there's always puts and takes in a given quarter, right? For example, in Q3, we are running ahead of plan. So we had to sort of true up for the annual bonus payout to reflect that. And then there is also incremental commission associated with outperforming your plan that comes in. When it comes to tax, there is always timing of discrete items and when they show up and when they get trued up. So on a full year basis, we're still at 16.5% on the tax rate. And as Udit outlined, I mean, we have tremendous growth catalysts out there for 2026. And if there is an opportunity to accelerate some of them or to derisk some of them, we will absolutely take it as long as it's within our guide and within our P&L. And we continue to do that as we come across investment opportunities that accelerate growth. Udit Batra: Look, I mean, to answer your second question on next year. First, I'll tell you this year is not over, and we're laser-focused on delivering a fantastic year, high single-digit growth, double-digit EPS growth. I mean puts and takes from one quarter to the other, notwithstanding, I mean, the full year is a fantastic, fantastic performance. 2026, the setup is the same, Doug, as this year with incremental drivers from a more stable policy environment, especially across pharma. The largest customer, stable environment also across academia as we start to go into next year. So a better -- even a better setup from an end market perspective. From Waters, the setup is excellent, right? Our instrument replacement cycle is still sort of in the mid innings. We are traversing at a low single-digit CAGR versus 2019. Idiosyncratic growth driver, GLP-1 testing, the revenues doubled this quarter versus last year. There's still a long runway to go as the volume keeps increasing and now you have semaglutide generics coming to the market. India is putting up really nice runs on the board with high-teens growth and as is PFAS testing. Talk about innovation. I mean, our pipeline is doing extremely well. The move towards bioanalytical characterization, bioseparations is paying off extremely well, as you saw in this quarter's results and year-to-date results and we expect that to continue next year. Now that's augmented further by strength in CDMS, which is a game-changing launch for large molecule mass spec. You then have informatics building on top of it, with malls going into Empower in the instrument space. So there are several catalysts for next year that are not even there this year. So we feel extremely good going into 2026 on our top line growth. Now as you know, we generally don't give specific guidance in Q3. We'll talk more about that when the year-ends and at Q4, but the setup is extremely good from an end market perspective, our execution perspective and how much traction all our new products have, and that allows us to deliver the performance we're delivering in a dynamic environment. Operator: Your next question will come from Dan Arias with Stifel. Daniel Arias: Just Udit, a follow-up on the biosimilar opportunity over the next few years. If you look at the revenue number for the drug sales over time, they move up nicely each year, '26 is higher than this year. And then '27 and '28 move up pretty significantly as well. Obviously, there is a pricing component there. So when you look under the cover, so to speak, to what extent do you see [ pill ] count increases underpinning that such that you can think about an incrementally larger opportunity being available to you each year because it looks good from a dollar standpoint, but I'm wondering what is the change for you when it comes to what matters most, which is obviously just the number of [ pills ]? Udit Batra: So look, I mean, Dan, that's a fantastic question. And it's exactly the right way to look at the biosimilars opportunity. You take any drug class. I mean you take oncology drugs or you take immunotherapies, what you find is the penetration for these really advanced therapies that make a massive difference in a patient's life, the penetration is still extremely low, right? And some of that has to do with pricing and affordability. And when you are able to introduce more biosimilars and do them without having a further requirement for clinical studies and just use bioanalytical characterization that Waters would provide, you allow for many more biosimilars to come into the market, hence, the price goes down and the price goes down, the access increases and the penetration increases. We think this is a significant volume growth opportunity. And more importantly, it will make access to many more biologics available to a significant number of patients around the globe. So of all the things that I've seen in policy improvements over the last few years, if this one takes traction, it is a significant improvement in patients' health. Daniel Arias: Okay. Maybe just a second -- just a follow-up for Amol. Amol, it sounds like you have a good number of new products coming to market over the next 12 months. Is there a margin impact that we should be mindful of there? I know in the early days, there can actually be some downward pressure even on a product that has a higher gross margin profile just until that product itself actually kind of gets up to scale. So I'm just wondering if there's something to be -- to think about there. Amol Chaubal: I mean, think of it this way, right? I mean the products that are coming to market are a healthy combination of bioanalytical characterization, bioseparations and Empower. And clearly, bioseparations being chemistry and Empower being software are meaningfully accretive to our underlying gross margin profile and that will offset sort of any instrument-related new products, which, as you know, out of the gate are not fully value engineered. And then keep in mind that products like Alliance iS and TQ Absolute and TQ Absolute XR, while they were not fully value engineered out of the gate in the last 2 years, it now becomes a time for us to value engineer them and our teams are laser-focused on that, and you'll start to see the accretive effect of that value engineering flow through. Operator: Your next question will come from Catherine Schulte with Baird. Catherine Ramsey: I'll just go ahead and ask my two. First on BD, I know we'll have to wait for later this week to get the full results. But in their preliminary announcement, they called out some incremental headwinds in academia for biosciences. So can you just talk to your confidence in that 4% to 4.5% top line for that asset next year? And then maybe on chemistry for the 4Q guide, I think you said up 6%, which would be a low single-digit sequential increase. We haven't seen less than a high single-digit sequential increase in the fourth quarter since 2012. So I just wanted to understand that a bit more. Was there less burn through the second quarter pull forward in the third quarter than you expected? Or any other timing dynamics we should be thinking about there? Amol Chaubal: Yes. So let me take the chemistry one first. That's simple, right? As we guide, we assume chemistry is 7% grower. We adjusted it a little bit for the Q2 pull-forward dynamics and that's it. We didn't sort of relate the Q3 performance into Q4, just to be prudent at this stage, right? On the BD side, right? I mean, look, we had meaningfully reduced the A&G numbers because in our models, in U.S. A&G came down by as much as 40% over the time '25 to '27 in our underwriting. So what we are seeing in the A&G market is largely in line with what we underwrote. But then in any business, there's always going to be new headwinds and new tailwinds like we had with Wyatt, right? I mean, right after the Wyatt transaction, the biotech market meaningfully softened. And as a true resilient team, we rose up to that challenge, and we accelerated synergies and found ways to make sure that we deliver the numbers we committed to the Street, right? And so that's generally the DNA of this team. Whatever the cards are, we always rise up. We look at every crisis as an opportunity, and we make sure we deliver what we commit. Udit Batra: So Catherine, just to build on what Amol has said, we feel very good about what we are seeing with BD. As I mentioned, I visited customers myself. I had a chance to talk to academic customers, small pharma and large pharma customers. And on the Biosciences business, especially with the FACSDiscover S8, A8, which are clearly setting a new benchmark in that category. I mean we're seeing very, very good reception. And now couple that with a more stable pharma environment, you should see CapEx start to go up in that environment, a more stable academic environment, you should see -- you should start to see that go up. And as far as the sort of early indication from BD on that market, it is largely in line, in fact, even better than what we have assumed for that business. So really feel very good about our assumptions going forward. Operator: Your next question will come from Brandon Couillard with Wells Fargo. Brandon Couillard: Udit, second quarter in a row, China has been up double digits, a lot better than peers. Do you think that's unique to Waters in your portfolio? And what are you assuming for China for the year? And how sustainable is that as you look out to '26 based on kind of how you're feeling about the macro there? Udit Batra: Look, I mean, yes, China again grew double digits. And Pharma first grew largely because of our CDMO customers supporting the local biotech industry. And again, our new products allow us to basically again show what I would call more differentiated performance and this is largely to do with execution and new products. When you look at the academic end market, that also grew almost 20%, and there, again, we took actions a couple of years ago to localize our full portfolio, expand our distribution. You couple that with fantastic execution -- fantastic commercial execution at the ground level and we've been able to win a significant share of the latest stimulus that has come through. So the academic end market has been doing pretty well. As we look at Q4, I mean, we're seeing the same trends persist. We are modeling a high single-digit growth, a bit of a slowdown from Q1 -- from Q2 and Q3 which if you just take it in all, the first half grew double digits and the second half grew double digits. So China would have had a double-digit year who would have thought that, that's possible in this environment. So I'm extremely proud of what the teams are doing on the ground and how they're taking new products and really operating effectively in a pretty dynamic environment. Amol Chaubal: The only thing I would add there, Brandon, is the Academic & Government stimulus-related revenue, you have to take it with a grain of salt, right? I mean, we very well know in our industry that it is just moving money from one year to another. And once the stimulus is done, you hit an air pocket, right? So that's not new or specific to anyone. And as we outlined at our Investor Day, we are modeling China low to mid-single digits in the 5-year time frame, and this outperformance versus that assumption is amazing. Operator: This concludes the Q&A portion of the call. I will now hand it back to Caspar. Caspar Tudor: Thank you, Leila. This concludes our call. We look forward to connecting with many of you at upcoming events and conferences.
Operator: Good day, everyone, and welcome to today's AdaptHealth Third Quarter 2025 Earnings Release. Today's speakers will be Suzanne Foster, Chief Executive Officer of AdaptHealth; and Jason Clemens, Chief Financial Officer of AdaptHealth. Before we begin, I'd like to remind everyone that statements included in this conference call and in this press release issued today may constitute forward-looking statements within the meaning of Private Securities Litigation Reform Act. These statements include, but are not limited to, comments regarding financial results for 2025 and beyond. Actual results could differ materially from those projected in forward-looking statements because of a number of risk factors and uncertainties, which are discussed at length in the company's annual and quarterly SEC filings. AdaptHealth Corp. has no obligation to update the information provided on this call to reflect such subsequent events. Additionally, on this morning's call, the company will reference certain financial measures such as EBITDA, adjusted EBITDA, adjusted EBITDA margin and free cash flow, all of which are non-GAAP financial measures. You can find more information about these non-GAAP measures in this presentation materials accompanying today's call, which are posted on the company's website. This morning's call is being recorded, and a replay of the call will be available later today. I am now pleased to introduce the Chief Executive Officer of AdaptHealth, Suzanne Foster. Suzanne Foster: Thank you, and good morning, everyone, and welcome to the call. I'm pleased to report that Q3 was a milestone for AdaptHealth. If you recall, last year at this time, we realigned our business into 4 reporting segments, each under general managers and dedicated sales leaders. This was intended to focus our efforts on improving patient service and operational efficiency. By doing so, it allowed us to better manage our resources, and that decision was a key contributor to the mid-single-digit organic growth each segment produced this quarter. The theme for today's call is that over the past year, the team has worked tirelessly to transform our business, and we are now seeing our progress taking hold and flowing through to our financial results. In the third quarter, we completed substantial operational improvements across the organization and delivered financial results that exceeded our expectations. We are continuing to demonstrate progress across all 3 value drivers: growth, profitability and risk profile. Starting with growth. Our third quarter revenue was $820.3 million, up 1.8% from prior year quarter. Organic revenue growth, which does not include changes in revenue from divestitures or acquisitions, was 5.1% versus the prior year quarter with strength across each of our 4 reportable segments. Sleep new starts were up nearly 7% from the prior year quarter, making it our highest quarter in 2 years. We also set new patient census records in both Sleep and Respiratory Health. We experienced robust year-over-year growth in our Wellness at Home segment, driven by orthotics and hospice. And in Diabetes Health, we delivered the first quarter of revenue growth since Q1 2024. Moving to profitability. Our third quarter adjusted EBITDA was $170.1 million, up 3.5% from the prior year quarter and above the high end of our guidance range. Adjusted EBITDA margin was 20.7%, up 30 basis points from the prior year quarter as we exhibited discipline on expenses even as we made forward investments in talent, technology and infrastructure to support our new large capitated partnership we announced in August. Turning to our risk profile. We reduced debt by another $50 million during the third quarter, bringing our year-to-date total debt reduction to $225 million. We are delevering quickly and rapidly approaching our 2.50x target net leverage ratio, with our net leverage ratio standing at 2.68x at quarter end. Debt reduction remains among our highest capital allocation priorities as we believe a strong balance sheet is essential to unlocking and sustaining value for shareholders. During the quarter, we continued to make significant strides towards improving patient service and field operations. As planned, we completed the implementation of our standard field operating model and organizational structure, starting with consolidating from 6 to 4 regions. This was a huge step forward. It required empowering our best operators to lead these 4 regions and realigning nearly 8,000 employees to our new field operating structure and standard workflows. As a reminder, we enter nearly 40,000 homes per day. We operate 640 locations across 47 states and without a standard operating model and org structure, rolling out standard workflows and technology can be slow and inefficient. Now with the standard operating model across the country, we can more efficiently deploy operational improvements and technology solutions in a timely manner and at scale. Another initiative that's taken place over the last many months is the consolidation of our previously fragmented call centers into a new national contact center and utilizing a single patient services technology platform. This is a significant enhancement that allows us to dramatically improve how we route our incoming call volume and standardize patient interaction. which creates a higher quality, more consistent experience for the patients we serve. Looking forward, as we deploy technology that allows more patients to self-serve, this new call center will supplement the local branches with increased capacity to manage the most critical patient concerns. We continue to believe that there is significant potential to deploy AI and automation across our business. Therefore, we continue to selectively but aggressively pursue and pilot the use of these tools to drive service excellence and operational efficiencies, and we are already beginning to see the early benefits. For example, in the third quarter, automation enabled the revenue cycle management team to reduce its reliance on offshore labor by approximately 5%. Let me connect these results to where we are headed strategically. We are moving quickly to establish the infrastructure required to service our recently announced exclusive capitated agreement with a large integrated delivery network. This is a significant undertaking that will require approximately 1,200 employees, 30 locations and 300 vehicles. Our partnership with this customer is off to a strong start because we share a philosophy about how best to unite our efforts to provide superior care for patients. This starts with a mutual recognition that the combination of an integrated delivery network at an at-scale home medical equipment and service provider working through a per member, per month or capitated fee model produces the strongest alignment of incentives. This means we share a common commitment to a seamless handoff of care as patients are discharged from the hospital when they are at their most vulnerable and the risk of readmission is the highest. It means being rewarded for clinical appropriateness and efficiency by providing exactly what the patients need, nothing more, nothing less. It also means being motivated to drive patient adherence by investing in setup, training, education and ongoing support to ensure patients use equipment correctly. In short, we are strategic partners working to keep patients healthy at the lowest sustainable cost. We arrived at this moment because of our success with our Humana capitated arrangement, which demonstrated for the first time that an at-scale HME provider could lift and shift significant volumes of activity while maintaining high service standards. Our immediate objective is to replicate that success by delivering on our promises to our new IDN partner as well as to another new capitation partner, a major payer for whom we will be the exclusive provider to an additional 170,000 lives as announced this morning. But as we look out on the horizon, we intend to lead the evolution of our industry by using our results to prove to every IDN and large hospital system in the U.S. that partnering with us produces better outcomes for patients. That means faster time to therapy, higher adherence, greater patient satisfaction and ultimately finding ways to lower readmission rates and deliver genuine clinical value in the home. AdaptHealth is uniquely positioned with our technology infrastructure and operational capacity to offer this value proposition at scale. And our relentless focus on operational discipline and service excellence demonstrated in our Q3 progress is all about enhancing the value proposition. Our national contact center, centralized order intake and adoption of AI and automation are just a few examples of how we are alleviating patient, physician and hospital pain points. This focus extends beyond capitation to our entire business. To be clear about what is at stake, service excellence is where HME providers win or lose loyalty. Hospitals and physicians remember which HME companies respond timely, who handles logistics seamlessly and who prevents patient readmissions. Service excellence creates referral stickiness. For us, operational discipline as the foundation for service excellence is not just about margin improvement. It's the key to competitive differentiation. And because of this, ingraining this discipline into our DNA is becoming one of our highest strategic imperatives. As we look toward the upcoming round of CMS' competitive bidding program, our operating efficiency is a unique and critical strategic asset. While the final rule has yet to be released and the ongoing government shutdown holds the potential to delay it, CMS has not missed words about what it hopes to achieve with the redesign of the program. As outlined in the proposed rule, CMS sees the successful process as one that will cause HME participants, small and large, to submit competitive bids, and it seems to view limiting the number of contracts awarded as the key mechanism for achieving that aim. Some look at the bidding program and focus only on the reimbursement risk. However, rate compression is not a foregone conclusion, and moreover, it is only half the equation. The other half is that if CMS retains its proposal to limit contract awards, this would, by definition, consolidate traditional Medicare market share with knock-on effects that would likely force industry consolidation more broadly. As a result, competitive bidding has more potential to transform HME industry structure than perhaps any other dynamic. AdaptHealth has been preparing for this moment for years. Our cost structure enables us to participate in the bidding program from an advantaged position. Furthermore, as government policy continues to evolve, our improving financial strength affords us the flexibility to take strategic action to consolidate market share. Where others may see risk, we see opportunity. Before I close, I'd like to express how grateful I am to my AdaptHealth colleagues. The progress we've made over the last year and especially in the third quarter, demonstrated our grit, determination and focus is paying off. We have a lot of momentum coming into 2026 and expect to see continuous improvements across our business as our teams execute on these growth opportunities ahead of us. With that, I'd like to pass the call over to Jason to review our financials. Jason Clemens: Thank you, Suzanne, and thanks to everyone for joining our call today. After covering our third quarter 2025 results, I'll provide a review of the balance sheet and our plans for capital allocation. Then I'll finish with guidance for the remainder of 2025 and some perspective on our early expectations for 2026. For third quarter 2025, net revenue of $820.3 million increased 1.8% from the prior year quarter. Organic revenue growth was 5.1% in the quarter. This does not include $34.4 million of prior year revenues related to the divestiture of certain assets from the Wellness at Home segment and $7.7 million of revenue from acquired businesses. As Suzanne noted, our third quarter revenues were characterized by strength across all 4 reportable segments, with each producing year-over-year organic growth. Third quarter Sleep Health segment net revenue increased 5.7% versus the prior year quarter to $354.8 million. Sleep Health starts were approximately 130,000, up 6.8% versus the prior year quarter, resulting in our highest quarter in 2 years. Our Sleep Health census reached a new record of 1.72 million patients, up from 1.70 million in the prior quarter. Third quarter Respiratory Health segment net revenue increased 7.8% from the prior year quarter to $177.0 million. Despite lower-than-anticipated oxygen new starts, retention remained strong, resulting in an oxygen census of 330,000 patients, which was a new third quarter record. Third quarter Diabetes Health segment net revenue increased 6.4% versus the prior year quarter to $150.1 million, our first quarter of year-over-year growth since the first quarter of 2024. Although CGM starts were softer than we expected, CGM census grew over the prior year quarter for the third consecutive quarter, driven by continued improvement in retention rates. Pump and pump supplies revenue continued to grow over the prior year quarter. For the Wellness at Home segment, third quarter net revenue declined 16.0% from the prior year quarter to $138.4 million, including the previously mentioned impact of the dispositions of certain noncore assets. Turning to profitability. Third quarter 2025 adjusted EBITDA was $170.1 million, up 3.5% from the prior year quarter. Adjusted EBITDA margin was 20.7%, slightly above the midpoint of our Q3 guidance range and up 30 basis points from 20.4% in Q3 2024. The year-over-year margin trend reflected modest improvement in operating expenses as well as the disposable of less profitable noncore product lines. Our labor expenses were well contained even as we invested in advance of revenue for our new capitated agreement. Moving to cash flow, balance sheet and capital allocation. Q3 2025 cash flow from operations was $161.1 million. CapEx of $94.2 million was 11.5% of revenue, up slightly from the prior quarter as we continue to invest in new patient growth. Free cash flow was $66.8 million, in line with our expectations and unrestricted cash stood at $80.4 million at the end of the quarter. At quarter end, net debt stood at $1.73 billion, down from $1.80 billion at the end of the second quarter. We reduced our TLA balance by $50 million in Q3 2025, bringing the year-to-date total to $225 million. Our focus on debt reduction has decreased year-to-date interest expense by over $15 million as compared with the same period for 2024. Our net leverage ratio stood at 2.68x, down from 2.81x at the end of the second quarter and rapidly approaching our target of 2.5x. Turning to capital allocation. Our highest priorities continue to be investing to accelerate organic growth and debt reduction to strengthen our financial position, followed by strategic acquisitions of home medical equipment providers to round out our geographic footprint and increase patient access. So far in 2025, we have allocated $19 million of capital to tuck-in deals, and we are continuing to advance modest tuck-in deals through our pipeline. Turning to guidance. We are maintaining our full year 2025 revenue guidance range and expect to come in very modestly above the midpoint of that range. We are also maintaining our full year 2025 adjusted EBITDA guidance, but we expect to come in at the bottom end of that range as we prudently accelerate investments in infrastructure, technology and labor to stand up our new capitated arrangement. We are maintaining our free cash flow guidance at a range of $170 million to $190 million. While the government shutdown has the potential to push some cash collections into Q1 2026, given the free cash flow generated year-to-date, we remain confident that we will still achieve our prior guidance range. Given the number of moving parts affecting our expectations for 2026, let me provide a preview of how we are thinking about next year. We anticipate the top line will grow 6% to 8% over full year 2025, which assumes accelerated growth in our core products, revenue from our new capitated contract and the impact of certain assets disposed in 2025. We expect revenue growth will start slower in the first half, but will accelerate in the back half due to the timing of the ramp of the capitated contract and the dispositions. We anticipate full year 2026 adjusted EBITDA margin to be approximately 50 basis points better than 2025, even as we invest in new capitated infrastructure in early 2026 ahead of the revenue ramp. As a reminder, we expect this capitated contract once fully ramped to produce at least $200 million of annual revenue with adjusted EBITDA margin and free cash flow margin in line with the rest of our business. As has been our practice, we intend to provide formal full year 2026 guidance when we report fourth quarter earnings this coming February. That brings me to the end of my remarks. Operator, would you kindly open up the call for questions? Operator: [Operator Instructions] Our first question comes from Eric Coldwell with Baird. Eric Coldwell: Nice job in the quarter. I wanted to hit on the large capitated deal. Your comments on '26, Jason, were very helpful. You mentioned slower growth in the first half, more in the second half. Conversely, the incumbent on that arrangement has been signaling that it actually expects the transition to begin this quarter and to be completely ramped or completed by the end of the second quarter of next year. So the incumbent sounding like the transition is going to happen a little faster. If I'm reading you correctly, it still sounds like you're expecting a little slower. I'm hoping you can just help us triangulate those 2 data points. Jason Clemens: Well, sure, Eric. I mean, I guess I'd say, firstly, that we don't have a lot of perspective on what competitors might be saying out there. What we do know is that the contracted dates that we've signed up to deliver, that's very clear. We're in advance of the bulk of that ramp. And so we think we're being appropriately conservative with our expectations of the ramp over the course of 2026. And as markets come online, we'll certainly gain confidence on having all the infrastructure that we need in place before the first patient shows up. I mean that, in our mind, is the priority is making sure that we've got the labor and the people and the vehicles and the infrastructure in place for those patients prior showing up. And if we do that, we take good care of those patients, that ramp could get better than what we're suggesting. Eric Coldwell: Just one quick follow-up or additional question. You've obviously been pretty successful here recently with these new wins, particularly on the large capitated side. At the same time, again, a competitor has recently announced a -- at least in the near term, an exclusive with a large network, OptumHealth. And I'm curious, based on your 2026 preview, it doesn't sound like that's a big impact, but I'm hoping you can give us some color on perhaps how much exposure you might have had there or if that competitor announcement is at all impactful? I mean, certainly, a larger OptumHealth larger network somewhat visible to the Street. I'm just curious if you have any thoughts on that change? Suzanne Foster: I'll take that one, Eric. So taking a step back, I think that these capitated agreements or preferred provider agreements as some call other types of agreements are evidence that the market, payers and providers are interested in partnering with a single scaled partner to help their membership or patients. But there's a distinction in my understanding between an exclusive capitated agreement and what we call a preferred provider agreement. And so the distinction here is that with -- when we say capitated agreement, we are exclusive, we -- they have to refer to us, and we have to service that patient pool. A preferred provider agreement means, hey, give us the business, we'll service it, but it still means that people can compete for that business. It's still an open network. And so if I understand correctly, the contract that you're referring to, I have not heard that it is exclusive. I have heard that at the end of the day, they have to earn the business just like anyone else would. And like I said, in this business, you earn that business by providing the best service. And so we believe with all of the infrastructure and continuous improvement that we made that we are going to continue to earn business on the basis of our service excellence. And so it does not preclude us from calling on that customer. Jason Clemens: No, Eric, I might add, since the announcement that you're referring to, there has been zero change in our trend lines and our expectations related to that contract. So we'll see what, I guess, tomorrow brings. But for now, we've got full access and coverage, and we feel just fine about it. Operator: We'll now move on to Brian Tanquilut with Jefferies. Brian Tanquilut: Congrats on the quarter. Maybe, Suzanne, I'll just hit on that last comment you made. So as we think about the fact that you've already won Humana, the Kaiser contract and then another one today, I mean, different dynamics there. Humana was not capitated prior. What are you seeing in the market? Or what are the conversations like in terms of getting more payers to convert their approaches to DME to capitation? And how far are we from -- or is it reasonable to think that eventually, this will be mostly capitated at least for the national providers? Suzanne Foster: Thanks, Brian. I mean I believe that this type of model is what's best for the industry. I was recently on the road meeting with some big hospital systems and their CEOs. And what they're talking about is reducing their length of stay, seamless handoffs putting our people alongside their people for discharge planning. So they're incented to move patients through the hospital or if it's a physician practice to have a seamless handoff. And so having a strong partnership where we can hold each other accountable, they can hold us accountable for service level initiatives, that's a big deal for them because if they're managing many, many different players without strong SLAs in place, that makes it difficult. So us showing up saying we're a large public company that takes compliance and integrity seriously, that we cover 47 states that we can do this at scale, that we agree to SLAs in the capitated agreement, they like that model. And so the idea that we can show up and have that seamless handoff for them and quarterly report out how that performance is going between us, that's something that's really getting a lot of interest. And that's where we're putting a lot of resources to go see how many more hospital systems, IDNs and payers that we can convince that by aligning our incentives that this is best for patient care. Brian Tanquilut: That makes sense. And then maybe, Jason, just back to the point of the guidance. I mean, obviously, a good quarter here, and you're maintaining the guidance. First, what exactly are these investments that you mentioned? And then how should we be thinking about the investments related to the new contract? And where are you tracking versus what you thought you'd be spending for Kaiser? Jason Clemens: Right. So I guess, firstly, like kind of when we say infrastructure, we're talking about an estimated 1,200 people that have to be recruited, onboarded, trained and ready for day 1 of patients flowing across multiple states. It's procurement of vehicles to our standards. They've got to be outfitted. They got to be painted, all this detail that needs to happen in order to have trucks running on day 1. So that's all well underway. And finally, it's the procurement of about 3 dozen locations in geographies that we don't compete in yet. And so as we get those locations identified and secured, they got to get outfitted, you got to get them ready, you got to stock them with inventory and capital equipment and again, be ready for that patient on day 1. So we're moving along according to our plans. In fact, in some markets, we've actually advanced due to some local dynamics in those markets, which is why we're seeing expenses running hotter, particularly in the labor lines. And then I'd say related, I mean, we went from 6 regions to 4. I mean we took out 2 kind of operating regions. Now as part of that operating model change, look, there's a lot of talent in the organization, a lot of experience, long time in DME. We think it was prudent to hold on to the folks that want to continue to be part of our business that potentially want to relocate. We're doing a fair amount of that to these markets to stand up new AdaptHealth operations and to grow from there. So that's a little bit about kind of what we're investing in. In terms of what to expect, we do expect to carry additional expense into the first quarter, potentially mid-second quarter. And as this revenue comes online, the nice thing about it is, I mean, you immediately move up to 20% EBITDA margin, which is our expectation for the contract because the infrastructure is paid for, the capital equipment is in, trucks are running. And then at day 1, you start getting paid per member per month. And so there'll be a little bit of forward investment in the fourth quarter and in the first quarter, and then that will start swinging out over the course of '26, and we expect high revenue growth as well as a big improvement in EBITDA margin in the second half of '26. Operator: We'll now move on to Richard Close with Canaccord Genuity. Richard Close: Yes. Just hitting on the capitated agreements a little bit more. In terms of the announcement or the new contract announced today, are there any more details that you can provide? Just curious if there's any geographic overlap with your other agreements that portend maybe some additional operating leverage there or less infrastructure investments on that? And then is there an opportunity to expand the number of lives with that agreement? Jason Clemens: Yes, Richard, I'd say that we announced this agreement more so for the strategic implications to the company and where we're heading in terms of taking control of our own destiny and reimbursement, capping business exclusively where we can contain an entire population and take care of all of those patients. In terms of like financial impact, I mean, 170,000 members, the math doesn't work exactly, but compared to over 10 million lives in this other contract that we've spoken about, you'll see us maybe a couple of percentage points. So it's nowhere near size and scale. There is benefit to the geography of this contract and potential growth. This is a major payer. If we do our jobs and we think we will, it does set up nicely for us to continue to work that payer's pipeline. So more to come. Operator: [Operator Instructions] We'll now move on to Pito Chickering with Deutsche Bank. Kieran Ryan: This is Kieran Ryan on for Pito this morning. Just wanted to check in and see if you could provide any other color on Diabetes. I appreciate the detail on CGMs versus pumps. I'm not sure if you can talk about anything you saw on the pharmacy side or with payer mix in the quarter that maybe contributed to the uptick. Suzanne Foster: I appreciate the question, Jason. I will tag team this. I'll start with just what we're seeing in Diabetes. So listen, we've talked about this now for the past year that this has been a focus of ours to improve our execution that a lot of this was certainly an interesting market dynamic, but that was no excuse for our past year's performance, and we have finally gotten our arms around the business and we're seeing the best attrition rates from our resupply team. We've really stopped that bleeding and servicing patients really well there. Pumps have been strong, and our sales force has been trained, put in place. We've made the changes we needed to. We have a strong leader there. So we're getting out in front of the right customers and leveraging the HME side of our business. The Diabetes team and our HME sales forces are working collectively to identify opportunities. So it's kind of been an all hands on deck that finally has proven to show some success. And then in terms of the numbers, I'll hand that off to Jason to give you a little bit more for that purpose. Jason Clemens: Yes. To get maybe into the weeds a little bit, this was the first quarter or last quarter, I'd say, of a comparable against a different management team, a different resupply organization and processes because those changes were made late September of 2024. And so what you're seeing is just strength in retention, as Suzanne said. Now when we get to Q4, now we're comping that same team that we've got running in Nashville is now comping against themselves. And so we're setting record retention rates, but to grow above that, it does get more challenging. So although we were thrilled to see over 6% growth in Diabetes in Q3, given the softer starts, we still have a ways to go until we're demonstrating consistency and stability and ultimately, some growth in this business. And so that's a little bit about Q3 versus Q4. As we get to '26, again, we expect stable retention, modest improvement in sales. We're taking actions to make sure we secure that. And with a little luck, we'll have a consistent stable business to report in 2026. Suzanne Foster: And to your point around pharmacy versus med benefit, during the past year, we didn't -- we've made the decision to pursue the pharmacy channel. We were slower last year committing to that to wait to see what we would -- this business and how it would perform. But now that we're seeing that providers do really want the optionality to send both, we are making investments to make sure that we can efficiently process those types of orders as well. Kieran Ryan: And then I guess just briefly on the Sleep side, obviously, strong new start and census numbers. I just wanted to still understand if you still expect that mix headwind to be fully comped out as we exit '25. So that's kind of not a factor as we move into '26. Jason Clemens: Yes, exactly. I mean there'll be de minimis impact in Q4. But as we get into '26, that we'll be past all that. So it will be a bit of an easier comp, if you will, as we look towards next year. Operator: We'll now move on to Whit Mayo with Leerink Partners. Benjamin Mayo: Jason, the 6% to 8% revenue growth that you're guiding to for 2026, any way to unpack that by segment, how you're thinking about it? Jason Clemens: Sure. We can probably offer some high-level views and then add a lot more to that when we guide in February. But if you look at the base business today, I mean, we've gone through a lot of disposition activity over the course of kind of late '24 through current. We're starting modest M&A that's been going on around that same time frame. And so you're going to likely have a bit of a canceling effect as we look to '26. Outside of that, our organic growth, which excludes dispositions acquisitions, year-to-date, we're running 1.8%. So as we look to '26, I mean, we think that we can get a little bit of growth there. Some of that will come through the accounting changes that Kieran mentioned in the last question. I mean that alone is $30 million or about 1 point of revenue. So if you look at Sleep, I mean, that alone will -- we expect to produce a better growth rate in Sleep, not just that single factor, but we're starting to near records of new start activity. And so we aim to continue that through '26. Respiratory in '25 so far has just had a blowout year. I don't know that we'll be producing at these upper single-digit levels for Respiratory. We think it will normalize back to kind of a lower single digit, which is what we've seen historically as it relates to Respiratory. And then as it relates to Diabetes and Wellness, we think we'll produce steady and stable revenue, potentially a little bit of growth in one or both of those segments. But all that together, we think organic growth, again, today, a little under 2% could move to a little under 3% next year. And then you've got the benefit, which is also organic of this compensated arrangement that gets you up to that 6% to 8%. Benjamin Mayo: Okay. That's helpful. And I was wondering, is there anything new on RAC audits for PAPs, ventilators, rentals, et cetera, that's on your radar that's concerning or not concerning to you? I think CMS did award a new contract recently. So just wanted to get an update there. Jason Clemens: That's right, Whit. But the number of audits and the kind of frequency of audits, it's been very, very steady. There's been no change or impact. Operator: Thank you. This now brings us to the end of today's meeting. We appreciate your time and participation. You may now disconnect.
Operator: Good morning, and welcome to the New Mountain Finance Corporation's Third Quarter 2025 Earnings Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to John Kline, President and CEO of NMFC. Please go ahead. John Kline: Thank you, and good morning, everyone. Welcome to New Mountain Finance Corporation's Third Quarter 2025 Earnings Call. On the line with me here today are Steve Klinsky, Chairman of NMFC and CEO of New Mountain Capital; Laura Holson, COO of NMFC; and Kris Corbett, CFO and Treasurer of NMFC. Steve is going to make some introductory remarks, but before he does, I'd like to ask Kris to make some important statements regarding today's call. Kris Corbett: Thanks, John. Good morning, everyone. Before we get into the presentation, I would like to advise everyone that today's call and webcast are being recorded. Please note that they are the property of New Mountain Finance Corporation and that any unauthorized broadcast in any form is strictly prohibited. Information about the audio replay of this call is available in our November 3 press release. I would also like to call your attention to the customary safe harbor disclosures in our press release and on Pages 2 and 3 of the slide presentation regarding forward-looking statements. Today's conference call and webcast may include forward-looking statements and projections, and we ask that you refer to our most recent filings with the SEC for important factors that could cause actual results to differ materially from those statements and projections. We do not undertake to update our forward-looking statements or projections unless required to by law. To obtain copies of our latest SEC filings and to access the slide presentation that we'll be referencing throughout this call, please visit our website at www.newmountainfinance.com. At this time, I'd like to turn the call over to Steve Klinsky, NMFC's Chairman, who will give some highlights beginning on Page 5 of the slide presentation. Steve? Steven Klinsky: Thanks, Kris. It's great to be able to address you all today, both as NMFC's Chairman and as a major fellow shareholder. Adjusted net investment income for the quarter was $0.32 per share, covering our $0.32 per share dividend that was paid in cash on September 30. Our net investment income and dividend were supported by consistent recurring income from our loan portfolio, full utilization of the dividend protection program, which remains in place through the fourth quarter of 2026 and an incremental fee waiver. Looking forward to Q4, we would like to announce a $0.32 dividend payable on December 31 to shareholders of record on December 17. Our net asset value per share declined $0.15 compared to Q2, to $12.06 as NMFC experienced modest decline across four investments, which John will address later in the call. Importantly, however, approximately 95% of our investments are green on our heat map. As a reminder, NMFC lends chiefly in defensive growth sectors such as health care information technology software, insurance services and infrastructure services, which New Mountain Capital knows well from its private equity ownership activities. Furthermore, NMFC's portfolio loan to value stands at just 45%. Our lending lines are being refinanced at lower rates and our percentage of first lien assets is growing. Since our IPO of NMFC in 2011, our stock has generally been a strong performer with consistent earnings and just a 1 basis point total net realized loss rate. I and my fellow managers at New Mountain are the largest shareholders of NMFC and have steadily increased our ownership level over time. Despite these strengths, NMFC's current stock price implies a 20% discount to book value and the dividend of $0.32 quarterly or $1.28 annually, represents more than a 13% yield. Therefore, over the course of the past 7 months, NMFC has fully utilized the $50 million 10b5-1 stock repurchase program with total shares repurchased this year of approximately $47 million at an average price of approximately $10. Our Board recently has approved a new share buyback program totaling an additional $100 million. Additionally, we are also now exploring a portfolio sale of up to $500 million of NMFC assets to a third party, which would accelerate our progress on our strategic initiatives meaningfully. For example, we could potentially sell assets of well-performing names in order to reduce concentrations in our portfolio and to reduce PIK income. This would enhance our financial flexibility in what could be a better deal environment in 2026 as well as provide us with an opportunity to evaluate debt paydowns and/or increase the size of our stock buyback program. While it is early in the process and the outcome is uncertain, we expect to be able to provide a fulsome update on our next call in February, if not before. As a reminder, New Mountain Capital overall now manages about $60 billion in assets. We have generated an estimated $100 billion of enterprise value gains for all shareholders at our private equity company since the firm's inception, and we currently employ over 90,000 people at our PE companies in the field, which is roughly equivalent to #78 on the Fortune 1000. New Mountain's own team has now grown to nearly 300 employees and senior advisers, plus approximately 70 more members on our Executive Advisory Council. Our goal is to apply the same PE business building skill and knowledge to benefit NMFC and our credit platform as a whole. We thank you for your ownership and partnership and we are working diligently to serve your interests in the months and years ahead. With that, let me turn the call to John. John Kline: Thank you, Steve. I would like to begin on Page 8, which offers an overview of our differentiated approach to direct lending. First and foremost, we focus only on sectors of the economy that we believe are defensive and have sustainable tailwinds that will benefit companies within these chosen sectors. We do not invest in industries that are volatile, cyclical or secularly challenged. Secondly, we believe that we have a better model for research as New Mountain uses in-house industry executives and private equity personnel to underwrite direct lending deals within our chosen sectors. If an investment underperforms and we are compelled to take an ownership stake, New Mountain is well positioned to improve the business as an equity owner, utilizing our private equity expertise and in-house operating talent. Finally, we continue to have very strong shareholder alignment with 14% of our outstanding shares owned by NMC employees and senior advisers, and we actively support shareholder returns through the dividend protection program, additional fee waivers and the incremental share repurchase program Steve just announced. Page 9 provides key performance statistics showing a long-term track record of delivering consistent, enhanced yield by minimizing credit losses and distributing virtually all of our excess income to shareholders. Since our IPO in 2011, NMFC has returned approximately $1.5 billion to shareholders through our dividend program, generating an annualized return of 10%. Today, our dividend yield is over 13% annualized based on the $0.32 quarterly payout, which is fully covered by net investment income. We have been a good steward of capital with negligible net realized losses over 14-plus years, and we maintain investment-grade ratings at Moody's and Fitch. Turning to Page 10. NMFC continues to make progress on its strategic priorities which focus on improving the quality and diversity of our asset base, optimizing our liabilities and enhancing the quality and character of our income. To that end, in Q3, we increased our senior oriented assets to 80% of the overall portfolio, up from 78% in the prior quarter. As Steve mentioned earlier, if successful, the potential secondary sale is designed to improve portfolio diversity by reducing exposure to certain more concentrated positions and to decrease our exposure to PIK assets. On the liability side, subsequent to quarter end, we repaid the 7.5% convertible notes at maturity and see an opportunity to refinance the 8.25% unsecured notes in the coming quarters. Finally, we continue to focus on reducing non-yielding assets in 2026. Notably, many of our non-yielding assets are associated with companies with improving performance including Benevis, UniTek and Applied Cleveland. As shown on Pages 11 and 12, the internal risk ratings of our portfolio decreased slightly during the quarter with approximately 95% of the portfolio green rated. At the margin, we did see a few select names migrate down our rating scale, representing $49 million or less than 2% of the portfolio. These migrations, including two health care services names that continue to experience lower growth and higher operating costs as well as a commercial restoration services company that has been impacted by a lack of severe weather activity. Despite the modest negative move in overall risk ratings, our most challenged names, marked orange and red represent only 3.6% of NMFC's fair value, making them a small portion of the portfolio. Turning to Page 13. We provide a graphical analysis of NAV changes during the quarter, resulting in a book value of $12.06, a $0.15 decline compared to last quarter. The main drivers of the decline this quarter were Edmentum, TriMark and Beauty Industry Group, partially offset by a handful of unrealized gains and accretive share repurchases. The biggest negative mover Edmentum is performing well but our mark continues to be pressured by the expensive PIK securities that sit senior to our common equity exposure. We are in the process of exploring a capital structure refinancing to reduce the overall cost of capital and limit future dilution from these securities. Additionally, Edmentum continues to be active on the M&A front and recently completed a tuck-in acquisition that will accelerate its career learning product portfolio, a growth area of the business. We are excited about the acquisition and believe Edmentum is well positioned in this area. Page 14 addresses NMFC's nonaccrual performance. During the quarter, we moved our first lien debt position in Beauty Industry Group to nonaccrual status and expect to equitize a portion of this debt position in the coming months. The company has experienced persistent earnings headwinds due to weaker consumer demand, specific go-to-market challenges and tariffs on its China-oriented supply chain. In coordination with the other lender, we have built a large New Mountain team that will be focused on improving this investment. The team includes members of the core credit team, the PE Consumer Group, NMC operating partners and additional industry executives that we work with. Our goal is to, over time, recover at least our full principal value on this investment. Overall, nonaccruals continue to be very low with only $51 million or 1.7% of the portfolio on nonaccrual at fair value. On the right side of the page, we show our cumulative credit performance since IPO. During that time, NMFC has made over $10.3 billion of investments while realizing losses net of realized gains of just $16 million over the course of our history as a public company. On Page 15, we present NMFC's consistent returns over the last 14-plus years. Cumulatively, NMFC has earned approximately $1.5 billion in net investment income while generating only $16 million of cumulative net realized losses and $159 million of cumulative net realized depreciation, resulting in $1.3 billion of value created for shareholders. While the realized loss rate remains very strong, we, as a management team, are focused on reversing the unrealized depreciation within the existing portfolio. I will now turn the call over to our Chief Operating Officer, Laura Holson, to discuss the current market environment and provide more details on NMFC's quarterly performance. Laura Holson: Thanks, John. As previewed on last quarter's call, we have seen deal activity pick up modestly over the last few months. The pipeline of potential PE exits remains exceptionally full given the extended hold times for many PE-owned assets. The pressure to both deploy dry powder and return capital to LPs are key drivers of sponsor activity. As confidence builds, we think 2026 could be a productive period for LBO activity and have already started seeing signs of that. We believe direct lending remains an attractive asset class in today's market, and continues to provide good risk-adjusted returns relative to other asset classes, including the syndicated loan market, which continues to experience meaningful repricing waves. Direct lending spreads, while tighter than 12 months ago, have been reasonably stable despite the lack of significant M&A. That said, one result of the supply/demand imbalance is a notable lack of dispersion in pricing. Most unitranche loans are pricing at the SOFR plus 450 to 500 range even for lower quality or smaller companies. While we continue to find opportunities in our defensive growth verticals where we can make loans that attach $1.01 in the capital structure at 8.5% plus unlevered returns, our underwriting bar remains higher than ever, and our pass rate on deals has increased. The more challenging environment underscores the importance of our differentiated underwriting strategy, which allows us to go deeper on diligence and identify the best credit opportunities. Deal structures generally remain attractive with significant sponsor equity contribution, representing the majority of the capital structures. Page 17 presents an interest rate analysis that provides insight into the effective base rates on NMFC's earnings. The NMFC loan portfolio is 85% floating rate and 15% fixed rate, while our liabilities are 53% floating rate and 47% fixed rate. Pro forma for the expected upcoming refinancing activity over the next several months, we expect our mix will shift meaningfully to approximately 85% floating and 15% fixed. This will align us with our target of matching our percent of liabilities that float with the percent of our assets that float. As shown in the bottom tables, while we would expect to see earnings pressure in the scenarios where base rates decrease, the ongoing evolution of our liability structure helps to alleviate some of that pressure. Moving on to Page 18. The third quarter was a modest origination quarter. We originated $127 million of assets, offset by $177 million of repayments. Our originations consisted of investments in our core defensive growth power alleys including ERP and IT software, data and information services and financial services. Notable repayments in the quarter included 3 second lien positions, which we've rotated into predominantly first lien securities. Repayment velocity remains strong, and we have line of sight into some additional expected repayments in the coming quarters. While we remain reasonably fully invested, as we receive repayments, we'll likely continue to prioritize share repurchases over new investments if our stock remains at current levels. Turning to Page 19. Approximately 80% of our investments, inclusive of first lien SLPs and net lease are senior in nature, up from 75% in the prior year period and up from 78% in Q2. Second lien positions now represent just 4% of our portfolio given the continued repayment activity we've seen in our second lien names. Approximately 5% of the portfolio is comprised of our equity positions, the largest of which are shown on the right side of the page. We continue to dedicate meaningful time and resources to business building at these companies and are pleased with the progress we are seeing. Page 20 shows that the average yield of NMFC's portfolio decreased slightly to 10.4% due to lower yields on our originations compared to our repayments as we continue to rotate more senior. Despite this, we believe total yields remain attractive for the risk. Page 21 highlights the scale and positive credit trends of our underlying borrowers, which remain largely consistent with prior quarters. The weighted average EBITDA of our portfolio companies increased slightly in the third quarter to $180 million due to growth at the individual companies we lend to and realization of some smaller companies during the quarter. We also show the relevant leverage and interest coverage stats across the portfolio. Loan-to-value continues to be quite compelling, and the current portfolio has an average loan-to-value of 45%. Finally, as illustrated on Page 22, we have a diversified portfolio across 127 portfolio companies. Excluding our investments in the SLPs and net lease funds the top 10 single name issuers account for 26% of total fair value. I will now turn the call over to our Chief Financial Officer, Kris Corbett, to discuss our financial results. Kris Corbett: Thank you, Laura. For more details, please refer to our quarterly report on Form 10-Q that was filed yesterday with the SEC. As shown on Slide 23, the portfolio had $3 billion in investments at fair value on September 30 and total assets of $3.1 billion. Total liabilities were $1.8 billion, of which total statutory debt outstanding was $1.6 billion. Net asset value of $1.3 billion or $12.06 per share was down slightly compared to the prior quarter. At quarter end, our net debt-to-equity ratio was 1.23:1, within our target range of 1:1.25. We remain committed to maintaining leverage within this range. On Slide 24, we show our quarterly income statement results. For the current quarter, we earned total investment income of $80 million, a 4% decrease compared to prior quarter. Total net expenses of $47 million, decreased 5% versus the prior quarter, inclusive of the fee waiver previously mentioned. Our adjusted net investment income for the quarter was $0.32 per weighted average share, which covered our Q3 dividend. Our earnings were driven by our strong core income and effective incentive fee rate of 7.6% and the share repurchase program. Slide 25 represents that 97% of our total investment income is recurring in the third quarter. On the following page, you can see that 80% of our investment income was paid in cash and 15% was PIK income from positions that included PIK from inception to best enable these borrowers to execute on their strategic growth plans. Only 3% of investment income is driven by modified PIK from an amendment or restructuring. Importantly, investments generating noncash income during the third quarter are marked at a weighted average fair market value of 95% of par and over 92% of this income is generated from our green rated names. Turning to Slide 27. The red line shows the coverage of our dividend. For Q4 2025, our Board of Directors has again declared a dividend of $0.32 per share. On Slide 29, we highlight our various financing sources and diversified leverage profile. Taking into account SBA guaranteed debentures, we have $2.5 billion of total borrowing capacity with over $700 million available on our revolving lines subject to borrowing base limitations pro forma for the convertible note that was repaid in October. This more than covers our unfunded commitments of $256 million as well as our near-term bond maturity. As John noted, subsequent to quarter end, we repaid the 7.5% convertible notes utilizing our lower-cost revolver. Looking forward to the next few months, the facilities outlined it red and the recently repaid convertible notes provide us with an opportunity to refinance and either maintain or potentially reduce our cost of financing in the near term. We believe this contrasts with the industry, which faces an increased cost of financing as debt issued in 2020 and 2021 mature. Finally, on Slide 30, we show our leverage maturity schedule. We continue to ladder our maturities and have sufficient liquidity to manage upcoming maturities in early 2026. Notably, approximately 60% of our outstanding debt matures in or after 2028, with near-term maturities representing an opportunity to continue to access the investment-grade bond market. With that, I'd like to turn the call back over to John. John Kline: Thank you, Kris. In closing, we would like to thank all of our stakeholders for the ongoing partnership and look forward to speaking to you again on our fourth quarter 2025 earnings call in February. I will now turn things back to the operator to begin Q&A. Operator? Operator: [Operator Instructions] The first question comes from Finian O'Shea with Wells Fargo. Finian O'Shea: A question on the potential portfolio sale, $500 million seems to imply perhaps a little bit of the affiliate or control book. Correct me if I'm wrong there. And -- if so, would it be sort of centered around that, the legacy equity names? Or should we think more regular way participation or just -- regular way debt deals on the portfolio sale. John Kline: Sure. Fin, thanks for the question. The way we're thinking about the sale is, we're focused on our biggest positions. As you know, we really want to diversify our portfolio. So if you were to look at the top 10 or 20 positions, there'll be names from within that group as well as some other names throughout the book. And it would -- the portfolio sale would address PIK names, but also cash-yielding names that are our larger exposures for NMFC. So that's really our goal. Our goal is to diversify and also reduce PIK income. But the portfolio is a group of well-performing quality names with a mix of interest, characteristics, PIK and cash. Finian O'Shea: Okay. That's helpful. And then a follow-up on the buyback. You were more aggressive this quarter at lower prices, which is great and then announced a larger program. Should we expect you to continue to be aggressive? Or maybe has that sort of run its course for now at your leverage levels and then overall and in consideration for a potential portfolio sale? John Kline: Sure. So I'd say the most important thing as we just think about managing the portfolio and the company is we want to stay within the leverage levels. That is very important to us. At the end of the quarter, you'll see that we were at the high end of our range, but still within the range. So we remain committed to that range going forward. We also see good deal environment or a deal environment that's getting better in the fourth quarter. So there will be -- we expect a lot of repayments throughout the portfolio, both in Q4 and into 2026. So at the margin, as Laura talked about, that does free us up to potentially focus using some of the proceeds from repayments to buy back stock, but we do want to remain, as I said earlier, remain very committed to our leverage range. Operator: The next question comes from Ethan Kaye with Lucid Capital Markets. Ethan Kaye: I wanted to ask about kind of deployment capacity or strategy, kind of following up on the last question here. And Laura, you may have touched on this a bit in your prepared remarks, but given that leverage is at the high end of the range and you're repurchasing shares. I guess my question is like, are you still allocating to kind of all the deals that you maybe would have in the absence of these constraints? Or are you kind of shifting the goalpost a bit and becoming more selective on kind of the deals you're pursuing? Laura Holson: Yes. I mean I think when we look at NMFC specifically, we do remain focused, as John said, on staying within our leverage range, and we are prioritizing share repurchases assuming our stock price remains kind of at this level. That said, that's not a black or white thing, right? We're evaluating each deal opportunity that comes in. We have a broader credit platform, as you know. So we're definitely active in the market regardless even when NMFC is not as active. We do see spreads, as I talked about. While they're reasonably stable, they're definitely a bit on the tighter end of where they have been over the course of the history of unitranche loans. But we still think, in general, still attractive risk-adjusted return. But given the desire around leverage, given the desire around our share repurchase program, those are some of the factors that we're thinking about when allocating. Ethan Kaye: Okay. Great. I appreciate that. And then just kind of switching gears a little on the potential secondary sale. So hit on it briefly, but I guess can you talk a little bit more maybe about how you would kind of prioritize the use of the proceeds from that sale? Would the idea be to kind of redeploy those into new investments or pay down debt or something else? Yes, I'll leave it there. John Kline: Sure. I think it could be any of three things. It could be paying down debt. It could be stock repurchases, depending on where our stock is trading, if and when we consummate the sale, and we could also use the proceeds to buy new loans. And those new loans would be a diversifier compared to where we are today. So we're excited about all three options. Operator: The next question comes from Paul Johnson with KBW. Paul Johnson: Just one or two more on the portfolio sale. I'm just wondering when you do the portfolio sale, is this going to be something that's kind of like a strip of -- sale of a strip of investments where you're kind of partially selling existing positions or kind of more of a selective whole position sort of sale to the third party of those debt investments? John Kline: Sure. Thanks, Paul. So I just want to clarify, the sale is still in very early stages, so it may or may not happen. As you may be aware, some of the trade press picked up on the fact that we were doing it. So we thought it was appropriate to tell our shareholders about it, but it is still pretty early stages. So I just wanted to make that note. And if I were to characterize the way we're thinking about it, I would think about it more as a partial sale of existing quality, well-performing positions that focus on more diversifying our portfolio as well as reducing PIK. So we're not blowing out of names, so to speak. Instead, we're focused on rightsizing a well-performing group of positions to add more diversity to the portfolio with less PIK income, just to be super clear. Paul Johnson: Got it. Appreciate that. And then on the diversification, I guess, how would you kind of focus on that going forward? Would it be smaller? Would you be looking to hold smaller position sizes on new deployment going forward? John Kline: Yes. So we have a vibrant direct lending business, both within NMFC and in institutional funds that we manage. So we've grown over the course of the last 5 to 7 years pretty nicely, which has allowed us to speak for bigger hold sizes, but we're not totally reliant on NMFC effectuating those hold sizes. So the way we manage a lot of our institutional funds, and we've done this over the last 4 or 5 years, and it has been our focus in NMFC as well is that we generally want to have our position sizes be 2% or lower, and the average position size across our funds, whether it's NMFC or our institutional funds, we want to be 1% or lower. We've been going in that direction for a long period of time in NMFC. We just need to -- we feel, accelerate that and just finalize the movement towards a 2% max and a 1% or less average. This sale won't totally get us there, but it will get us almost there. And I think that's a big milestone for NMFC. That's really the way we want to manage the portfolio. What we're trying to deliver our investors across all of our funds is a New Mountain Best Ideas fund, but we don't want any of the positions to be as big as 2.5%, 3%, 4%. We do have some positions that big today in NMFC and our goal is to change that. Paul Johnson: Got it. Appreciate it. Congrats on the share repurchases and the progress on those matters. Operator: The next question comes from Robert Dodd with Raymond James. Robert Dodd: Focusing on credit, if I can, for a moment. Obviously, notorious or Beauty Supply was put on nonaccrual this quarter. You put it on the red list last quarter, so you kind of flagged it. You do have some other portfolio positions like Lash OpCo that are in kind of the same business that also import from China, et cetera. I mean, should we be concerned about the same themes that hit Beauty Supply applying to other portfolio positions that are in kind of the same niche industry? Laura Holson: Yes. I mean, I think we've talked about in the past that we think our portfolio is quite well positioned when we think about an issue like tariffs. And we've talked, I think, on prior calls that Beauty Industry Group really is our one material name that has exposure to tariffs because of its China-oriented supply chain. So I don't see any kind of look through to other subsectors in our portfolio in that regard. We think the rest of the portfolio is quite insulated from a primary impact perspective, and we think that's reflected in the 95% green. Robert Dodd: Got it. And on the other comment -- I think it was John, you said your goal over time was to recover at least full principal. I mean that sounds -- you're going to equitize some of the debt, et cetera. But I mean, going to recover at least, it sounds like you're actually long term quite optimistic about business despite the fact that obviously it's on nonaccrual. John Kline: I think it's a little too soon for us to have all the details that an owner of a business would have. We'll have that over the course of the next months and quarters. But I think it's more of a reflection of our mindset around problem positions. This is a problem position. It's a first lien unitranche loan, we and one other lender are going to take control of the asset. And whenever we do that, we bring the full power of the New Mountain platform to bear on managing the asset. And our mindset is that we are going to get all of our investors' money back. So I think it's more of a mindset than having all the facts, our ducks in a row as it relates to managing the business. We just feel very confident that we have the ability to do it in a differentiated way. And we already have a full, I think, 8-person team, as I mentioned on the call, that's ready to go in and take a very active hand in helping the management team at Beauty Industry to improve their business. Robert Dodd: Got it. And then one more, if I can, on the potential portfolio sale. I mean if that were to occur, you would obviously have quite a large influx of -- depending on how it's structured, potentially have a large influx of cash all at once. To your point, you could use that to delever potentially buy back stock. Would the potential buyback structure change, right? I mean, as it is, you buy it in the market. But if you had an extra couple of hundred million dollars of cash sitting there, would you consider something more like a Dutch tender or some other mechanism to maybe buy back a larger chunk at once? Or would that not be kind of how you'd be thinking about utilizing that capital? John Kline: I think we're going to think about a broad range of alternatives, but it's a little premature to give any specificity around those alternatives or how we're thinking about it. But we'll have a -- we'll be thinking about a broad range of things. Operator: And we have a follow-up from Paul Johnson from KBW. Paul Johnson: Yes. One more question from me. I was wondering if you could just provide maybe a little bit more color on the -- just the Edmentum investment and the markdown this quarter. So is this a case where the multiple or the valuation of this company, the EBITDA is stable. You said it's performing fine, but just the preferred is obviously the claim from the preferred side is growing every quarter. So the [ com ] is essentially getting squeezed out of its value a little bit? Or I mean, I guess, overall, how would you kind of describe the performance of the company at this point? And is this more of a situation where our capital structure was put in place after restructuring and maybe just unforeseen for kind of a victim of its own success, if that makes sense. But any color there would be helpful. Laura Holson: I mean, I think how you described it is largely accurate when we think about the capital structure. I think the good news is that the performance of the company is stable, right? We've talked a lot of times in the past as to how this business had some peaks really during COVID, just given the underlying product and the end market that they serve and then that has since normalized. But performance is definitely quite stable. The business is growing and performing we think, overall well. It's -- they have high-quality products and a good value proposition. So I think those are all positives. I think the challenge from our perspective is, as you described, in the capital structure, and that is something, as John alluded to, that we're in the early stages also of trying to help and work with the company and the other sponsors here to address. So more to come on that. John Kline: And just to zoom out quickly on Edmentum. Edmentum has a big picture been a success story for us. We took ownership of that business years ago, and we sold a significant chunk of the business to another private equity firm. So we've had, in the past, material gains on Edmentum. And I think what's happened over the past couple of years is Edmentum got highly valued during COVID and has had a little bit -- and earnings have come off a little bit since COVID. And now we're working with the company to find its base earnings. And then we're working, as I mentioned in my prepared comments on doing really smart, targeted M&A to grow off a very -- what we think is a very solid base. But big picture Edmentum has been a success story. We're just in a more difficult time right now, but we're still fighting hard to grow the business with the management team. Operator: And we have a follow-up from Finian O'Shea with Wells Fargo. Finian O'Shea: Just jumping in on the follow-ups. A question on the ATM distribution agreement. I think you haven't used this in a few quarters at least, but upsized it not too long ago. Can you give us any color on the sort of ongoing or maintenance fees that the BDC incurs here? What line item that hits? And further if BDCs, if the space remains below book, if that's something you could let roll off or contain? Kris Corbett: I would say overall, I mean, the ongoing maintenance fees to keep that program going are minimal. As you know, we haven't been above book value for a few quarters now, so we haven't actually utilized that. But generally, we want to keep that open and up. So that's -- when and if the share price gets above book that we can start to utilize that again and start growing the fund by issuing shares. Operator: This concludes our question-and-answer session. I would like to turn the conference back over to John Kline, President and CEO of NMFC for any closing remarks. John Kline: Great. Thanks, everyone, for joining our call today, and we look forward to speaking to you again on our next call in February. Thanks. Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Operator: Greetings, and welcome to the AudioCodes 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, Mr. Roger Chuchen, Vice President of Investor Relations. Sir, the floor is yours. Roger Chuchen: Thank you, operator. Hosting the call today are Shabtai Adlersberg, President and Chief Executive Officer; and Niran Baruch, Vice President of Finance and Chief Financial Officer. Before we begin, I'd like to remind you that the information provided during this call may contain forward-looking statements relating to AudioCodes' business outlook, future economic performance, product introductions, plans and objectives related thereto, and statements concerning assumptions made or expectations as to any future events, conditions, performance or other matters are forward-looking statements as the term is defined under U.S. federal securities law. Forward-looking statements are subject to various risks, uncertainties and other factors that could cause actual results to differ materially from those stated in such statements. These risks, uncertainties and factors include, but are not limited to, the following: the effect of global economic conditions in general and conditions in AudioCodes' industry and target markets, in particular, including governmental undertakings to address such conditions, shifts in supply and demand, market acceptance of new products and the demand for existing products, the impact of competitive products and pricing on AudioCodes and its customers' products and markets; timely product and technology development upgrades the event of artificial intelligence and the ability to manage changes in market conditions and evolving regulatory regimes as applicable, possible need for additional financing; the ability to satisfy covenants in AudioCodes financing agreements, possible impacts and disruptions from AudioCodes acquisitions, including the ability of AudioCodes to successfully integrate the products and operations of acquired companies into AudioCodes business; possible adverse impacts attributable to any pandemic or other public health crisis on our business and results of operations; the effects of the current and any future hostilities involving Israel, including in the regions in which we or our counterparties operate, which may affect our operations and may limit our ability to produce and sell our solutions, any disruption in our operations by the obligations of our personnel to perform military service as a result of current or future military actions involving Israel and any other factors described in AudioCodes' filings made with the U.S. Securities and Exchange Commission from time to time. AudioCodes assumes no obligation to update the information. In addition, during the call, AudioCodes will refer to non-GAAP net income and net income per share. AudioCodes has provided a full reconciliation of the non-GAAP net income and net income per share to its net income and net income per share according to GAAP in the press release that is posted on its website. Before I turn the call over to management, I'd like to remind everyone that this call is being recorded, and an archived webcast will be made available on the Investor Relations section of the company's website at the conclusion of the call. With all that said, I'd like to turn the call over to Shabtai. Shabtai, please go ahead. Shabtai Adlersberg: Thank you, Roger. Good morning and good afternoon, everybody. I would like to welcome all to our third quarter 2025 conference call. With me this morning is Niran Baruch, Chief Financial Officer and Vice President of Finance at AudioCodes. Niran will start off by presenting a financial overview of the quarter. I will then review the business highlights and summary for the quarter and discuss trends and developments in our business and industry. We will then turn it into the Q&A session. Niran? Niran Baruch: Thank you, Shabtai, and hello, everyone. Before I start my formal remarks, I would like to remind everyone that in conjunction with our earnings release this morning, we will post shortly on our Investor Relations website an earnings supplemental deck. On today's call, we will be referring to both GAAP and non-GAAP financial results. The earnings press release that we issued earlier this morning contains a reconciliation of the supplemental non-GAAP financial information that I will be discussing on this call. Revenues for the third quarter were $61.5 million, an increase of 2.2% over the $60.2 million reported in the third quarter of last year. Services revenues for the quarter were $30.9 million, a decrease of 4.8% over a year ago period. Services revenues in the third quarter accounted for 50.3% of total revenues. The amount of deferred revenues as of September 30, 2025, was $81.6 million compared to $78.6 million as of September 30, 2024. Revenues by geographical region for the quarter were split as follow: North America, 48%; EMEA, 33%; Asia Pacific, 15%; and Central and Latin America, 4%. Our top 15 customers represented an aggregate of 53% of our revenues in the third quarter, of which 38% was attributed to our 10 largest distributors. In the third quarter of 2025, we experienced increased expenses due to the implementation of the new tariff of U.S. imports accounting to approximately $0.5 million additional cost, which impacted on both GAAP and non-GAAP. GAAP results are as follows. Gross margin for the quarter was 65.5% compared to 65.2% in Q3 2024. Operating income for the third quarter was $4.1 million or 6.6% of revenues compared to operating income of $4.9 million or 8.1% of revenues in Q3 2024. EBITDA for the quarter was $5.2 million compared to EBITDA of $5.9 million for Q3 2024. Net income for the quarter was $2.7 million or $0.10 per diluted share, compared to net income of $2.7 million or $0.09 per diluted share for Q3 2024. Non-GAAP results are as follow. Non-GAAP gross margin for the quarter was 65.8% compared to 65.6% in Q3 2024. Non-GAAP operating income for the third quarter was $5.8 million or 9.5% of revenues compared to $7 million or 11.7% of revenues in Q3 2024. Non-GAAP EBITDA for the quarter was $6.9 million compared to non-GAAP EBITDA of $7.9 million for Q3 2024. Non-GAAP net income for the third quarter was $4.9 million or $0.17 per diluted share compared to $4.9 million or $0.16 per diluted share in Q3 2024. At the end of September 2025, cash, cash equivalents, bank deposits, marketable securities and financial investment totaled $79.7 million. Net cash provided by operating activities was $4.1 million for the third quarter of 2025. Days sales outstanding as of September 30, 2025, were 122 days. In July 2025, we received court approval in Israel to purchase up to an aggregate amount of $25 million of additional ordinary shares. The court approval also permit us to declare a dividend of any part of this amount. The approval is valid through December 30, 2025. On July 29, 2025, we declared a cash dividend of $0.20 per share. The aggregate amount of the dividend was approximately $5.6 million. The dividend was paid on August 28, 2025, to our shareholders of record at the close of trading on August 14, 2025. During the quarter, we acquired 1,267,000 of our ordinary shares for a total consideration of approximately $12.7 million. Regarding the direct cost impact from the tariff announced since the beginning of 2025, we expect roughly $3 million of cost burden for the full year 2025. Given the recent stabilization in the tariff developments, we are resuming our practice of providing full year outlook. For 2025, we expect revenues of $244 million to $246 million and non-GAAP earning per share of $0.60 to $0.64. I will now turn the call over to Shabtai. Shabtai Adlersberg: Thank you, Niran. I'm pleased to report solid third consecutive quarter of top line growth in the third quarter and execution for our strategic objectives amidst our long-term transformation to an AI-driven hybrid cloud software and services company. In the quarter, we continued to build on the strength of our UCaaS and CCaaS connectivity business, accounting now for over 90% of our revenue and successfully leveraged our enterprise customer base to drive cross-sell of our fast-growing GenAI business applications that make up our Conversational AI division. In fact, in many ways, we can say that as of now, AudioCode has put Voice AI front and center going forward in our operations in terms of sustained growth. Our solid third quarter results were marked by strong traction in our dual growth engines, namely the Live family of Unified Communication and Collaboration and customer experience connectivity services and conversational AI business line. In fact, our conversational AI business increased 50% in the quarter, putting us on track to reach the 40% to 50% growth for the full year 2025. Together, these 2 units drove our annual recurring revenue exit third quarter to $75 million or up 25% year-over-year, which positioned us to reach our full year target of $78 million to $82 million. We are growing ever more optimistic about the continued strong ARR momentum and growth prospect for the overall company, fueled by a strong pipeline of opportunities catalyzed by recent launch of the next-gen live platform and the growing demand for productivity-enhancing GenAI value-add services. This is further reinforced by the growing backlog of live and managed services that will convert to revenue in the coming quarters. We ended third quarter backlog at $76 million, growing 13.4% over the year ago backlog of $67 million. Let me share some key developments in our strategic business lines that underscore our growing confidence in our growth prospect. We have seen growing demand from partners for our live platform, an all-in-one cloud software stack that empowers them to seamlessly integrate connectivity with GenAI-powered business voice applications. To that end, in the third quarter, we signed a live platform agreement with a global Tier 1 system integrator. This strategic landmark deal calls for alignment and coordination of all sales aspects from initial opportunity pursuit to post-sales delivery. This comprehensive approach ensures customer satisfaction and success. The initial scope of the agreement provides managed SVC and Gateway as a service in support of major UC and CX platforms for greenfield deployments and for existing customers looking to transition their legacy infrastructure to the cloud. Where applicable, the partner will also cross-sell our award-winning Teams certified Voca Contact center, delivering a unified UCCX experience. Based on the currently committed services, we anticipated low single-digit millions in recurring revenue during the first year of operation in this agreement. This strategic agreement represents a clear win-win for both parties. For the Tier 1 system integrator, our all-in-one UCCX conversational AI stack simplifies operations, reduces cost to serve and enhances end customer experience. For us, it significantly expands our market reach and scales our go-to-market execution in the enterprise space. Together with our long-standing successful partnership with AT&T in North America, this announcement reinforces our market credibility and position us as a partner of choice for all AI-infused UCCX services. We are seeing strong interest from other Tier 1 prospects. Other Tier 1 system integrator prospects recognize the transformative potential and cost efficiencies of our integrated platform. We look forward to sharing additional updates on new partnership with global system integrators in coming quarters. Now to conversational AI. In addition to pull-through of conversational AI from live platform partners, we are seeing broad-based interest in our Gen AI-powered voice application from end customers. Specifically, I would like to highlight the progress we are making in our newer service, Meeting Insights on-prem, which we call Mia OP. This is our unique Gen AI-powered meeting intelligence platform, providing transcription, summarization, automation and connectivity to other leading enterprise IT application that is completely detached from the Internet and that is tailored for regulated and security-sensitive industries. Launched earlier this year, we have gained significant traction in the Israeli market, mainly in the government space, all through word of mouth. Recently, our leading position in the Israeli market were further cemented when we were officially awarded a contract under Project Nimbus, the Israeli government's multiyear cloud migration initiative. As the exclusive provider of meeting intelligence services in the non-SaaS category for calendar year 2026, this award streamlines procurement for all Israeli agencies, both civilian and military, allowing them to activate Mia OP without the lengthy tender process. We are also actively marketing this solution outside of Israel and initial customer responses in APAC and North America have been overwhelmingly positive. Now to a more successful Gen AI-powered business line in the quarter, Voice AI Connect and Live Hub. Leading our revenue growth in the conversational AI business is the Voice AI Connect and Live Hub connectivity and orchestration services business, which grew north of 50% year-over-year. We delivered a standout quarter with strong performance across the board, highlighted by exceptional third quarter booking growth that puts us on track to exceed our full year target. This momentum was fueled by high volume of new logo wins across the United States, Europe and APAC, along with significant expansion within our existing installed base. Driving this rapid growth is the emergence of the voice bots market, which is experiencing robust growth, driven by advancement in Gen AI and NLP. Market analysis projects that the voice bot market size will reach above $25 billion in 2034, up from just $4.3 billion in 2024, with a compound annual growth rate of 20%. Now to the Voice AI Connect space. A key highlight was a high 6-figure voice, voice access project license agreement aligned with leading agentic platform, AI Agentic platform that's supporting virtual agent and agent assist use cases for its large enterprise clients. We view this initial engagement as the foundation for a strong and mutually beneficial partnership. On the expansion front, we renewed a strategic agreement with a long-standing VoiceAI Connect customer, a leading multinational healthcare company. The expanded contract reflects a substantial increase in total value driven by the customer growing demand for virtual agent and assist capabilities as part of the digital transformation. Additionally, we secured a significant follow-on order from one of the largest credit unions in the U.S., which is deploying our VoiceAI Connect solution for conversational IVR use case. Following the successful implementation of initial order in the first quarter of '25, focused on internal HR and help desk, the customer expanded rollout through its IVR this quarter, enabling self-service option for its end customers. Moving on to Live Hub, offered as a Software-as-a Service. Live Hub is a cloud-native self-serve platform that helps voice bot developers for enterprise and service provider connect, connect, orchestrate and enrich the voice communication collaboration stride across various channels and systems. During the third quarter, another exciting milestone was the introduction of Agentic AI capabilities within our Live Hub platform. This pivotal enhancement delivers an end-to-end solution carrying text-to-speech, speech-to-text and LLM-powered bot development with related best-in-class connectivity services, all tailored to service small to medium-sized customers. Importantly, our Live Hub financial momentum continues with ARR growing above 30% sequentially and substantially above 100% versus the year ago period. Now turning -- before turning to the detailed business line discussion, let me quickly shift to the third quarter profitability metrics outlook. We performed -- outperformed on top line with revenue growing 2.2% year-over-year. Our non-GAAP gross margin for the quarter was 65.8%, which is above our previous quarter of 64.5%. The sequential improvement in our non-GAAP gross margin is attributed mainly to more favorable product mix and lower tariff related cost headwinds of about $0.5 million versus prior expense of above $1 million in the second quarter of 2025. We expect fourth quarter '25 tariff costs to be in the similar range to this recent third quarter. Third quarter non-GAAP operating expenses of $34.7 million compared with $35 million in the second quarter and $32.5 million in the year ago quarter. On a year-on-year basis, the higher expenses are attributed mostly to targeted investment in growing the conversational AI business and higher impact from the weakening U.S. dollars against the euro in the third quarter. Non-GAAP operating margin reached 9.5% compared to 7.2% in the previous quarter and 11.2% in the year ago quarter. Non-GAAP EBITDA margin was 11.2%, again, an improvement compared to 8.6% in the previous quarter. Non-GAAP earning per share was $0.17 compared to $0.14 in the previous quarter and $0.16 in the year ago quarter. In terms of headcount, we ended the quarter with 961 employees, essentially flat across the first 3 quarters 2025 and compared to 935 employees in the year ago period. Net cash provided by operating activities was $4.1 million for the quarter and $25.2 million for the first 3 quarters of 2025. The key takeaway from these financial results is that our business remains strong and is expected to grow steadily through 2026 and beyond across our 2 primary sectors. Looking ahead to the upcoming year, we expect a noticeable shift in our top line performance. Specifically, we project that 2025 will demonstrate both change and growth compared to 2024. This improvement is significant as it will mark a reversal of the declining annual revenue trend experienced in 2023 and '24. So, we're moving to positive trend, and we believe that '26 will be even higher. Firstly, the UCaaS and CX connectivity business has stabilized compared to 2023 and '24. Additionally, 2 significant developments in the third quarter: one, signing the service agreement with the leading global system integrator and increasing engagement with Cisco, which is the second largest shareholder in the UCaaS market, involving all type of services, including Cloud Connect offering devices and more. The 2 developments give us confidence that this connectivity business will perform well in coming years. And secondly, as anticipated, we expect strong growth exceeding 40% annually in our conversational business over the coming years. Now to some of the major business lines, starting with Microsoft. Our third quarter Microsoft business was almost flat year-over-year, impacted by seasonality and late purchase order push into the fourth quarter. For the first 9 months of the year, Microsoft grew 4%, driven by our connectivity business, coupled with increasing attach rate of sales of devices, Voca CIC or Team Certified CCaaS and other conversational business application services. Importantly, our pipeline of created opportunities remained robust in the third quarter, up 20% year-over-year and up 8% for the first 9 of 2025, again, compared to the year ago quarter. Market service and partner inputs continue to support a growth story for Teams Phone business, driven by the Microsoft Operator Connect program, where adoption in the market continues to show healthy growth. Teams Phone usage is also strongly supported by Microsoft efforts to drive Copilot as a central capable chatbot for the Teams Phone meetings and calls. All this points to a strong market today and for coming years and further supports business expansion and dominance in the connectivity area. Before wrapping up on Microsoft business discussion, let me share details of some representative wins. One is a very large greater than 1 million defense information system agency. Here, we have signed $1.1 million total contract value over the next 36 months through AT&T, covering the expansion of additional managed SBC services and calling plans in a new region. Second win is with a financial services company operating internationally. It is a provider of investment management services outside to the U.S. This is a $1 million TCV contract over 36 months deals renewal of all prior services and purchased at a modest increase in value. Third is a win with a large -- one of the largest hospital, pediatric hospitals in the U.S., again, close to $1 million TCV over 36 months, covering live from managed services and gateways, enabling full migration from legacy PBX systems to Microsoft Teams. Now turning to the contact center or customer experience market. CX grew by 13% year-over-year in the quarter, benefiting from growth in connectivity for CCaaS and connectivity services. We continue to see growing customer and partner interest in Live CX, which is an integral component of the live platform and targets applications such as cloud migration of contact center, replacing traditional 1800 services with click-to-call functionality and enabling conversational AI through Voice AI Connect and Live Hub connectivity. As discussed in my earlier remarks, during the third quarter, we signed a landmark live platform agreement with a global Tier 1 system integrator where Live CX was a critical element of the broad-based agreement. Expanding our network of global Tier 1 integrator remains a key strategic initiative as it significantly broadens our addressable market. These partners focus on midsized customer experience customers, a segment traditionally underserved by our direct sales team. Importantly, our pipeline of opportunity remains -- remains robust and gives us confidence about our growth prospects for the balance of '25 and into 2026. Now to conversational AI other lines. As discussed previously, conversational AI business grew 50% in the quarter. Key in the growth for the business line of Voice AI Connect and Live Hub, which we just discussed. Let's now discuss highlights of additional business lines that make up the conversational AI segment. First, Voca CIC. We recorded another quarter -- record quarter of strong year-over-year invoicing and booking growth for Voca. Key highlights include major win in aviation. We signed a deal to deploy our team certified omnichannel contact center at a major APAC, Asia Pacific airport, one of the busiest airports in the world, beating out a couple of well-known premium CCaaS vendors. We won based on our ability to leverage our broad portfolio, offering a tightly integrated Teams-based phone and CCaaS service along with mobile app call enablement to contact center via our click-to-call solution. Ongoing momentum in higher education, we continue to make solid progress in this vertical, adding another university this quarter that selected our best-in-class Teams certified contact center solution alongside our live Teams managed UC services. We now serve 12 university accounts in North America with Voca, including the second largest university in the U.S. and the largest school network on the East Coast. Microsoft Unified certification, Voca became the second vendor worldwide to receive certification. We have distanced our self from competition as the only vendor with real-world enterprise production grade experience with this stack, thanks to our long-standing partnership with Microsoft. Now to a new product update. Later in the fourth quarter, we plan to launch Agent Insights, which brings advanced conversational AI and generative AI to the Voca CAC platform. Powered by LLMs, it transforms recorded Teams interactions into structured insights, including AI summaries, sentiment analysis and one-click CRM updates. Each contact center desk can define customer summary prompts, ensuring precision and compliance across use cases. Strategically, Agent Insights aligns with our unified integration model with Teams Phone, adding a critical AI layer to the Microsoft Teams CX ecosystem and strengthening Voca CIC as the role as the intelligent engagement layer driving efficient and quality business value. Now needless to say that Agent Insight is based on our technology developed in the meeting insight and therefore, we are in a good position to make great value and benefit from a technology in different areas. Overall, our achievements are gaining recognition from leading industry analysts, culminating in a recent award from the UC today for best Microsoft Teams Contact Center, representing back-to-back win for the second year in a row in this category. Moving to Meeting Insights. Meeting Insights Cloud Edition maintained strong momentum in this quarter with continued growth in new customer acquisitions. Other key metrics include the number of meetings and unique active users reached record levels, contributing to continued growth in monthly recurring revenue. In addition to our broad market focus, we have developed workflow solution tailored to specific verticals, adding automation and connectivity to other leading enterprise IT solution aimed at leveraging Gen AI to enhance meeting productivity and accelerate business outcomes. Early traction has been promising. One example involves the University of Central Florida, one of the largest universities in the U.S., which amongst a broad portfolio of solution customer takes from us, they deployed also Meeting Insight to generate AI-powered summaries and transcript of interaction between counselors and students. Working closely with the customer, we perform analytics such as sentiment analysis and speaker [indiscernible] ratio, displaying key metrics in a custom dashboard available to the counselor, supervisors to support student wellness and improve graduation rates. This is just one example of how our vertical solution are transforming data into actionable insights and support workflows, optimizing outcomes. We look forward to sharing more in the coming future. Moving on to Mia OP. Since second quarter, we have made significant strides in Israel and globally that are expected to drive growth in our conversational AI segment. In addition to the exciting contract award under Project Nimbus, we discussed earlier, our momentum in Israel is extending beyond the government vertical. We are now in final stages of several large tenders in other verticals such as healthcare and utilities, reflecting growing demand across various industries. We also witnessed customer interest outside of Israel when customers understand the uniqueness of Mia OP solution that unlocks meeting intelligence at the edge computing level. Fresh from the debate of Mia OP in Asia Pacific in early third quarter, we are now engaging with several government opportunities in APAC countries in setting up a proof-of-concept trials. In late third quarter, we also showcased our solution in the United States and customer response was overwhelmingly positive. We are currently in conversation with several U.S. federal and civilian agencies through a mix of collaboration with partners and direct engagements. We ended the third quarter with close to 10 customers in production and about 15 proof-of-concept project, all arising from word-of-mouth recommendation. Based on our exceptional pipeline of opportunities, we expect our momentum in Mia OP to further accelerate in fourth quarter and into 2026. So, to wrap up our call, in third quarter '25, we continued to make solid progress in our long-term transformation to a hybrid cloud and voice services and Gen AI business application company. We delivered against our strategic objectives in that, a, we have a third consecutive quarter of revenue growth; b, we executed well to our playbook of leveraging our strong connectivity installed base in driving successful cross-sell value-add services. And third, the R&D and sales marketing investments we have made over the past several quarters have led to record conversational AI bookings in the quarter. And importantly, pipeline remains very healthy. This is the basis for our belief that we will grow in the next coming years more than 40% to 50% on an annual basis in the conversational AI business. We are operating from a position of strength, supported by a fortress balance sheet, a dominant connectivity franchise and a growing conversational AI segment that enhances enterprise intelligence and productivity. We believe that these factors position us well for the rest of 2025 and increase growth in top line and earnings into 2026. And with that, I have concluded my presentation, and I'll move over the call to the operator. Operator: [Operator Instructions] We have a question from Joshua Reilly with Needham. Joshua Reilly: All right. Nice job on the quarter here. On the global Tier 1 system integrator win, maybe you could give us some more color on what helped you win that deal from a product perspective or any other factors that you think would be relevant to give to investors here. Niran Baruch: Right. Well, I need to go back to the significance of our Live platform, which is a services delivery platform for UCaaS and CX. I think by now, this is the only platform that allows large system integrators, which serve large enterprises around the world, deliver all of the different services that are needed in order to move to modernizing the enterprise and to move to enhanced, I would say, communication and collaboration. Starting from connectivity, which connects all of the sites of a company across the globe. And then adding on top of that management, management of users, management of sites. And then on top of that, a list of business application and among them, an advanced and AI-first contact center, coding solution, meeting intelligence platform and now we're coming with voice bots and Gen AI applications. So, all in all, this is the most advanced platform these days. And for a large system integrator that operates globally, this would be a great services delivery platform to serve its customers. And I think from that stems the recognition and the importance of that platform. Joshua Reilly: Got it. That's helpful. And then you're obviously building a lot of these kind of adjacent AI solutions for the communication landscape. If you look at the older products that you have in the market, whether it's FPCs or some of the gateways and all the older products that you sell, those are typically in pretty price-sensitive markets. What are you seeing with some of these new AI solutions and your ability to drive pricing power relative to the UCaaS market, which is historically a pretty price-sensitive market. Niran Baruch: Right. Well, voice AI is a emerging market and therefore, those organization which are early adopters and quick to implement workflows and solutions that will substantially enhance their productivity are not less concerned with the cost. So, we do not see any price pressure at this point on the Voice AI business application. And we believe that as we will continue to enhance and add more features and make the solution substantially richer, we can still keep that. So, you have identified correctly the difference between the legacy business, which is price sensitive. But again, there, we enjoy the fact that competition is becoming less and less powerful. But then we enjoy relatively convenient price environment, I would say, for Voice AI business application. Joshua Reilly: Got it. That's helpful. And then on the Microsoft business, I believe last quarter, it grew 6% year-over-year, and I think you said it was flat this quarter. Is there any change in the trends there? Or is that just really around the year-over-year comparison dynamics for the growth rate? Niran Baruch: Right. So, I think overall UCaaS market is kind of flattening out in recent 12 months. We've seen that trend. It's been fairly strong up until '22, '23, then it becomes the expansion rate really decreased. It's a good market. It's a great market, right? Just take into account that out of -- if you go back to like 15 years ago and you talk about 400 million endpoints overall in the enterprise world served in the past by PBX'. So these days, UCaaS I believe, is serving less than $100 million. So, a lot of room to grow. And again, we all need to acknowledge that the majority of the growth occurred more in the U.S., U.K., Western Europe, Canada, Australia, maybe, et cetera. But there's a huge -- actually above 50% of the $400 million market that's still served by the old PBX technology. So, there's a lot of room to grow. So -- but pricing is such that I would assume that UCaaS will grow, but our services should be applied to the non-UCaaS market at a lower range. And I think that would be basically the driver for increased growth going forward. Joshua Reilly: Got it. And then last question for me is, if you look at the mix of revenue in the quarter, I would say that the product revenue was pretty strong, above what my estimate was and what I would have expected. Can you just help us understand maybe what outperformed on the product revenue side in the quarter? Niran Baruch: Yes. As you've seen, first, we had a great quarter in terms of product recognized revenues. It was driven mainly at the software, which is part of the voice AI solution. So that's where the product growth came from. Operator: As we have no further questions on the lines at this time, I'd like to turn the call back over to Mr. Adlersberg for any closing remarks. Shabtai Adlersberg: Okay. Thank you, operator. I would like to thank everyone who attended our conference call today. With continued good business momentum in our UCaaS and CCaaS operations and continued growth in our emerging voice AI business, we believe we are on track to grow revenue and profitability in the next coming years. We look forward to your participation in our next quarterly conference calls. Thank you all. Have a nice day. 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.
Carrie Gillard: Good morning, and thank you for joining Shopify's Third Quarter 2025 Conference Call. I am Carrie Gillard, Director of Investor Relations. And joining us today are Harley Finkelstein, Shopify's President; and Jeff Hoffmeister, our CFO. After their prepared remarks, we will open it up for your questions. We will make forward-looking statements on our call today that are based on assumptions and, therefore, subject to risks and uncertainties that could cause actual results to differ materially from those projected. Undue reliance should not be placed on those forward-looking statements. We undertake no obligation to update or revise these statements, except as required by law. You can read about these assumptions, risks and uncertainties in our press release this morning as well as in our filings with the U.S. and Canadian regulators. We'll also speak to adjusted financial measures, which are non-GAAP and not a substitute for GAAP financial measures. Reconciliations between the 2 are provided in our press release. And finally, we report in U.S. dollars, so all amounts discussed today are in U.S. dollars unless otherwise indicated. With that, I'll turn the call over to Harley. Harley Finkelstein: Thanks, Carrie, and good morning, everyone. It's been another strong quarter for Shopify. I'll take you through the numbers and what we've built and shipped in Q3 shortly. But first, I want to zoom out as I always do. There's a real shift happening in the world of technology right now. And I know you're all going to ask about AI and there's a lot to cover, from enabling agentic commerce with some of the biggest global leaders in conversational AI, to our AI assistant Sidekick supercharging merchants' businesses, to how we are using AI reflexively across the entire business and company to tighten our product loops and to ship world-class solutions more efficiently than ever. But here's the thing. There's a bigger story behind the updates, and it's a story of the evolution of commerce. Now evolution teaches us to adapt or die, and Shopify is built for this pace of change. It's in our DNA. So while you'll certainly see it in how we're leveraging AI, you will also see it in our international expansion. You'll see it in the development of our offline B2B channels. And you'll see it in how we've dramatically lowered the barrier to entry. Every 26 seconds, a new entrepreneur makes their first sale on Shopify. I'm going to say that again. Every 26 seconds, a new entrepreneur makes their first sale on Shopify. In fact, it's happened at least 3 times since I started talking here. That is TAM expansion at its best. And any of those merchants could easily become one of the world's biggest brands in a decade or less. As I said before, that's what we mean when we say we're not just growing our piece of the pie; we are growing the pie itself. That is our superpower. Commerce never stands still and neither do we. We are always building for what's next. And now as we're entering what is likely to be a whole new era of agentic commerce, our scale and agility mean that Shopify is perfectly positioned to lead the way and empower more businesses using AI. AI is an incredible tool for us in what has always been our goal to enable more entrepreneurs in the world. More on that in just a moment. First, back to the numbers. While we're continuously evolving, the story of our results remains incredibly consistent. Normally, I hate repeating myself, but this is one place I'm very happy to do just that. For quite some time now, we've demonstrated that we can balance both growth and profitability. Well, here it is again. Q3 delivered 32% GMV growth, 32% revenue growth and an 18% free cash flow margin. And this is not just a one-off. Revenue grew 27% in Q1 this year, 31% in Q2 and 32% in Q3. At the same time, free cash flow margin has held steady at 15% in Q1 to 16% in Q2 and 18% again in Q3. Consistent, strong, executing just as we said we would. We are really proud of these results. Delivering these numbers quarter after quarter at our sale is a huge achievement. And this consistency is not an accident. It's incredibly intentional. It's a direct outcome of how we operate. We build what merchants need, we ship relentlessly and we grow consistently. This is the right balance for a growth company: invest to capture opportunity, keep margins at a profitable level and deliver durable results quarter after quarter. It's how we operate, powered by a model built to accelerate merchant growth, a team built for execution and millions of businesses pushing from their first sale to full scale. And that's why you continue to see consumers' favorite brands come to Shopify to power their businesses. More on that later. Now let me walk you through what we've built and shipped in Q3 and how it's fueling our growth. I touched on AI at the start of the call. That's because, simply put, we all recognize this could be the biggest shift in technology since the Internet, and Shopify is preparing to be at the center of it. The products we're talking about today could very well become a quintessential piece of technology that will be used by every one, every day. That's how big this could be. And we believe Shopify is perfectly primed to help lead the way. Think of it this way. If AI is fueled by data, then Shopify has a clear advantage. We power millions of merchants and billions of transactions. That gives us access to a world of data across a spectrum of commerce. And we're using that data to create better shopping experiences for both merchants and shoppers. This is the strength of our platform: massive scale paired with unmatched velocity. We think about the evolution of AI in 3 ways: how AI will help our merchants sell everywhere, how AI will help our merchants operate smarter, and how we, as a company, will use AI to build better. Sell everywhere, operate smarter and build better. Let me take each in turn. Let's start with how AI is helping our merchants sell everywhere, what's known as agentic commerce. Put simply, AI is able to fundamentally change how we shop, moving from search to conversation, helping all consumers purchase more efficiently. And that's why we built the Commerce for Agents tools that we introduced on our last call, Catalog, Universal Cart and Checkout Kit. These tools make it easier for agents to shop across merchant stores on a buyer's behalf. But here's the thing. Agentic commerce is so much more than just the last click. Think about it in 3 layers: product discovery, purchasing experience and the post-purchase journey. Now if you're only looking at the payment or checkout layer, you're missing the bigger picture of what we're building: a seamless and intuitive shopping experience end to end. First, let's talk discovery. We've structured data across billions of products so our partners can surface the most relevant items in seconds. It's clear where this is going. Shopping is becoming more conversational, more personalized and much more efficient. And that's why the leading AI partners are already using Catalog to power product discovery inside their experiences. I'm sure you all saw the announcement about our partnership with ChatGPT, which is a strategic play that we're really excited about. But let me be clear, we're also partnered with other leaders in conversational AI like Perplexity, and our goal is to power product discovery for all agents, making us the standard across the Internet. Up next, on purchasing experience. Once a shopper finds what they want, Universal Cart and Checkout Kit make add to cart and checkout seamless inside the conversation. ChatGPT, along with Microsoft Copilot have already partnered with us here to make in-chat shopping flows possible. And finally, post purchase. We're investing in tools that help agents keep customers engaged and informed, order status, return, support, reorder prompts, so the experience stays smooth and merchants build durable relationships with their customers. Of course, different permutations will emerge as agentic commerce evolves, and we are preparing our merchants to be well positioned for whatever path wins. What all this should tell you is that our merchants are primed for success in the new world of agentic commerce, just as they will continue to be armed with the tools for their online store, physical retail stores, B2B channels or wherever commerce goes next. This is the advantage of being on Shopify, we are everywhere commerce is happening and we always aim to get there first. Okay. Let's now talk about how merchants are using AI to operate smarter. We set an extremely high bar for every AI feature we build and ship. We're not just here to keep pace with change; we're here to set the standard for what's possible in commerce technology. Sidekick, our on-platform intelligent assistant, is a prime example of that commitment. And frankly, the rate of adoption speaks for itself. In Q3 alone, over 750,000 shops used Sidekick for the first time. And to date, Sidekick has had almost 100 million conversations with merchants, with 8 million in October alone. And it's quickly becoming the default way merchants get things done. Hundreds of thousands of merchants are running core parts of their business using Sidekick. In fact, conversation can go from 50 to 100 turns deep, covering everything from analytics and building new customer segments, to automating better SCO and so much more. Five years ago, none of this would have been possible. And today, it's a reflexive daily habit for many of them. At this scale, Sidekick will only get smarter and more powerful. We've been betting on this from day 1, and that bet was correct and it's already paying off. Sidekick is central to have so many merchants operate their businesses. Let me be clear, this is not just about automation. This is also about autonomy. This is exactly what we had hoped for when we started out on this journey. It's also something we knew we were uniquely positioned to build given everything we know about the merchants' business and commerce at large. This is what building a purpose-built agent and deeply integrated into the platform looks like, and we are just getting started. The last thing I'll touch on with AI is how we're using it to build better products. For years, we've been honing our internal capabilities in the same way we've been empowering our merchants: shipping fast, measuring what matters and scaling what works using AI. Shopify's founder mode mentality really comes into play here. We're turning vast amounts of raw signal into ship products and features quickly and relentlessly. This is what building with AI looks like at Shopify, using our scale to gain insights, our culture to move really fast and shipping more of what truly matters so merchants win sooner. Let me share one quick example to illustrate this. We have a tool effectually known as Scout. Now Scout is an internal voice of the customer system that indexes hundreds of millions of merchant feedback items, making them searchable within our tools. Any PM, designer, engineer or, frankly, anyone at the company, including myself and Jeff, can ask a question and get grounded answers in seconds. That used to take weeks. Patterns emerge by market, vertical and merchant size, allowing us to write clear specs, prioritize better and ship with confidence. And Scout is just one of many tools we're developing to turn our own signals, whether it's support tickets, usage data, reviews, social interactions or even Sidekick prompts into fast informed decisions. If you take away one thing from this call, let it be this, AI is not just a feature at Shopify. It is central to our engine that powers everything we build. Okay, that's a lot about AI, which should give you some idea about how much is happening behind the scenes over here. But now let's shift our focus to other key products and growth areas that are driving our results. Starting with Shopify Payments. Payments continues to lead the way for driving growth, hitting 65% penetration of GMV in Q3. Shop Pay has seen significant growth as well, up 67% year-over-year to $29 billion this quarter. Now I want to underline what I just said because it's important to understand what we're building here. If there was ever one company that could own the checkout, we believe it can be Shopify. And that's no small feat. If we've made it look easy, then that means we're doing our job. But in reality, the checkout is an incredibly complex system. It's the engine room of commerce. That one simple buy button is a contract between merchant and customer that has to cover a whole world of optionality, from taxes, shipping and inventory, to pricing and payments in any currency, to bundles and upsells and subscriptions, our checkout scales in terms of volume and functionality, all while ensuring compliance with various regulations. Think of it like a really well-made watch. The watch face or the buy button is just the tip of the iceberg. What's underneath is an intricately built network of complications that handles a world of nuance all designed to make the experience beautifully simple. And it doesn't end there. Once the sales complete, we handle refunds, exchanges, store credits, partial captures and loyalty programs, all seamlessly allowing merchants to focus on growth instead of paperwork and building trust with their customers. So why does this matter? Because it demonstrates that we execute incredibly well at scale. No one else can handle this complexity as seamlessly and with such a focus on the merchant as Shopify can. And for our partners, we keep it simple as well. Platforms like Microsoft Copilot can easily plug in to activate commerce quickly embedding checkout and maintaining a native field. And the result, we simplify online stores and check out at scale, empowering our merchants and our partners to thrive wherever commerce happens today and wherever it goes next. So we've talked about AI, we've talked about the checkout, but you'll see this laser focus in everything we build. In Q3, every upgrade we shipped, cut friction simplified selling and put merchants within reach of new markets. I'll give you a few examples related to our payments business. Merchants, using Global-e's managed markets products can now offer Shop Pay as a payment method. Our Klarna partnership now includes local currency displays and streamlined payouts, and Shop Pay installments launched in the U.K. following Canada that rolled out earlier this year. So why am I talking to these specific rollouts? Because it shows how each integration makes it easier for merchants to convert wherever they do business. And we're not close to being done. There's significant runway ahead, especially internationally where our adoption rates are increasing but still remain lower than our core market in North America. We see that momentum continuing. In Europe, penetration gains for Shopify Payments in Q3 were more than 50% higher than the gains in the same quarter a year ago. This is how we continue to capture growth and drive greater payment penetration, by making the hard things simple and putting merchants at the center of every transaction. Let's stay on international because, frankly, the results speak for themselves. International GMV grew 41% in Q3, on top of 42% in Q2 and 31% in Q1. The momentum is real, and we're still only scratching the surface. Europe's market share continues to make gains, while revenue from the region now accounts for 21% of our overall revenue in Q3, up from less than 18% 2 years ago. On top of the payment product enhancements I already mentioned, Q3 was packed with solutions across our business that further break down barriers and open new markets for merchants everywhere. I'm going to drill into the details here because it's important to understand the velocity of progress we are making internationally to add more products in more markets. In point of sale, we launched Shopify Payments for POS to 3 additional countries and rolled out Tap to Pay in 7 more countries. Shopify Capital has now doubled its footprint from where we started the year, with Ireland and Spain launching in Q3. And Shop App expanded Track with Shop and Translations in 6 new markets, making it a top destination for local buyers around the world. On the cross-border front, as I mentioned earlier, Shop Pay is now available for merchants using our managed markets product. Let's talk about shipping and fulfillment next because we made big strides here this quarter. We expanded merchant optionality across the stack for both international and local. This quarter alone, we partnered with Amazon of multichannel fulfillment, Big Blue, DHL Fulfillment Network, Go Bolt and Maple all to give merchants more fulfillment flexibility. We partnered with Australia Post, Royal Mail and DHL Express Canada to give more carrier diversity. And we launched DHL Express DDP, DHL e-commerce DDP and enabled Canada Post DDP, so merchants can collect duties at checkout. With a single integration, we've empowered merchants to eliminate the customs delays that kill international sales. But this is not just about adding integrations. It's about giving merchants the optionality to choose the best solution for their business, whether that's the lowest cost, fastest delivery or best cross-border experience, all managed from a single platform. As regulations shift and merchants' needs evolve, this depth of choice gives our merchants even more ways to be successful, while continuing to build an ecosystem that is truly world-class. And while we're scaling horizontally across geographies, we're also growing vertically across merchant types and channels. As you know, we've built multiple on-ramps into Shopify: online, off-line, B2B and enterprise, so brands can start and scale on their terms. And that is why the biggest brands and retailers are choosing Shopify. Just last week, the Estee Lauder companies announced they're coming to Shopify. This is a global beauty Empire with 80 years of heritage and more than 20 iconic brands under 1 roof, Clinique, MAC, La Mer, Bobbi Brown and more. And now they're trusting us to power their next chapter. So why are industry legends like Estee Lauder, Mattel, Aldo, Hunter Douglas all moving to Shopify? Because our technology wins: on speed, on scale, on agility. And our price-to-value ratio is unmatched. But it's more than just tech. Estee Lauder is still a family-led company at heart. For them, this isn't just business, and it isn't for us either. We simply outcare everybody else. Sometimes that means me spending the weekend on calls with both potential and existing merchants. And sometimes, it's Tobi jumping in to explain a new feature to a merchant. But all the time, it's the roughly 8,100 people at Shopify who're relentlessly merchant-obsessed showing up every day to help them win. And that mix of world-class technology and true partnership, that's what sets Shopify apart and that's what's driving us forward. And you can expect to see that continue to set us apart as we scale. Every day we are seeing some of the world's biggest brands with complex, high-volume operations choose Shopify to unify it's channels, to cut complexity and to move faster. This quarter alone, we have signed an incredible mix of brands that shows just how versatile and scalable Shopify is. Affordable billion dollar beauty giant e.l.f Cosmetics, Italian luxury label TWINSET, iconic American snack brand and household staple Welch's, 3D printing company Formlabs, the sport betting company FanDuel and the 170-year-old French retailer Ladurée. And in the growing baby category, we just welcomed Stokke. Anyone who has small children at home will know this company. Their signature high chair has sold over 16 million times. And just like Estee Lauder, they have an incredible heritage, a 90-year-old company, and they're bringing Shopify in to supercharge their next chapter. And I hear stories like this every day. It's one of the things I love most about what we're building, partnering with generational businesses and setting them up for future generations to come. Meanwhile, some of our other recent signings are now ramping up on Shopify. Since we last spoke, brands like Michael Kors, David's Bridal, Goop, Mejuri and Dooney & Bourke, they're all live on Shopify. That's a serious list of companies I just mentioned, on top of the incredibly diverse brands we mentioned last quarter, which included everything from coffee to luxury outerwear to mining equipment. What's most exciting is that we're increasingly welcoming more brands from all corners of commerce. And this growing merchant diversity, both in the U.S. and all over the world, make Shopify more resilient, expands our addressable market and it fuels our growth. No matter how the market shifts, Shopify is built to thrive. We're widening our reach, we're deepening our offerings and we're laying the groundwork for long-term success, from entrepreneur all the way to enterprise. Now I want to quickly touch on offline as it's one of our long-term growth drivers that is continuing to power forward. Offline GMV in Q3 was up 31%, and we welcomed a host of incredible brands to Shopify. These are retail-first brands led by in-person experiences that are expanding to more channels and looking for a unified commerce solution. Iconic names like UGG Australia, Comme des Garçons are choosing Shopify to power their stores, expand their reach and deliver seamless experiences online and offline. These are not small wins. Our progress with the retail-anchored brands is another strong signal that Shopify is becoming the platform for all brands selling everywhere: in-store, online and across countries, channels and markets. Finally, a quick note on B2B. Our momentum remains strong and steady. Following 2 years of consistent growth over 100%, we nearly doubled B2B GMV again in Q3, up 98% year-over-year. This isn't just 1 cohort or 1 region; we're seeing broad GMV growth across both new and established merchant cohorts. For example, in Canada, Q3 B2B GMV was up over 155% year-over-year. From a vertical perspective, B2B continues to deliver strong results across the board, with home and garden standing out at 150% year-over-year GMV growth in Q3. Shopify's platform is delivering for merchants no matter the size, vertical of our market. Now before I hand it over to Jeff, I want to close out where I started. Shopify is evolving at a pace that is entirely unmatched, while maintaining consistent durable growth. We're 3 quarters into 2025 and we've delivered exactly what we said we would: relentless growth, consistent margins and unwavering execution. We build, we ship, we grow. We're also about to kick off what will be my 16th holiday season or, as we call it, BFCM here at Shopify. This moment has evolved too. It used to be a few peak sales days, but now it stretches across the whole quarter. And it's more global than ever. And more than ever before, AI will play a significant role in how shoppers discover and buy. And we are ready for it. Our merchants are primed to win. They've got AI tools that didn't exist a year ago. They're shipping internationally with options that didn't exist a year ago. And they're doing it all on infrastructure designed to handle peak demand at global scale. This is Shopify at full speed. And with that, I'll turn the call over to Jeff for a deeper dive in the numbers and trends we are seeing. Jeff, over to you. Jeff Hoffmeister: Thank you, Harley. Q3 was another exceptional quarter for Shopify, continuing the strength of what has been an impressive year. Before I dive into the numbers on a line-by-line basis, I want to examine our GMV from a few different angles in order to give you a holistic view of what we are seeing in our business. Let's examine GMV by merchant size, cohorts, geographies and channels. Note that all growth rates mentioned are year-over-year unless specifically stated otherwise. First, regarding merchant size. We saw strong growth across all merchant sizes. In Q3, merchants with annual GMV below $25 million generated the significant majority of our GMV. And we saw a relatively equal balance between GMV from merchants in the $2 million and below band and merchants in the $2 million to $25 million band. Two trends that have been relatively consistent for a while. Merchants with GMV greater than $25 million grew at a faster pace in Q3, but admittedly, that is the smallest segment of the 3 bands I discussed. Next, looking at our cohorts. Q3 was another strong quarter where our growth was fueled by both recent quarterly cohorts and the strength and durability of previous cohorts. In fact, one of the elements of our business that I believe is frequently underestimated is the stickiness and continued growth of cohorts from 2, 3 or more years ago. Year-over-year growth in GMV was primarily driven by the strong performance of our 2024 and 2025 cohorts. But our earlier cohorts also continue to perform well. Notably, the 2025 cohort is currently outpacing and generating more GMV than previous years' cohorts at the same age. Moving to regions. Europe continued to be a standout driving significant growth with GMV up 49% or 42% in constant currency. Approximately half of our GMV dollar growth in Q3 on a constant currency basis came from markets outside North America. We experienced stronger growth from existing merchants compared to new acquisitions in Q3 across all regions. In terms of channels, offline GMV increased 31% as we attract more retail-first brands globally. Our B2B GMV was up 98%, fueled by existing merchants embracing our offerings and our go-to-market initiatives targeting more B2B specific verticals and merchants. Finally, verticals. We saw strong performance in apparel and accessories, health and beauty, home and garden, and food and beverage. We also continue to experience rapid growth in emerging verticals like pet supplies, which grew over 50%, and arts and entertainment, which was up 45%. Our merchants have consistently delivered over 20% GMV growth for 9 consecutive quarters, with Q3 GMV growth rate of 32%, representing the highest growth rate quarter that we've had since the COVID-impacted growth rates of 2021. In short, our merchants are performing well across size, cohorts, geography, vertical and channel. Let's now turn to our Q3 results. In Q3, we reached $92 billion in GMV, marking a 32% increase or a 30% increase on a constant currency basis. This strength was driven largely by North America, which outperformed our expectations, driven by an acceleration in growth rate fueled by stronger contributions from both Standard and Plus merchants. Revenue for the third quarter was up 32% or 31% on a constant currency basis. The strong GMV trends I mentioned drove this revenue growth with these results coming in ahead of expectations, largely on the backs of outperformance in North America. Looking at the 2 components of revenue. Merchant Solutions revenue increased 38%, with the strength in GMV driving the significant majority of the growth. To a lesser extent, we also saw increased penetration of Shopify Payments, which reached 65% for the quarter. This quarter's higher GPV penetration was driven by continued adoption of Payments by more merchants around the world and the strong performance of those merchants, and the expanded partnerships with PayPal and Klarna. These dynamics are partially offset by our continued growth in Europe, which accounted for a larger share of GMV but which has lower payments volume penetration compared to North America. Over time, we expect that this will become less of an impact for Payments penetration as we continue launching Payments in more countries. Subscription Solutions revenue grew 15%, primarily driven by a larger percentage of subscriptions coming from higher-priced plans and, to a lesser extent, higher variable platform fees. Q3 MRR was up 10% year-over-year, led by growth in our Plus plans, which represented 35% of MRR for the quarter. We had 2 headwinds impacting our year-over-year growth rates in MRR. MRR for Q3 last year benefited from the 1-month paid trial, which drove MRR higher and made for a tougher comparison this year. Second, we are also lapping the Plus pricing changes, which went into effect in Q2 of 2024. We will have some year-over-year comparability headwinds on MRR until Q2 of next year as our rollout of the 3-month trials happened in Q4 of last year and Q1 of this year. We now have had a full quarter where all of our regions are back on 3-month trials, which clears up a lot of the noise and comparability of our recent merchant acquisition efforts. We're seeing the results of these efforts settle generally in line with historical trends and are pleased with this part of our business. Gross profit grew 24%, coming in slightly ahead of our expectations, driven by the outperformance in revenue, primarily due to stronger growth of Payments. Gross profit for Subscription Solutions grew 14%, slightly less than the 15% revenue growth for Subscription Solutions, with gross margin coming in at 81.7%. Gross margin was down slightly year-over-year as a result of higher hosting costs needed to support higher merchant transaction volumes and our continued geographic expansion as well as higher AI usage. This downward pressure was partially offset by lower support costs. Gross margin for Subscription Solutions was almost exactly the same as last quarter and healthily above the multiyear trend line of 80%. Gross profit from Merchant Solutions grew 33%, with gross margin coming in at 38.2% compared to 39.7% in Q3 of 2024. The decrease was primarily driven by the same factors we have seen throughout the year, including the impact from the expanded partnership with PayPal, which will become less of a headwind in Q4 and beyond as we will have now lapped the initial expansion of the partnership, and lower noncash revenues from certain partnerships, which carry a high gross margin. This brings our overall Q3 gross margin to 48.9%, compared to 51.7% in the prior year. This year-over-year change in gross margins is driven by the mix shift from Subscription Solutions to Merchant Solutions this year that I have mentioned above and on prior calls, coupled with the continued strength of Payments overall. Increase in Payments penetration will generally drive lower margins initially, but Payments is often the on-ramp for merchants to adopt other Merchant Solutions products. So that is a trade-off as many of you think through modeling how our business trends over time based on your assumptions regarding payments penetration levels. Operating expenses were $1 billion for the quarter or 37% of revenue. To put this leverage into context and focusing on how Q3 has trended the past 3 years, we've reduced our operating expenses from 45% in 2023 to 39% last year and further down to 37% this year. Our discipline on head count has been the key force behind our increased operating leverage. For over 2 years, total head count has consistently been flat to down, both sequentially and year-over-year, as we redeploy talent to the highest-impact work. Our team's productivity is rising through automation, better tooling and the reflexive use of AI, so we can build, ship and deliver more for our merchants. In Q3, transaction and loan losses represented 5% of our revenue, an uptick above our historical trend line. This increase stems mostly from higher losses in our Payments business, resulting primarily from some testing and experimentation with merchant onboarding. Our Payments loss rate is already turning back towards historical levels as some recent changes have already had an impact in lowering these loss rates. We also saw an increase in capital losses driven primarily by the continued volume growth of our capital business, but with a slight increase in the loss rate for the quarter, and with Q4 trending below Q3 and year-to-date. Operating income for the quarter was $343 million or 12% of revenue. Stock-based compensation for Q3 was $116 million and capital expenditures were $6 million for the quarter. Q3 free cash flow was $507 million or 18% of revenue, coming in slightly ahead of our outlook. For the first 9 months of the year, free cash flow margin is at the same 16% as last year at this point, delivering on the consistency of free cash flow margins that I've highlighted in past calls. Moreover, we have done this all while accelerating our year-to-date revenue growth rate in 2025 versus 2024. Note that subsequent to the end of the quarter, our convert became due and settled on November 2. If you pro forma our September 30 cash balance for the settlement of the convert, we sit at $6 billion of cash and marketable securities and no debt. Before we move to our outlook, an update on some of the items that I've discussed the past 2 quarters regarding tariffs and where we are or are not seeing an impact on our merchants businesses. In short, the trends that we are seeing remain very similar to what we have called out on our 2 preceding calls. Two items to highlight briefly. Cross-border GMV was 15% of GMV in Q3, consistent with prior quarters. The U.S. inbound and outbound demand within that, which, as a reminder, is roughly half of the 15%, has remained relatively steady. We still see that our merchants have in the aggregate raise their prices some since the April tariff announcements in the U.S., but the level of pricing increases is, in fact, slightly lower than the trends that we were seeing last quarter. Turning to our outlook for the fourth quarter. We expect Q4 revenue growth to be in the mid to high 20s year-over-year. A few items for appropriate context. We were up against a high benchmark from Q4 last year, which was the highest-growth quarter in 2024. Also, as a reminder, we will lap the expanded partnership with PayPal, which benefited last year's Q4 revenue growth rate. Finally, we have factored into Q4 guidance FX tailwinds that are expected to be slightly higher than what we experienced in Q3. We expect Q4 gross profit dollars to grow in the low to mid-20s. We expect Q4 gross profit to be impacted by essentially the same dynamics that I discussed earlier in the call regarding our Q3 gross profit. We anticipate that our Q4 operating expenses will be 30% to 31% of revenue. Q4 stock-based compensation is expected to be $130 million. Finally, on free cash flow. We expect Q4 free cash flow margin to be slightly above Q3. Two items will affect Q4 margin by a couple of hundred basis points in the aggregate. One, the higher payments losses that I mentioned earlier, which are already trending back towards historical levels but which we expect will remain elevated in Q4, and some tax receivables, the timing of which are outside of our control and which we expect to negatively impact Q4 net working capital. Even with these 2 factors and based on the Q4 outlook that I have provided, we are on track to achieve a free cash flow margin for 2025 similar to 2024. As I've mentioned consistently, we believe that these free cash flow margins strike the right balance between profitability, discipline and investment in future growth. Let me end where it matters most, merchants. We build, we ship, we grow, we execute. Our performance metrics are aligned with merchant outcomes. Our strategy remains unchanged: deliver results, elevate merchant value and foster long-term growth. With that, I will turn the call back over to Carrie. Carrie Gillard: Thanks, Jeff. We will now take your questions before turning the call back to Harley for some final words. [Operator Instructions] Our first question comes from Colin Sebastian at Baird. Colin Sebastian: Great. Good morning, and I appreciate the opportunity here. We see that the integration with OpenAI has already begun. So just curious on any initial observations from those transactions. I guess how quickly you'd expect incremental contribution from -- or versus other channels? And generally, your expectations for how volumes will originate through AI platforms would be helpful. Harley Finkelstein: Colin, Harley. I'll take that first call. Look, I mean, if you just look at the sheer numbers outside of even OpenAI, just around agentic in general, since January, we've seen AI-driven traffic to Shopify stores up like 7x. And we've actually seen orders attributed to AI searches up like 11x since that. So the data is showing it's already growing. And we actually just recently did a survey for -- to consumers to better understand some BFCM trends, and something like 64% of shoppers told us they're likely to use AI to some extent in their buying. But look, we've been building and investing in this infrastructure to make it really easy to bring shopping into every single AI conversation. The fact that we're already working with the leaders in this space should, I think, be a testament to the fact that we want to make sure merchants on Shopify are better prepared than those that are not. It's still obviously very, very early. But what we're really trying to do is laying the rails for agentic commerce. Now in terms of how that's going to affect Shopify, that's the beauty of the business model. The business model is really -- is perfectly aligned with merchant success. The more money they make, the more money we make. And so the way we think about the agentic channel, like any other channel for that matter, whether it's a marketplace or it's social commerce, is that the more money our merchants make, the more customers they're able to sell to, we're able to obviously share in that upside through the GMV, through Payments. That's kind of the way we look at it. But in particular, to your question, this partnership with OpenAI around conversational commerce is really exciting. And again, it's just one more surface area that merchants on Shopify are going to be able to service customers. Carrie Gillard: Our next question comes from Craig Maurer at Financial Technology Partners. Craig Maurer: I wanted to follow up on the prior question. One debate we've been having with investors is how, in an instant checkout flow, accelerated checkout solutions might get prioritized in terms of presentment. So I was curious your view on how over time when you have tons of instant checkout solutions available in the market, how those might be prioritized or presented to consumers. And at the same time, how you're positioning as the merchants platform might advantage, say, Shop Pay in that type of scenario. Harley Finkelstein: I mean, look, that's the value of Shopify and these relationships. The reason that we're able to be front and center, whether it's obviously OpenAI or it's companies like Microsoft or Perplexity, is that fundamentally what's most important is that these agentic products have the best brands, the best brands are on Shopify. Now in terms of the Shop Pay thing, I mean, look, Shop Pay in Q3 processed almost -- I think it was $29 billion in GMV, which is up like 67% year-on-year. It's now processed over $280 billion. So the fact that it is the #1 accelerated checkout on Shopify means it's becoming very popular amongst consumers that are very discerning when it comes to buying from the brands they love, which again are on Shopify. So our mission is to make sure that merchants and [ Shopify ] are best set up. The way that we bring it to these partners is that we make sure that it's the easiest way for these agentic products to get access to all the brands that the consumers are looking for, but also to do it in a way where the technology stack is really simple. This idea of creating this agentic kit, which allows these partners to plug in, checkout, to plug in our Catalog means that it's kind of a no-brainer to work with Shopify. In terms of which accelerated checkout they'll use, the more people that you Shop Pay, which, of course, is growing amazingly well, means that we just will have more of an advantage. Now again, this is still very, very early days for agentic. Obviously, we've been planning for this for years now, but we'll see how things progress. But we think Shopify and our merchants are incredibly well positioned here. Carrie Gillard: Our next question comes from Andrew Boone at JMP Securities. Andrew Boone: I wanted to go back to the marketing investments and given the fact that MRR is just a little bit complicated at this moment. Can you just help us understand the guardrails and what you're seeing in terms of the efficiency of that spend? And then how should we think about that as we think about next year? Harley Finkelstein: Yes. Maybe I'll start there on the marketing side and then Jeff can jump in to some of the MRR stuff. Look, I think we've said it on almost every single call, but Shopify, we are a growth company, and we are focused on driving merchant growth, which leads and fuels our growth. If we see opportunities to lean and accelerate growth in key areas, we're going to make that decision. But ultimately, marketing is an area where we have a lot of flexibility. So let me be very clear. We really like this approach. Our investments in marketing are working really well. It's driving merchant adoption across verticals, across industries, across geos. I mean obviously, you're seeing that happen really well right now in Europe. And for Q4, we don't expect any change in the environment. So we're going to keep spending money where it makes sense. That being said, we have very tight guardrails to make sure that where we spend marketing dollars, we do have the appropriate returns. And you guys have heard us talk about this on the previous calls, where we just see opportunities for us to double down in one particular area or one vertical, we double down on it, we see the payback from that fairly quickly. So we're going to keep doing that. But this is an area -- marketing is an area where we have a lot of levers. And when we do see opportunities, we're a growth company, we want to win. Maybe I'll hand it to Jeff on some of the MRR side. Jeff Hoffmeister: Yes. I would add 2 points. One, Andrew, I think as we look at -- and I referenced this a little bit on our call. When we look at our merchant acquisition engine overall, we're very pleased with what it's doing. I recognize some of the noise, as you allude to, in looking at MRR in terms of some levels of comparability. I would point out, and I gave the percentage of MRR, which was Plus versus the remainder obviously being Standard and point of sale. And when you look at the Standard piece, this was the first quarter where we had sequential growth. We were up 4% the last few quarters. It's been flat, but that's purely a function of the paid trials, because Q3 was really the first quarter where you had a clean sequential comparison, because Q1 was when we were essentially finishing the migration back to 3-month trials. So that was, in terms of looking at Q2 versus Q1, that was not a clean comparability opportunity for you when you look at Q3 versus Q2, it's up 4%. We're still going on a year-over-year basis. We're going to still have some headwinds until we get to Q1 of next year, because of the timing of the paid trials. But we certainly expect with what the merchant acquisition engine is doing, as Harley mentioned, no change in marketing philosophy, that we feel good about what we can do in terms of merchant adds. Carrie Gillard: Our next question comes from Siti Panigrahi at Mizuho Securities. Sitikantha Panigrahi: I just want to dig into the enterprise business. Could you talk about the success there in changes to the go-to-market and pipeline there? And then specifically, as you're expanding in the enterprise segment, displacing some of the incumbents, how should we think about the take rate from that segment? Harley Finkelstein: Thanks, Siti. I'll take that question. Look, I mean, just to say the thing, I mean, the enterprise is migrating to Shopify. I mentioned last quarter, some of the largest companies in their respective verticals are coming. Obviously now, companies like e.l.f. Cosmetics or Estee Lauder joining us is -- should tell you that the pipeline that we are seeing is quite incredible. Not to mention brands that we talked about a couple of quarters ago, Michael Kors, David's Bridal, Goop, Mejuri, they're now fully launching on it as well. So I think it's not just that we're winning the enterprise in one particular vertical. It's a broad spectrum verticals, and I think that strengthens our platform. We're also being able to go after more international merchants now with proper go-to-market in places like Europe, for example, obviously, our core markets, North America, Australia and New Zealand, Canada are still doing very, very well. But it's still -- I mean, it's hard to say this because I'm mentioning all these great names, but it's still fairly early days for enterprise. I think we are the best positioned to attract merchants while making sure that the existing ones also improve efficiency. This is also we're seeing a lot more partner-led deals. We're seeing Europe and Japan do really well right now. I think a lot of these companies are -- these large enterprise, especially the more -- the older ones, the ones that have been around for decades, they're having conversations in their boardrooms talking about where do we go to future-proof platform, where do we go to make sure that we don't miss out on agentic commerce? And all roads lead to Shopify. So whether it's food or manufacturing or education or even automotive, these are verticals traditionally we didn't go after, and now we're winning them. And we're winning them both from in-house built custom solutions, we're also winning them from some of the larger -- we're displacing a lot of the larger existing enterprise platforms. And I think it's because of the product and, frankly, on the value side, the price-to-value of Shopify's enterprise product is simply best-in-class. And so we're going to keep winning these larger deals. I'm deeply involved in this particular area of our business. I often am and on the calls with the CEOs of these companies. And what I hear is that they're looking to future-proof their business, they want to sort of have what they call their final migration, and Shopify is that partner for them. So I think you can continue to see some of those incredible brands, consumer saver brands continue to migrate to Shopify. Jeff Hoffmeister: Yes. And Siti, the only point I'd add, because you referenced the attach rate, one of the things that you see in our enterprise business, of course, is all these brands that Harley talked about, is we have more and more success bringing more and more of these large GMV brands on the platform. That obviously gives encouragement to even more brands to follow behind and continue to adopt all the great solutions we have. And so I think we're at the front end of the funnel in terms of a lot of these larger enterprises maybe starting with just Payments. But when you look at what we're seeing over time, compare that funnel to how many are also taking point of sale or taking other elements of our business, whether installments, some of the cross-border things we're doing. And so this, in a good way is a multiyear step in the right direction as we continue to have merchants take on, especially the larger merchants, take on more and more products from us. So we feel good about while there's short-term headwinds with attach rate, what that means long term for our business is a positive. Harley Finkelstein: It is also quite interesting to watch some of these merchants, these very large enterprises, first come to us for a very specific commerce component. So they'll come to us really just talk about Shop Pay, or just to talk about checkout. I mean our checkout, obviously, we think, is the best in the world. And frankly, checkout is so complicated. And we've really nailed checkout on a global scale and -- for scale for these massive merchants. But it's so interesting to see them first come to talk to us about exploring, "Hey, we just want to talk about checkout." And then within a couple of weeks, it's a full stack. It's, "Hey, we want all of Shopify now." That sort of land-and-expand strategy that we've been implementing for the last couple of years, maybe the last 2 or 3 years or so, it's really starting to work out. And it's really cool to see these brands moving from just one thing to saying, "Yes, just give us all of Shopify." Carrie Gillard: Moving on to the next question comes from Michael Morton at MoffettNathanson. Michael Morton: Harley, today, you've talked about product search. Tobi talked about it, changing on the cheeky pint. And I would love to know, I know Shopify has a model you will always be where commerce occurs. But as you see product search changing in conversational commerce, what do you envision happening for the product discovery funnel? Does that compress? And then in your world over the next several years, how do you see the winners and losers of the e-commerce landscape evolving? Is it more merit focused on brands, as Tobi referred to in the past? Anything on how you see the world playing out, not your product road map, but what you see commerce looking like several years from now, I think, would be really beneficial to investors. Harley Finkelstein: Yes. Great question. We think about this a lot. Let me say this. I think there's going to be different permutations of how agentic commerce will evolve, how conversational commerce will evolve. It's really exciting. We're all talking about it, we're all excited about it. But the way that Shopify and the way that, certainly, Tobi sees it, ultimately, who's really thinking about the vision around our product he's the one that really understands more than anyone on the planet how commerce and, certainly, retail is evolving, is that whatever permutation will emerge, that we have to be prepared for whatever path wins. That was the same thing when social commerce starts to get a lot of attention or when this idea of it's not e-commerce versus physical commerce, but it's going to be this idea of commerce everywhere. We think that one of the advantages of being on Shopify will be that we are everywhere that commerce is happening, and we always aim to get there first. So in terms of exactly how these conversations are going to happen, what we're building right now are these deep connections to AI agents. So when a shopper asks, it's a Shopify merchant who appears and that is powered by our Catalog. The idea of this Catalog where buyers ask for products and the agent searches millions of items and displays interactive product cards directly in the chat, where the product is robust, it's in real time, it is accurate inventory, localized pricing, [ even if it is ] like smart product clustering, that's what we're bringing to these agentic tools. And I think in terms of your question around who is going to win on the brand side or the retailer side, the one thing that I will say is this has been happening for years, but you're seeing it now more than ever, is that consumers are really voting with their wallets to buy from brands that they absolutely love. And we've always said that Shopify is the place where consumers go to buy things that they want, things that they have a connection to. More and more, if not entirely, those brands are on Shopify. The reason that I spend time on these earnings calls and, frankly, all day long talking about all the brands coming on to Shopify is I love the fact that these brands are coming on. It's very personal and it's also -- there's a lot of pride for us at Shopify that the biggest companies on the planet are choosing us. But what I'm also trying to suggest is that consumers' favorite brands are on Shopify, and those consumers, they have a different connection with those brands than maybe they historically did where it was just some sort of staple item. And so I think brands that have incredible product and incredible brand and incredible connection with the consumer, those are the ones that are going to win ultimately. And we're really fortunate that those are the brands that are on Shopify. Carrie Gillard: Our next question comes from Todd Coupland at CIBC. Thomas Ingham: I'm wondering if you can talk about your view of the state of the consumer by geography and post tariffs now that we've seen a little bit of data there. Harley Finkelstein: Maybe I'll start with the consumer, and then, Jeff, you can talk a bit about tariffs. Look, consumer confidence for us is measured at checkout. That's the truth. That's what we look at. And on Shopify, shoppers keep buying, they keep returning and demand remains really resilient across channels and categories. So I can only comment on what we see at Shopify, but whether it's the GMV, but like I said earlier, consumers are more selective right now and they're buying from brands they love and those brands are on Shopify. And I think even our Q4 outlook suggests that. But we're not complacent. I mean this is not a place where we rest on laurels ever. We always monitor these macro factors, whether it's consumer spending, it's household savings, tariffs, frankly, even FX trends and supply chains with a lot of our partners. But the strength of our merchant cohorts are pretty clear. I think quarter after quarter, they're growing faster than the broader market. In terms of geo, I mean, obviously, Europe is definitely gaining traction for us. I mentioned that in my prepared remarks, which we expect to continue. But again, if you look at consumer [ confidence ] measure at checkout, you saw it through the GMV this quarter, $92 billion. We see that the consumers that care about brands that are buying from brands they love, they're buying them from Shopify stores. Jeff Hoffmeister: Yes. And Todd, on some of the tariff pieces, on my call -- sorry, on my prepared remarks, I mentioned that there's not been a whole lot of change what we've seen this quarter versus the prior quarters. There was a little bit of a downtick in what we're seeing in terms of merchants and in terms of how they're raising their prices. We've basically been tracking that since April when there was a bunch of tariff changes, obviously, in the U.S. It's ticked down a little bit versus what we had seen before. Pretty much everything else has been consistent versus last quarter. When we look at the trade routes, when we look at the percentage that is inbound versus outbound in the U.S., when we look at what we're seeing on de minimis, we've not seen any significant impacts on our merchants, at least from what we can tell from the data we have. We obviously put a lot of primacy in our proprietary data. We don't have as much visibility admittedly into some of the P&Ls of our merchants, so we can see from a price perspective what they're doing. Some of them are obviously choosing to, as they think about some of these price levels, pass those on to consumers in some way. And I think others are basically choosing not to do that, and it's impacting some of their own P&Ls. But you can see this in our GMV, our merchant base remains strong, they're adapting quickly. And we're trying to do everything we can to help them on cross-border. So from a tariff perspective, between the April announcements and then obviously the elimination of de minimis, things have been relatively constant from our vantage point. Carrie Gillard: Our next question comes from Trevor Young at Barclays. Trevor Young: Great. Can you expand upon Shopify campaigns? How do merchants get ramped onto campaigns? How do the economics work? And what do you foresee as the revenue opportunity from that initiative over the next few years? Harley Finkelstein: Yes. I mean, look, I think customer acquisition remains one of the hardest problems that merchants face. We've been working on this for quite some time now. And the way we're sort of looking at it is solving this problem in kind of 2 primary ways. The first is on shop campaigns, which I'll get to in a second specific to your question. The second is on sort of discovery and merchandising enablement, which Shop app obviously plays a role in with helping merchants drive more traffic, increase lifetime value and then Shopify Collective plays a role there as well. Specifically on campaigns though. I mean, what we're really trying to do is we want to run commerce-native performance ads across these high-intent services. And our strategy has been and continues to be to reinvest any gains we achieved through the ads business back into the growth. We want to ensure our advertising inventory and our scale continues to grow. And the proof has been really great. I mean we've seen 9x year-on-year increase in budget commitments from merchants this quarter for campaigns. In fact, if you just look at Q3 2024 to Q3 2025, we've actually seen a 4x year-on-year growth in merchant adoption of campaigns. So it's going really well. And on the product side, this thing keeps getting better and better. We introduced Gross Sales, which is this new default high-reach objective in campaigns. We just shipped an AI-powered ranking improvement, which is showing some really good early results in terms of performance gains. But net-net, I mean, what we're trying to build with campaigns is the scaled, ROI-positive ad engine that really brings merchants more buyers and also unlocks more brand discovery to connect new consumers. So again, this is an area that we're going to continue to work on. We think that early signs have been good. But we -- whenever there's a merchant pain point, we always much prefer to solve it for them than have them solve it themselves. And I think customer acquisition is one of those that we're going to keep working on, and it's already going pretty well. Carrie Gillard: And our last question will come from Mark Zgutowicz at Benchmark. Mark Zgutowicz: Harley, on the last quarter's call, you mentioned more to come on advertising opportunities. And if we think about your merchant spending, roughly 20% of their GMV on advertising, is there a longer-term strategy in terms of a piece of that you want? Maybe if you could talk a little bit about that. And then specific to ChatGPT, I'm curious if there are ad rev share opportunities there with -- in the future with promoted or sponsored listings for you. Harley Finkelstein: Yes. I mean I'm not going to talk about any particular economics of any particular deal. What I will say when it comes to how we make money from these channels is we've always been able to monetize when our merchants do better. So this idea that merchants sell more, Shopify makes more, we monetize through GMV, we monetize through Shopify Payments. That will always be the case across any new channel. And any specific individual deal that has additional economics, we're not -- we don't disclose. To your first part of your question around sort of ads, as I said in the last question, it still remains one of the hardest problems merchants face. We think we can do a better job. We have a ton of data, we have a ton of scale to do this with. The goal here with -- when it comes to advertising for us is that we want to drive greater scale against this opportunity. The way that we do this is we were testing, we're measuring and we're reinvesting to drive really great outcomes for merchants in the future. I still think it's still in early stages. I'll give you a little nod to the fact that you should tune into our next Shopify edition, if you're interested in ads because we're going to spend some time on that as well. But this idea of focusing both on campaigns and then also focusing on the discovery and the merchandising elements through the Shop App and Collective, you're already sort of seeing quite a few breadcrumbs that we're laying down here to show that this is an area that we think we can add even more value to. And again, it's one more thing that we do. We want to make sure that the relationship that we have with the millions of stores who use Shopify is way more than simply being just some software provider. We are their partner in commerce. And as commerce gets bigger and more complicated and more interesting, that they can continue to rely on us to be their partner. It's the reason why the biggest brands come to us and it's the reason why they stay with us. Maybe I think it was the last question, so maybe I'll just spend a quick second or 2 just on some closing remarks, as I've been doing the last couple of quarters here. I just want to kind of say this in case it's not clear, but I hope what is obvious now to all of you is that we are doing exactly what we said that we'd do quarter after quarter. We built AI agent tools last year, now we're partnering with everyone that matters. We built Sidekick 2 years ago, well before any of the hype around that. And in Q3, 75,000 -- excuse me, 750,000 shops used it for the first time. 8 million used it, in October alone, we saw 8 million conversations happen there. So we built enterprise on-ramps into Shopify almost half a decade ago. And now the Estee Lauder Companies, David's Bridal, Aldo, Michael Kors are all choosing us. We're not guessing the future of commerce here. We're really building it. And the thing that I'm most impressed with and most proud of at Shopify is that I think we're balancing 3 critical things simultaneously here. You're going to see us investing aggressively to capture these opportunities. You're seeing us maintain profitable margins, I think, that demonstrate our discipline. And you're also seeing us deliver durable results quarter after quarter. And that is compound execution. And I don't think there are many companies out there that can do all 3 at once at this scale, and we are doing that. So with that, I just want to say thanks for joining the call. And on behalf of Jeff and Carrie and I and the entire Shopify team, we're back to building for our merchants. Thank you so much for joining. Carrie Gillard: And that concludes our third quarter 2025 conference call.
Operator: Welcome to Hertz Global Holdings Third Quarter 2025 Earnings Call. [Operator Instructions] I would like to remind you that this morning's call is being recorded by the company. I would now like to turn the call over to our host, Johann Rawlinson, Vice President of Investor Relations. Please go ahead. Johann Rawlinson: Good morning, everyone, and thank you for joining us. By now, you should have our earnings press release and associated financial information. We've also provided slides to accompany our conference call, and these can be accessed through the Investor Relations section of our website. I want to remind you that certain statements made on this call contain forward-looking information. Forward-looking statements are not a guarantee of performance, and by their nature, are subject to inherent risks and uncertainties. Actual results may differ materially. Any forward-looking information relayed on this call speaks only as of today's date, and the company undertakes no obligation to update that information to reflect changed circumstances. Additional information concerning these statements, including factors that could cause our actual results to differ is contained in our earnings press release and in the Risk Factors and Forward-Looking Statements section in the filings that we make with the Securities and Exchange Commission. Our filings are available on the SEC's website and the Investor Relations section of the Hertz website. Today, we'll use certain non-GAAP financial measures, which are reconciled with GAAP numbers in our earnings press release and earnings presentation available on the website. We believe that these non-GAAP measures provide additional useful information about our operations, allowing better evaluation of our profitability and performance. Unless otherwise noted, our discussion today focuses on our global business. On the call this morning, we have Gil West, our Chief Executive Officer, who will discuss strategy, operational highlights and our fleet. Our Chief Commercial Officer, Sandeep Dube, will then share insights into our commercial strategy, followed by Scott Haralson, our Chief Financial Officer, who will discuss our financial performance and liquidity. I'll now turn the call over to Gil. Wayne West: Thanks, Johann. I want to start by thanking our teams for their exceptional work this summer. Their disciplined execution is moving this transformation forward, and I'm grateful for their continued commitment of delivering for our customers every day worldwide. We said it would take consistent dedicated effort to rebuild this company's foundation no matter the macro environment by focusing on what we can control, disciplined fleet management, revenue optimization and rigorous cost control, and that is exactly what's happening. This quarter, we achieved $2.5 billion in revenue and delivered adjusted corporate EBITDA of $190 million, a $350 million year-over-year improvement and positive EPS for the first time in 2 years. In Q3, we completed our transformative fleet refresh hitting another major milestone and setting a new standard for our sales and the life cycle of our vehicles. With our younger fleet, we also achieved a record high utilization rate since 2018. While we could not control at 2% of our U.S. fleet was under recall, being able to drive record utilization in that environment shows that even when headwinds get in the way, we're able to deliver strong results. Managing with rigor also means keeping our customers at the center of everything we do. Our Net Promoter Score continues to rise, up nearly 50% year-over-year in North America with measurable improvement in ease of rental and confidence in vehicle quality. Fundamentally, Hertz is an asset management company built on a century of buying, renting, and selling vehicles at scale. That's why we set North Star metrics to guide the improvements to our core rental business and ensure operational excellence comes first. This quarter, we maintained our sub-$350 DPU goal, overcame cost headwinds and inflation to lower DOE per day, both year-over-year and sequentially while continuing to execute initiatives that are driving us closer to the low $30 and made solid progress towards our annual target RPU of over $1,500. These results continue last quarter's momentum and show we're doing what we said we'd do. Our progress is steady, our heads are down, but our eyes are on the horizon. Transforming a 100-year-old company requires executing with discipline today while building, testing, and innovating for tomorrow. That's why our North Star metrics aren't the finish line. They're the stakes we're putting in the ground to rebuild our foundation. Through this work, we're sharpening our skills, enhancing our systems and creating a platform for growth. While our near-term priority remains transforming our rent-a-car business with operational rigor and a relentless customer focus, we're simultaneously laying the groundwork for a diversified value-creating platform. That platform spans four strategic areas: rent-a-car, fleet, service, and mobility. Today, these fuel our core rental business, but we see unique opportunities for each to scale and synergies between them all, unlocking new revenue streams across the entire enterprise. It's still early, but the actions we're taking are already revealing what a bright future for Hertz looks like. Let's start with the fleet, a powerful economic lever. We've transformed our fleet from a headwind to a competitive advantage by continuing to hone our skills, sourcing vehicles optimally, deploying them effectively, and monetizing them strategically. Today, our U.S. fleet is newer and more aligned to customer preference than it's been in years. With the refresh complete, our average fleet age is now under 12 months and we're positioned to sustain a modern fleet aligned with our DPU North Star metric. Model year 2026 buys landed with both price and volume hitting our targets, unlocking model year 2025 sales and activating our short-hold strategy. Shorter vehicle life cycles sustain favorable fleet economics and enable additional unit cost efficiencies in our service operations while also driving stronger residual values in the used car market, reinforcing our retail car sales momentum. which brings us to the big story this quarter, Hertz car sales. For 50 years, Hertz car sales existed as a valuable but under-leveraged business line and dormant brand. We've been working to transform it from a simple fleet rotation mechanism into a profit accretive engine, one that not only strategically monetizes our fleet but expands our relationship with our customers from rental to ownership. We have all the tools traditional dealers have, plus significant built-in advantages. We own and service hundreds of thousands of cars with a consistent inventory pipeline. We're essentially a used car factory that rents to millions of loyal customers who test drive our cars every day. Those differentiators guide our strategy. As such, we're meeting customers where they are and capitalizing on what makes Hertz unique. A great example is our rent-to-buy program, which offers a 3-day test drive before you buy. This leverages our competitive advantage to convert renters into buyers and is now available in more than 100 cities and is working. 70% of our rent-to-buy customers purchase their vehicle, far exceeding traditional dealership conversion rates. With a few notable exceptions, car buying remains a largely antiquated and fragmented industry, and we're here to compete. Our view is simple. Customers shouldn't have to choose between digital ease and dealer confidence. Our strategy connects both worlds, meeting them however they choose to buy with a trusted global brand. So partnering with Cox Automotive, we're further advancing our digital retail channels. We now have a full-service e-commerce site with financing and delivery, turning a browsing tool into a transaction engine. In August, we launched Hertz car sales on Amazon Autos, letting customers browse and purchase our vehicles with one of the world's most trusted retail services. These digital innovations create an omnichannel experience that we believe only Hertz can offer. We strengthen -- our strengthened foundation enables partnerships like Cox and Amazon, giving us flexibility and speed to move from strategy to execution. It's early, but by scaling our direct-to-consumer and e-commerce channels, we're positioned to capture $2,000 or more incremental margin benefit per vehicle versus wholesale channels. And this is all while maximizing fleet utilization by renting vehicles right up until they're sold, reducing holding and selling costs, leveraging real-time AI pricing and capturing back-end finance and insurance revenue. This is just the start. Our goal is to scale these channels so the vast majority of vehicles sell through e-commerce retail. We will execute this effectively, harnessing our fleet size and broad customer base. Every Hertz renter becomes a potential buyer and vice versa. Just as Hertz car sales will create new value and scale, we see the same opportunity across other areas. This company cannot and will not rest on rent-a-car alone. The skills and capabilities we're building through our transformation are strengthening our operations while creating the foundation for diversified growth. It's a platform spanning rent-a-car, fleet, service and mobility that can expand into complementary revenue streams from servicing customer vehicles and scaling Hertz car sales to expanding rideshare partnerships and managing AV fleets. With each area sits at a different maturity stage. But together, they reinforce one vision, turn Hertz into a value-creating mobility platform that meets customers wherever they are. And wherever mobility goes next, from today's rental and ownership models to tomorrow's connected and autonomous vehicle ecosystems, we'll share our momentum as these capabilities mature and demonstrate the tangible results behind our strategy. Near term, our focus remains disciplined fleet management, revenue optimization and rigorous cost control and ensuring each area of our business powers the next and can grow. We're proud of this transformation's progress, but we are most excited about what is to come. What excites us most is how much more the Hertz platform can become. With that, I'll turn it over to Sandeep to walk through the strategic actions we're taking and the progress we're making on our rental business. Sandeep Dube: Thanks, Gil, and good morning, everyone. As we continue to improve fleet economics and agility, we are leveraging that momentum to action our commercial strategy. By maximizing asset productivity and strengthening pricing through enhanced customer experience, diversified durable demand and advanced revenue management actions, we have positioned ourselves to deliver both near-term gains and long-term value. This quarter, we delivered sequential year-over-year improvement in revenue, RPU and RPD while achieving record utilization. While we actively manage RPD, we prioritize RPU because it captures both rate and utilization. This helps our team balance rate and days, giving us a truer measure of the revenue generated by each vehicle in a given month. This is especially relevant for lower rate, longer keep rentals like those in our rideshare and off-airport segments, where costs are lower and rentals are longer. RPU came in at $1,530, nearly flat year-over-year and sequentially improved through the quarter on a year-over-year basis. Internally, we also track RPU across our total fleet, which includes all vehicles irrespective of operating status, whether in service, out of service, or in our car sales inventory. RPU on total fleet better measures our economic progress, and that metric improved 2% year-over-year. Breaking RPU into its components, let's dive into utilization first. As Gil mentioned, we delivered record utilization since 2018 of 84% this quarter. Days were nearly flat, thanks to our strategic ability to offset the impact of recalls despite our decision to operate a 7% smaller fleet overall. This utilization rate, which excludes vehicles being held for sale, improved by 260 basis points year-over-year. Utilization across our total fleet, a term which I just defined a moment ago, showed a more substantial improvement of 460 basis points. This improvement was driven by better process management of our car sales inventory. This utilization performance didn't happen by chance. It's the product of sharper coordination between fleet planning, technical operations, and revenue management, aligning capacity to demand in real time, reducing out-of-service units and accelerating vehicle redeployment. Turning to pricing, which as we discussed last quarter, remains our largest unlock to fuel RPU growth. Our sights are set on delivering a positive RPD for a comparable asset class. Global RPD was down approximately 4% year-over-year. RPD was negatively impacted 2% year-over-year by changes to the fleet mix. Within the quarter, July RPD was down over 3% for a comparable fleet mix and improved by September to down 2%. Encouragingly, October RPD performed even better. The results in late Q3 and October incorporate some of the short-term wins that have come from a critical review of our commercial strategies and tactics. Many of these haven't been innovated for years, and we have been acting upon them with urgency, including driving a better customer experience, which leads to better pricing power, generating greater durable demand from higher-margin channels and segments, including continued diversification beyond airport, improving our pricing tactics and strategies, elevating our revenue management tools and processes, monetizing our higher RPU assets more effectively and integrating world-class commercial talent into our team. The improvement in Q3 was powered by an updated booking curve strategy, enhanced revenue management tools, stronger value-added service monetization and local level fleet mix optimization. As I mentioned earlier, October RPD performed better than September. Looking ahead at the rest of the fourth quarter, there is some softness in the remaining months, driven by seasonal leisure troughs combined with the impact of the government shutdown. Over the next few quarters, we expect our efforts to gain further traction, fueling our ultimate objective of achieving absolute price increases across comparable asset classes. For an insight into what's to come, let's detail the initiatives a bit, starting with delivering better customer experience, a pathway to greater repeat business and brand advocacy. Our focus is on delivering greater consistency, convenience, and care across our customers' rental journey, knowing that when we invest in our customers, they invest in us. Great customer experiences start with great employee experiences. This quarter, we focused on reconnecting our employees around the world through new communication channels and giving them the right tools to succeed. We rolled out a new customer experience training, empowering our customer-facing teams with new approaches to get it right and make it right each time. We also leveraged technology to deliver a smoother customer experience, including making it easier to modify reservations and purchase upgrades digitally, enabling self-service rental extensions and building on customer trust through improved post-rental communications. The AI-powered chat and call support launched earlier this year now services 72% of U.S. inbound chats, delivering faster resolutions and improved satisfaction while also delivering cost efficiency. As Gil said, these improvements translated into a nearly 50% increase in our North American Net Promoter Score versus last year, a clear signal that customers are noticing the difference. To help build further momentum, we welcomed a seasoned leader yesterday as our new Chief Customer Experience Officer. This last quarter, we made progress on growing and diversifying durable demand, a strategy important in growing RPD as it enables us to curate our portfolio by weaning off lower-yielding demand. In the U.S., app bookings increased by 800 basis points year-over-year, making the app our fastest-growing channel. We simplified membership sign-up and added exclusive benefits, driving U.S. Hertz loyalty member enrollments up over 90% year-over-year. Previously, we said we would further diversify revenue streams through our off-airport and rideshare business lines. These combined business lines showed year-over-year sequential revenue improvement, a dynamic which is RPD dilutive, yet RPU and EBITDA accretive. This diversification approach expands scale, drives utilization, especially during truck and shoulder seasons and feeds the flywheel across all four of our verticals. We are also reexamining every aspect of revenue management. The advancements we are making go well beyond the multiyear transformation of our pricing systems and present a significant opportunity. We are improving the demand funnel with the goal of delivering a healthier upward sloping pricing curve for our various segments. Part of October's pricing improvement can be attributed to this work, and we believe we'll unlock greater value as we progress. We also strengthened our revenue management leadership team with a world-class pricing and revenue management systems leader. His experience will help us deliver smarter pricing strategies that maximize value for both our customers and our business. Alongside these commercial upgrades, we are transforming how local teams operate, ensuring we are adapting our strategy to each market's unique demand and opportunity. New dashboards and analytical tools now give field leaders visibility into pricing, utilization, and customer satisfaction drivers in real time, equipping them to identify opportunities and act faster. This shift represents more than a process change. It's a cultural one. We are empowering our teams to think like owners and build lasting trust with every customer. So stepping back, the playbook is working and the results prove it. Better customer experience is increasing loyalty, driving more durable demand. Our revenue management transformation is off the starting blocks led by world-class talent. Revenue metrics improved through the quarter, including a pathway to better RPD. With that, I'll hand it over to Scott to walk through our financial performance and liquidity. Scott Haralson: Thanks, Sandeep. Good morning, everyone, and thank you for joining us. I want to congratulate the team on a great quarter. We achieved our first positive EPS in over 2 years, improved RPD and RPU, record utilization and a major leap in NPS scores. That's great stuff, and we are all proud of the progress, but we're only getting started. Tech, we've barely begun. Our focus doesn't stop with being just the best rental car company. Our vision expands beyond that. If our goal was to just be the same old rental car company in the same old industry that has largely been the same for a couple of generations, the value of our business would be limited. Now that is not to say that the rental car business isn't important. It is, very important, critical, in fact. And we'll strive to be the best in the world, but we view it as a stepping stone to bigger ideas. We're building a diverse platform of value-enhancing capabilities that could make Hertz considerably more valuable than today. It's hard to look past the near-term quarter-to-quarter year-over-year metrics the industry typically focuses on. We just don't view them as the ultimate predictors of real long-term value creation. It will be our job to figure out how to eventually tell the story in a way that highlights that value. Over time, we'll publicly release the components of our platform as they become ready, like we have with our digital car sales platform. We had to start with our rental car fleet in order to turn the rental car business up right. There was no avenue to pursue the extended vision until that was progressing. We've been refining our vision over the last year or so and are still doing that today. We have said all along, this wasn't a quick fix, and we couldn't yet articulate our expanded vision. So we are starting to now. Now changing course, let me give you some details on the numbers for the quarter, our view on Q4 and a framework for 2026. Revenue was $2.5 billion and adjusted corporate EBITDA was $190 million, an 8% margin within guidance and up roughly $350 million year-over-year. We also posted net income of $184 million and positive EPS for the first time in 2 years. Our International segment saw increasingly strong margins with larger RPD and RPU gains as the international market is seeing a strong pricing environment globally, RPU was $1,530, nearly flat year-over-year but improving sequentially through the quarter. Transaction days were almost flat versus Q3 of 2024 despite a 7% smaller fleet, with utilization reaching the highest number in more than 5 years at above 84%, even with more than 2% of the U.S. fleet impacted by OEM recalls. That's the operating model working, tighter fleet, sharper deployment, better productivity. Our buy right, hold right, sell right strategy continues to anchor fleet unit economics. DPU was $273 per month, in line with expectations, supported by healthy residuals and disciplined channel management. As planned, gains on sale moderated with lower volumes with overall fleet returns remaining balanced. On cost, discipline is sticking. Direct operating expenses declined 1% year-over-year and DOE per day improved both sequentially and annually despite inflation and smaller scale. SG&A remained tightly managed as technology and process leverage flowed through. This is the kind of durable cost posture we set out to build. We ended the quarter with $2.2 billion of total liquidity, including about $1.1 billion of unrestricted cash and the balance in revolver capacity and generated approximately $250 million in positive adjusted free cash flow. We had a $154 million benefit in the quarter from cash received from the previously disclosed litigation settlement distribution. Our ABS programs remain healthy with ABS vehicle fair values comfortably above net book values and market access is solid. In September, we completed a $425 million senior unsecured exchangeable notes issuance. We used cap calls to increase the effective strike price of the notes to $13.94. At least $300 million of that will be used to partially redeem our $500 million bond obligation that matures in December of 2026. The remaining balance is our only corporate maturity in 2026. Looking to Q4, we expect transaction days to be close to flat year-over-year, even with our expected fleet to be down just under 5%. Total fleet utilization will face an elevated number of fleet recalls, but should remain solid. We also expect lower DOE per day by roughly 5%. This outsized number is primarily due to a large true-up expense we took in 2024 related to our insurance claims reserve that shouldn't reoccur this quarter. Excluding that, DOE per day would still be down about 1% to 2%. We are, however, seeing a large number of vehicles being sold at auctions in the quarter, which is having an effect on residuals in the period. We believe this to be isolated to the quarter, but it will likely have an effect on used car pricing for Q4. Given that, we expect net DPU to rise slightly quarter-over-quarter to $280 to $285 per month. For revenue, while you heard from Sandeep around the positive pricing trends in October, the softness in the remaining months of the quarter seem to potentially be government shutdown related and are likely transitory. We do expect the peaks of the quarter to perform well. The softness will likely sit in the troughs, which Q4 has a large trough to peak spread given Thanksgiving, Christmas, and some New Year's impact. Also, in October, we experienced three different external system outages at three of our larger infrastructure vendors. Two of the events were isolated to us, but the other one affected multiple companies. We are certainly not happy about the ineffectiveness of the redundancies at our vendors. These outages will likely cost us about $10 million to $20 million of revenue in the fourth quarter. While isolated to this quarter, we are taking further steps to reduce the likelihood of these types of events in the future. As a result of all the Q4 moving pieces, we have updated our Q4 guidance to a slightly negative margin range of negative low to mid-single digits EBITDA margin. So let's talk 2026. While there has been some recent dust in the air for Q4, we are cautiously optimistic for a stable setup for next year. Our fleet is in a good position for continued rotation and growth of Hertz car sales with model year 2026 vehicle purchases progressing nicely as we now have more than 80% of purchase volume already procured with line of sight to a good bit more. We still expect to have run rate net DPU well below $300 per month. For capacity, we are looking to start growing the fleet again in 2026, but doing it the right way. With the three usages for vehicles being: one, our on-airport rental business; two, our HLE or off-airport locations; and three, our rental car adjacent mobility business. Each has different levels of maturity and different growth opportunities. For 2026, we expect to grow the mature airport business at GDP-like levels in the low single-digit range. Our HLE or off-airport business is less developed and has more white space for us to grow. So that business will likely grow in the mid-to-high single-digit range. And lastly, our emerging mobility business has a large amount of runway and will likely grow in the 10% to 20% range next year. All of this together should put us in the mid-single-digit growth range in transaction days and a somewhat smaller number in growth of the fleet with the ability to increase or decrease with minimal lead time based on market dynamics given our fleet flexibility. This is likely the same framework we would see again in 2027 as well. We expect that our continued revenue management initiatives as well as continued cost performance, along with DPU and capacity assumptions in 2026 will drive a significant margin improvement year-over-year. We are targeting a 3% to 6% EBITDA margin for next year and putting us on our way to our target of $1 billion of EBITDA production in 2027. In closing, I am encouraged by the progress we've made in strengthening our rental car business. However, my true optimism lies in the possibilities unlocked by the diverse platform we're building. Car rental is an important piece of our business, but the horizon is expanding well beyond it. It is exciting to think about what Hertz could look like in the years ahead. With that, I'll turn it back to Gil for closing remarks. Wayne West: Thank you, Scott. This is another quarter where we delivered on our commitments. Proof that our strategy is working. That said, we know there's more work to do. We're holding ourselves accountable for the improvements we need to make by driving rigor across each of our North Star metrics and other key financials every day, every month, every quarter. We'll always strive to be the best rental car company we can be for our customers. But as you've heard, this work is more than that. It's about building on our foundation to create a truly diversified value-creating platform that gives our customers more and positions Hertz to thrive across the full spectrum of mobility. Understanding our customers and evolving to meet their needs is in our DNA. It's driven our success for the past 100 years and it's how Hertz will become more than a rental car company for the next 100. Our philosophy is simple. The best way for Hertz to be part of the future is to be in the service of it. The work we're doing to transform this company is deepening our skills and capabilities across all aspects of our business and giving us a foundation few others have. So while the future of mobility continues to evolve and AVs aren't yet ready for mass deployment, we're building the infrastructure and talent today for when they are, whether it's how our people buy or ride in cars or how the cars themselves change will play a key role. With that, let's open it up for questions. Back to you, operator. Operator: Our first question today comes from the line of Chris Woronka from Deutsche Bank. Chris Woronka: Gil, you've talked -- and this is back in the prepared comments, you talked about kind of becoming this -- I think you said value-creating mobility platform. Can you maybe unpack a little bit for us what that kind of means in practice and what the platform includes and maybe how, I guess, in your mind, creates value beyond the traditional and core rental business? Wayne West: Yes. Sure, Chris. Yes, thanks for the question. I guess, I would start just by saying, historically, we've subordinated everything to our rental car business, and we see additional growth and value creation well beyond that. So as I -- maybe I unpack some of that, I'll start with the rental car piece first and just reemphasize, this is our core business. It is job one for us to rebuild that core rental car business. We're making progress. I hope you're seeing that in the numbers, but we got a lot of work to do. So we're not going to be distracted from that is the key message, and we're going to remain focused, but we're far more than a rental car company. So the other pieces that I touched on there, the car sales, service, and mobility, maybe just pulling that back a little bit. The car sales, first of all, the strategy we deployed, the end-to-end buy right, hold right, sell right strategy. That really sets us up well for this, especially with the fleet rotation kind of being in the rearview mirror. And of course, we got an iconic trusted brand. So the way we look at it is we're trading large volume of cars annually, especially as we shorten the hold periods, that volume will increase even further. So we got -- we've also got a pipeline of discounted supply of vehicles. So as I said it earlier, we kind of have used car factories the way I visualize it. So we're producing well-maintained, low mileage, and I'd just add one owner cars with a natural footprint that puts us in the top 5 used car dealerships in the country. So we have scale and we got ongoing supply. We also take trades on vehicles. We can buy used cars in the market and have in the past. So just like other dealers, which generally is their only source of supply. So we got people, as we talked about, test driving our cars daily and a very large installed customer base. So we, in short, have real strategic advantages to other large dealers in the market that we just hadn't been exploiting. So unlocking the e-commerce side of this gives us capacity along with our existing physical footprint and infrastructure to create a scale retail sales model. So that's how we see the car sales side. Service, it's more early innings in service candidly. But we've got a deep and I'd just say, much improved core operating competency and infrastructure to service vehicles. And as you know, we've been cleaning and fueling and maintaining cars for over 100 years. So we've got the opportunity to monetize this core competency beyond just servicing our own vehicles and go direct to really a B2B and a B2C customers, and we're starting to action that. Again, the way we look at it, we got a global footprint of car washes, gas stations, EV charging stations, and repair or oil change shops. So a lot of potential with that footprint. And then finally, last but not least, the mobility part of our business. We're part of the future of mobility. We got great partnerships in rideshare now. We've been piloting some very innovative new models with Uber that we're beginning to start to scale as we go into '26. And of course, I think we're a natural player in the AV space as it continues to evolve. You heard that, I think, on our last earnings call, the rationale behind that. And we've got just an incredible team in the mobility business. So I'm really bullish on mobility as well. But look, everything comes down to execution, and we're staying focused, and we're pushing hard to execute. Chris Woronka: Okay. I appreciate all the details there, Gil. Very helpful. As a follow-up, I think we understand the gist of the strategy that's now well underway, which is rightsized fleet, newer cars, very high utilization. I think one of the things that maybe comes with that slightly smaller vehicle size, smaller purchase price, maybe less maintenance, et cetera. But the question is, are the economics on that -- on those, I'm going to call it, smaller vehicle footprint. Are the economics so much better because you would appear to be giving up a little bit of RPD and pricing on an absolute basis. And I'm curious as to whether that's just the customer mix or utilization, maybe it's rideshare or new accounts, whether it's corporate or leisure. Maybe you can just kind of give us a little tour of like how customer mix and things like that and maintenance and operating expenses are, I guess, accretive from smaller vehicles. Wayne West: Yes. No, it's well said. I think a couple of things. First, I would say on the mix side, I mean there are some RPD headwinds, as you noted. But the way we look at mix is that it's dynamic. So ultimately, we're trying to optimize and align our car class mix around customer demand, what are the customers booking, their willingness to pay and -- for that class, and then the car class unit economics and doing that at a market level, really. So when we think about our model year '26 buys in particular, I'll back up. Our model year '25 buys, to some degree, what was available in the market, coupled with our strategy to rotate and refresh the fleet, right, all that led to a fleet mix that was certainly a big tailwind for us on the macroeconomics of fleet, which is the biggest economic lever we have. But as we think about model year '26 and the availability that we're seeing, that gives us the ability to further improve in this area and get it more dialed in at a market level. So -- and then I think just to touch on model year '26s while I'm talking about it, the buys, as I mentioned, have really come in at the price and volume targets we were seeking, which keeps our DPU well below the North Star target we've been managing to. But it also unlocks our ability to sell off our model year '25 fleet. And as I mentioned, roll into our shorter hold strategy. And that helps us for the unit economics you mentioned, Chris, whether it's maintenance expenses or even our ability to sell easier into the retail side. But the reality is we're really working hard to change our paradigm in the sense of beginning with the end in mind. So when we're buying cars, we're selling them. We're really selling them in mind. So we've got the selling side in mind and trying to develop a real car dealership mindset. Operator: Your next question comes from the line of Chris Stathoulopoulos from Susquehanna International Group. Christopher Stathoulopoulos: On the outlook for the sub-300 DPU for next year, I want to understand the moving pieces here. So it sounds like this vehicle recall is perhaps going to spill into early part of next year. The '26 vehicle purchases seem to be largely in place. And so what other work needs to be done, I guess, with respect to mix and mileage to confidently secure that sub-300 number? Wayne West: Yes. I mean I'll start, Scott, you feel free to jump in. But I think the broader strategy that we've talked about, the end-to-end fleet strategy, buy right, hold right, sell right, that works in any environment for us, right? I mean you think about where we were 1.5 years, 2 years ago as we were really -- I mean, we had fierce headwinds on the fleet itself. And we -- through the fleet rotation, we've turned those around into tailwinds now with the model year '26s and the buys, again, the price and volume that we've seen, that helps us continue that model. In fact, it gets us to the short hold now with the volumes that really perpetuate our ability to hit our North Star DPU targets. Scott Haralson: Yes. No, that's right, Gil. I think Chris, good to see you. Yes, I think, look, what we're looking at today is a very similar platform in '26 we saw in '25. We expect generally stable residuals. We have good pricing on '26. So everything we're seeing and also the sort of channel management of how we dispose of vehicles will influence DPU. And one other point is that while this also even excludes the fact that our F&I revenue doesn't even hit DPU. It hits revenue. So we think we still have a good bit of benefit coming from the Hertz car sales that will benefit DPU, but ultimately impact revenue as well. So we're pretty bullish on the channels and how it affects DPU, but also total EBITDA. Christopher Stathoulopoulos: Okay. Great. And then, Scott, so I appreciate the color on the composition of the fleet for next year. So as I understand it on the airport side, GDP like off-airport, mid-to-high single digits, mobility 10 to 20. It sounds like you feel where you have the tactics in place to sustainably hit this sub-300. There are several efforts out there with respect to pricing utilization, customer satisfaction that Sandeep outlined that I'm guessing should result in lower DOE. So let's call that low single-digit growth. So is that all of these here, this fleet outlook, this sub DPU? Is it fair to think of those as, I guess, the algo going forward when we think about Hertz and I guess, it's pivoting towards this more of a sort of car sales, digital channel sort of focused platform? Scott Haralson: Yes, I'll start. I'm sure Sandeep and Gil want to chime in, too. I think it's a good initial view of the base platform, which is something we've tried to articulate in the call. The base rental car business, yes, DPU-driven DOE per day, RPD, RPU, those sort of historical metrics. Now I think over time, you'll see that get influenced by things that Gil referenced in the first question around some of the services and some of the things that are outside the traditional rental car and even some of the mobility things that we do today that we might do tomorrow. So obviously, our ability to sort of tell that story with additional metrics, additional color commentary might change over time. But I do think, yes, the base rental car business in the near term will be influenced by those things you mentioned. And we tried to outline that a little bit in our script that obviously, we hope to see organic and industry-supported RPD, RPU growth. We're going to drive some scale and efficiencies to get DOE per day benefits. We think the fleet setup is good for DPU. So all of those are foundational. But over time, I think you'll see a few more tangents start to hit. Operator: Your next question comes from the line of Ian Zaffino from Oppenheimer & Company. Ian Zaffino: I was just wondering if you could maybe just give us a little bit of color on just the quarter in general as far as what have you seen from international inbounds or corporate? And also maybe any markets that have been particularly strong or particularly weak? I know you referenced the government shutdown. Was that specifically D.C. area or anything else going on there? Sandeep Dube: And Ian, this is Sandeep here. Just for clarification, you're asking about Q4? Ian Zaffino: I was -- actually 3 and 4, if you can. So what you've seen and what kind of look -- yes, look at for going forward. Yes. Sandeep Dube: Awesome. Great. Thank you. So yes -- so overall starting, I think, high level, there was a substantial improvement from a demand profile in Q3 over -- when compared to Q2 on a year-over-year basis, right? When you look at overall airport demand, airport demand was largely, I'd say, slightly negative from Feb all the way through June this year. And then July onwards, it's been positive. So there's been an uptick both on the leisure side of the business in Q3 as well as on the corporate side of the business. And on -- let me first touch upon the corporate side of the business. There's been a couple of points of improvement when we talk about Q3 over Q4. And I'd say even more of an improvement sequentially within the quarter when you look at August and September, but it was still in negative territory when we talk about corporate. Now that's turned positive in October as we moved into Q4. So positive trends on the corporate side. Inbound had basically -- it was down double digits when you look at Q2, June -- May and June, right? We know some of the impact that had happened earlier on in the year. And a lot of that reduction was from EMEA as well as Australia and New Zealand. What we've seen since then is basically a couple of points of improvement again in inbound demand through summer and improvement going into October as well. But inbound is still down, I'd say, low single digits as such on a year-over-year basis. And then finally, we come to the government side of the business. So that was down substantially in Q2, improved a bit in Q3. Since the start of November, given everything around the federal government, we've seen that part of the business come down significantly in November. But again, we believe that in due course, that will be resolved. But right now, we see impact of that in November. Overall, when I pull up and I ask the question, okay, what does that mean for us? I think Q3 was substantially better from a demand profile perspective relative to Q2, and that was represented in the pricing environment that we had seen at that point in time. As we stepped into Q4 and looked at October, further improvement on the demand profile and I would say, a pretty solid pricing environment as well. So that's the way things have shaped out so far. Ian Zaffino: Okay. And then just maybe as a follow-up, can you talk about the strategy of -- as you go more off-prem, is that insurance replacement? Is that other? How do we think about maybe the competitive dynamics there? And what you kind of expect as far as metrics, whether vis-a-vis what they would look like on-prem versus off-prem? Wayne West: Yes. I'll jump in and then, Sandeep, you can add a lot more color. At least the way we look at it, look, it's a really big market. It's more less cyclic than the airports. We're in the space. We have the footprint and the opportunities are both B2C and B2B opportunities there, including retail. Sandeep Dube: Yes, it's -- to be transparent, that was a less mature part of our business in terms of how we handle that part of the business. I'd say from a demand generation perspective as well as from how we kind of operated that part of the business. And we've been working on improving our ability to generate demand there. There's been improvement on the replacement side of the business, but also, in general, a greater demand coming from direct retail customers as well as from our partnership business. So I'd say, overall, the -- there's a commercial engine that's working on growing greater durable demand for Hertz as a brand overall. And that powers both airport as well as off-airport business. Operator: Your next question comes from the line of Stephanie Moore from Jefferies. Stephanie Benjamin Moore: Great. I wanted to touch on the early -- kind of early view on 2026, particularly the margin commentary. Very helpful to have the range that you provided. But given you guys have made tremendous steps forward in your own execution, it does remain a pretty volatile underlying market in general. Maybe just talk about what we would need to see to either hit the high end of that margin range or on the other side, if it ended up coming at the lower end of the range? And how do you kind of balance between actions that are more within your control and then again, the uncertainty of an underlying environment? Scott Haralson: Stephanie, this is Scott. I'll start. Yes, I think there's a few things there. One, obviously, this is just a first indication of how we're kind of viewing '26. I think some of the details are still to be played out through our internal budget process and plus through as the fourth quarter starts to materialize, giving us a better foundational view for '26. But look, I think there's a few things that we impacted a little bit in some of my comments, but the plan is to generate a little bit of scale in the right way, as I mentioned, less so on airport and more so off-airport and mobility. We think those businesses have a lot of room to grow. So I think as Sandeep talked about some of the maturity we have from a revenue management perspective and that scale will generate a little bit of DOE benefit with continued process efficiency. Like I think those alone, I think, are sort of the foundational components. I think we're cautiously optimistic, too, about the benefit of sort of DPU and the distribution channel, specifically Hertz car sales, which could drive further DPU benefit and/or revenue benefit. So I think as we sort of think about the boundaries of that, I think the upside, obviously, there's additional sort of industry movement on sort of pricing that gives potential upside. But putting some of that to the side, internally, we think it's our ability to ramp up the sort of percentage of flow-through of car sales through our Hertz car sales. Today, we're sort of 20%, 25% of cars through that side. Our ability to get to north of 75%, 80-plus percent will be a big driver of value. So in our internal views, that's probably the component that really drives us to the top end or beyond. Stephanie Benjamin Moore: Great. That's very helpful. And then I just wanted to follow up to your point on the incremental growth for next year. Could you maybe talk about how much net fleet CapEx you would expect to meet those plans? And then secondly, as you're thinking about this overall net fleet itself, maybe talk a little bit about how the 2026 purchases are shaping up and how we should think about in terms of the fleet mix for 2026 versus 2025? Scott Haralson: Yes. Okay, Stephanie, I'll start. I'm sure Gil want to chime in, too. But yes, there will be a CapEx to the growth, probably in the, I'll call it, in the $100 million, $150 million range. The specific number will sort of depend on a number of factors. including vehicle type program versus risk, a number of other things, but probably in that range. And yes, I think you'll probably see us -- and Gil mentioned this, too, the fleet plan and our fleet mix in any given year is dependent on a large number of factors. But I think we'll probably -- we have an opportunity next year to probably look at a shift into some slightly larger vehicles, which we think can play out in a number of geographies for us. But I don't think you're going to see a dramatic shift in our fleet plan, but we have an opportunity to grab some vehicles that we think will be fruitful for us overall. But I think I mentioned, I think, in my script, that we're probably 80% of the way, maybe even north of 80% of the way and line of sight to some good opportunistic buys in '26. So we feel good about where it sits today. So I don't know, Gil, do you want to add. Wayne West: No, I mean that's a good summary. Thanks. All I would say is the volume of model year '26 has been there. We've locked up kind of our primary needs. But we also see spot buy opportunities as we come out throughout the year. We've already done several of those post our original round. So we've got -- we're in a -- and price as well has hit our target. So we are in a position to be far more selective than last year. And I think Scott said it, we'll end up with probably a larger, you call it, richer mix of vehicles than we currently have. But that's all aligned with what we're trying to achieve at a local market level. And I would also say that as, again, we're thinking about when we're buying cars selling them and have that dealership mindset. I would say some of the trim that normally we would default for just for cost purposes for lower cost vehicles, we're thinking more about the sales side of that and can we get paid for different trim packages, especially at a location level, all-wheel drive, 4-wheel drive probably being the most notable example, but there's a lot of trim packages that we're thinking more about on the sales side and what the residual value impacts are than just for cost. So I'll just say we keep refining that model. And then probably one other last thought. There are definitely more program cars available than I think we've seen over the last few years. So that gives us some additional flexibility with mix, especially seasonally when it's a little harder to hit the peaks with large SUVs and luxury vehicles. We've got more flexibility than we've had in the past through program cars to manage that. Operator: Your next question comes from the line of Dan Levy from Barclays. Dan Levy: I wanted to ask about the plans to grow the fleet next year. And specifically in light of the comments in your deck that some of the underlying RPD pressure is still being driven by market pricing pressure. So question is, do you think that fleet levels are rightsized in the industry? Or is there excess fleet? And how do you think the market will absorb your plans to grow fleet? How can you ensure that you will have positive RPD when expanding your fleet next year? Wayne West: Yes. Let me start. I know Sandeep has got thoughts and probably Scott as well. It's a good question, right? So I think Scott laid it out our view well in that you've got to look at this at a segment level because all segments are not created equal, right? And I think, again, airport, off-airport and mobility, off-airport mobility will grow at faster rates than GDP because we've got the ability from a demand generation to generate that and continue the momentum we're already seeing in those businesses. The airport piece of the equation, I think where most of the root of your question comes from, right, is we -- I mean, we view it more in terms of we can grow more or less at GDP. We're not -- I'll just say we're not after gaining market share here. But there is a natural growth now that we've done our fleet rotation and have our unit economics more in line with where they should be, that gives us the right to grow again in all three segments. But we're going to be very disciplined in our approach here. Sandeep Dube: Yes. And the only thing I'll add here is basically even at the airports, I think if I look at the overall pricing environment from the start of the year until where we're sitting here right now, I think that pricing environment in -- especially in Q3 and then as we look so far what we've seen in Q4 is much improved, right? And I'm talking about just the overall industry backward looking, it's much improved. And then the slate of commercial initiatives that we had outlined there's momentum there, and you've seen the impact of that in -- at the tail end of Q3. And so I expect that to take a further foothold in the coming quarters and have an impact in 2026. Dan Levy: Okay. Great. As a follow-up, I wanted to just ask about the utilization in the quarter. And maybe you can just unpack, and I see the commentary here in the deck, but it was -- it seems like close to a quarterly record. Just how sustainable is that? And what type of utilization can we expect into next year? Wayne West: Yes. No, great question. I see we've been building momentum with utilization over the last several quarters. And I attribute it principally to our operational processes are starting to get some real traction to eliminate out-of-service vehicles and idle time in general, along with the commercial team has done a great job with better demand generation. It all starts with demand generation, but we're starting to sweat our assets. And as you've seen, I think we made some big leaps here. I think there's more room to run candidly, albeit the spike in the recalls create a headwind for us in the short run. The fourth quarter is even more of a headwind than we saw in the third quarter. But I want to say we'll never be satisfied with our performance in this area. We're just the team's wired for continuous improvement. And I think the other big item aside from the kind of operational processes is -- plays into how we're selling cars because traditionally, -- and Sandeep talked about total utilization, which is really the way we look at it internally. It's not just operational, it's total utilization because we own those vehicles. The big difference being the inventory we have that is for sale for cars that take the turnaround times there have been very long. So we've process engineered that and some big improvements, which you see in the quarter on total you. But ultimately, as we sell digitally and we can continue to operate vehicles to the point of sale without taking them out of service for a month or 2 to sell, that creates tremendous opportunities for total utilization. So that's really our focus and strategy. Operator: And this concludes the Hertz Global Holdings Third Quarter 2025 Earnings Conference Call. Thank you for your participation.
Operator: Good morning, and welcome to SNDL's Third Quarter 2025 Financial Results Conference Call. This morning, SNDL issued a press release announcing their financial results for the 2025 third quarter, ended on September 30, 2025. This press release is available on the company's website at sndl.com and filed on EDGAR and SEDAR as well. The webcast replay of the conference will also be available on sndl.com website. SNDL has also posted a supplemental investor presentation in addition to the conference call presentation, we will be reviewing today on it's sndl.com website. Presenting on this morning's call, we have Zach George, Chief Executive Officer; and Alberto Paredero, Chief Financial Officer. Before we start, I would like to remind investors that certain matters discussed in today's conference call or answers that may be given to questions could constitute forward-looking statements. Actual results could differ materially from those anticipated. Risk factors that could affect results are detailed in the company's financial reports and other public filings that are made available on SEDAR and EDGAR. Additionally, all financial figures mentioned are in Canadian dollars unless otherwise indicated. We will now make prepared remarks, and then we'll move to analyst questions. I would now like to turn the call over to Zach George. Please go ahead. Zachary George: Welcome to SNDL's Third Quarter 2025 Financial and Operational Results Conference Call. The third quarter of 2025 marks another milestone for SNDL as we report record quarterly free cash flow. And for the first time in our history, positive cumulative free cash flow for the first 9 months of the year. We also continue to report sustained double-digit revenue growth in our combined Cannabis segment, underscoring the strength of our ongoing operational and profitability improvements. Beyond our ability to generate cash, which, in our view, is the ultimate measure of a business' fundamentals. We are also seeing numerous bright spots in our income statement. These include robust growth in our Cannabis segments, margin expansion across our Retail Operations and reductions in SG&A expenses. Collectively, these factors translate into continuous improvements in our financial performance. Despite our progress in operations and our strengthened competitive position, this quarter's P&L reflects the impact of $11.9 million in unfavorable noncash items. These were triggered by increases in our stock valuation as well as inventory and fixed asset impairments, resulting in a reported operating loss of $11 million. For those who are unfamiliar, our unvested long-term incentive equity grants show up as a liability on our balance sheet. So when our stock price increases, we have to take a negative charge to operating income in order to reflect the increased value of that liability. These noncash items and the volatility inherent to our industry should not overshadow the undeniable operational improvements we have achieved. We also continue to leverage the strategic advantage provided by our strong balance sheet with no debt and over $240 million in unrestricted cash as we build a resilient, growth-oriented and profitable business. To this last point, during the third quarter, we continued to support the regulatory review process in Ontario which is the final step before closing the acquisition of 32 1CM cannabis stores. We also accelerated our investment pace to support the opening of 5 new Cannabis stores and 2 new Wine & Beyond stores during the fourth quarter. Additionally, we completed the ramp-up of our Atholville cultivation facility to support international growth, and we are now making further investments in its infrastructure. Last but not least, beyond strengthening our competitive position in Canada, the company continues to work towards resolving the ongoing litigation required to complete the SunStream restructurings. These restructurings are expected to provide shareholders with exposure to dynamic medical markets, including Florida and Texas. I'll pass the call to Alberto now for more insights on our third quarter financial performance. Alberto Paredero-Quiros: Thank you, Zach. I want to remind everyone that the amounts discussed today are denominated in Canadian dollars, unless otherwise stated. Certain figures referred to in this call are non-GAAP and non-IFRS measures. For definitions of these measures, please refer to SNDL's management discussion and analysis document. Our third quarter financial results represent another step forward in profitability, particularly in terms of free cash flow generation. Net revenue for the third quarter of 2025 reached $244 million, reflecting a 3.1% increase compared to Q3 of last year. This growth was driven by our Cannabis segments, while the Liquor segment continues to navigate market headwinds. Gross profit of $64.2 million represents a $1.2 million increase or 1.9% growth year-over-year despite being impacted by $3.9 million in noncash inventory-related adjustments within Cannabis Operations. This inventory adjustments reduced gross margin by 160 basis points, more than offsetting the strong margin expansion in both Liquor and Cannabis Retail segments. As a result, consolidated gross margin declined 30 basis points compared to the prior year. Operating income was affected by noncash adjustments totaling $11.9 million. In addition to the $3.9 million inventory adjustment mentioned earlier, the 121% share price increase during the third quarter triggered a $6.8 million increase in share-based compensation liability. Finally, we recorded a net of $1.6 million fixed asset impairment, mostly driven by the [ idle ] Stelletton facility. These 3 factors fully explain the reported operating loss of $11 million. When excluding a $1.5 million restructuring charge, adjusted operating income ended at a loss of $9.5 million. This represents a $7.1 million improvement or 42.7% compared to last year. Free cash flow is the main highlight of the quarter, with a positive $16.7 million. In addition to the $7.5 million improvement compared to the same period last year, this strong Q3 results enable us for the first time in our history to achieve positive cumulative free cash flow for the first 9 months of the year, totaling $7.7 million year-to-date. When reviewing our 4-year historical performance, we continue to demonstrate a clear upward trajectory, reflecting our sustained focus on growth and improve operational efficiency. Additionally, we can observe the seasonality of free cash flow within the first and second half of the year with a consistent upward trend over time. When analyzing the contributions from each segment across our main financial KPIs, we can clearly see that net revenue growth was driven by our Cannabis segments, partly offset by Liquor Retail. The revenue [ elimination ] for cannabis is related to the sales from the Cannabis Operations segment into our own retail. As in previous quarters, dissemination is increasing as a result of our cannabis business growth. Adjusted operating income shows a solid improvement compared to the prior year, although there is some noise related to noncash adjustments in both periods. Liquor Retail posted a small decline of $0.6 million as gross margin and SG&A improvements were offset by revenue declines and the lapping of a $1.2 million favorable fixed asset impairment reversal recorded in 2024. Cannabis Retail delivered a strong operating income growth, driven by revenue gains, gross margin expansion and SG&A efficiencies. Additionally, this quarter included a $1 million reversal for asset impairments recorded several years ago. Cannabis Operations reported negative operating growth, primarily due by the $3.9 million inventory valuation adjustments and the $2.7 million fixed asset impairment related to the idle Stelletton facility. The Investment segment showed significant favorability year-over-year. As last year included an unfavorable valuation adjustment from the SunStream investment portfolio. Finally, despite meaningful cost reductions in the Corporate segment, the $6.8 million increase in share-based compensation triggered by the 121% rise in our share price during the third quarter, resulted in a $2.2 million unfavorable movement year-over-year. Clearly, there are numerous typical adjustments impacting the third quarter in both years. When we strip away this noise, the underlying improvement in operating income becomes evident. Both the third quarter and the year-to-date free cash flow results are the key highlights. It's representing historic records for the company. In the third quarter, the negative income of $13.3 million was driven by the different noncash adjustments previously mentioned, which leads to the high amount of $30.8 million in noncash add-backs. Inventory and other working capital follow the regular seasonality as the investments in the first half of this year start being offset as of the third quarter. We're also seen the higher amount of CapEx and lease payments in the third quarter compared to the previous 2 quarters, driven by the incremental capital investments for the anticipated store openings in the fourth quarter. This strong Q3 free cash flow results is allowing us to report for the first time in our history, positive cumulative free cash flow in the first 9 months of the year, with a total of $7.7 million. Looking closer at the 3 operating segments, starting with Liquor Retail, we see that the segment delivered net revenue of $139.4 million in the third quarter, a 3.6% year-over-year decline as it continues to face market headwinds. Gross profit of $36.7 million represents a modest reduction of $0.2 million compared to the prior year. As the revenue decline was almost fully offset by 80 basis point improvement in gross margin, which reached 26.3%, a new historic record for the segment. Operating income came in at $11.2 million, a decrease of $0.6 million compared to last year. While the record gross margin and further reduction in SG&A spending provided support, these gains were offset by the lapping of a $1.2 million in fixed asset impairment reversals recorded in 2024. Cannabis Retail delivered outstanding results in the third quarter. Net revenue of $85 million represents a new record for the segment, supported by a 4.8% year-over-year growth, driven primarily by a 3.6% increase in same-store sales. Gross profit of $22.5 million is also a historic high for the segment, reflecting an 8.5% increase compared to last year, supported by a 90 basis points improvement in gross margin. Finally, both operating income and adjusted operating income reached new records for the segment, driven by revenue growth, margin expansion and SG&A optimization. Operating income of $9.1 million more than doubled compared to last year, further benefiting from a $1 million fixed asset impairment reversals recorded in the quarter. Our Cannabis Operations segment delivered mixed results as a result of noncash adjustments impacting the third quarter, masking the underlying improvements. Net revenue for the third quarter of 2025 was $37.4 million, also a new record for the segment, reflecting a $12.4 million or 50% growth compared to the prior year. This growth was driven by edibles following the acquisition of Indiva in the fourth quarter of 2024 as well as the accelerating international sales that reached $4.2 million in the quarter. Gross profit was impacted by $3.9 million inventory write-offs and valuation adjustments primarily related to the cultivation ramp-up at our Atholville facility. Gross margin ended up at 13.4% in the quarter, as the inventory adjustments had a negative impact of 10.4 percentage points to the margin of the segment. Finally, adjusted operating income also reflects a $2.7 million fixed asset impairment related to the Stelletton idle facility. The total of $6.6 million in unfavorable inventory and fixed asset noncash adjustments resulted in the negative $4.8 million adjusted operating income. Over to you, Zach for additional comments related to our strategic priorities. Zachary George: Looking at the progress we've made towards our 3 strategic priorities: growth, profitability and people, there are several highlights I'd like to point out. Let's start with growth. Our Cannabis Retail segment continues to outperform the market, achieving 3.6% same-store sales growth in the third quarter and contributing to an additional 12 basis point gain in market share. Despite softness in the liquor market, our Wine and Beyond banner continues to demonstrate strength with 2.9% same-store sales growth, supported by double-digit growth in private label sales. As mentioned in previous calls, we have accelerated organic capital investments in new store expansion. In addition to the 2 cannabis stores opened during the third quarter, we anticipate opening 5 new cannabis stores and 2 new Wine and Beyond stores in the fourth quarter. It is also encouraging to see strong 50% revenue growth from our Cannabis Operations segment, driven by market leadership in edibles following the acquisition of Indiva in the fourth quarter of last year, as well as continued growth in international sales, which reached $4.2 million in the third quarter. Shifting to profitability. The most significant highlight is the generation of $17 million in free cash flow during the quarter, enabling us to achieve positive year-to-date free cash flow of $7.7 million at the end of the third quarter for the very first time in our history. This was accomplished through revenue and margin expansion, coupled with working capital optimization despite incremental CapEx investments to fund future growth. While adjusted operating income remains negative due to the previously mentioned noncash items reflected in the quarter, it did grow by 43% compared to the prior year, supported by revenue growth, retail margin expansion and reductions in G&A costs. On that point, G&A expenses in the third quarter were $4 million lower than last year as our $5 million of productivity savings more than offset inflationary pressures. Additionally, data licensing revenue contributed $4.6 million in the quarter, providing further support for gross margin expansion. Foundational to all of these improvements is our people strategic priority. During the third quarter, we continued to enhance the deployment of Talent cards and development conversations, a key step in our strategic talent review process. We also launched a recruitment efficiencies project to streamline hiring and improve the experience for recruiters, hiring managers and candidates through automated workflows. Additionally, we introduced a monthly leadership development series, a new networking forum where leaders share personal and professional experiences and discuss our strategic priorities. As we focus on driving strong execution in the fourth quarter and a strong finish to the year, we are also encouraged by the many opportunities and execution plans our teams are developing for 2026, taking us step by step closer to our ambition to become a global cannabis leader. Once again, I'd like to thank our entire team for their contributions and our shareholders for their continued trust. I will now hand the call back to the operator for the analyst Q&A session. Operator: [Operator Instructions] And the first question today will be coming from the line of Aaron Grey of Alliance Global Partners. Please go ahead. Aaron Grey: I see some more of the cash flow generation. First question for me. I just want to kind of strip out some of the one-offs to make sure we have a good understanding of how best to think about the business going forward. So particularly for Cannabis Operations, included the write-offs for inventory within that. So I just want to clarify there from the prepared remarks. Was it only the $3.9 million inventory in the gross margin and the $1.6 million fixed asset, that's SG&A and not in gross margin? So I want to clarify that point. And then secondly, how best to think about the gross margin specifically for the Cannabis Operations going forward? Both of those are added back, it gets you back to that 29% gross margin from prior quarter. If just inventory, gets you more to the mid-20s. So I just want to get a better understanding of how to think about that on a go-forward basis. Alberto Paredero-Quiros: So yes, I confirm the $3.9 million of inventory adjustments that's obviously is impacting gross profit. And it has an impact of about 10.6 percentage points in the margin of the segment. The other onetime adjustments that we saw in the quarter is the Stelletton facility impairment, it's a $2.7 million charge, that happened below gross profit. So it's in other income and expenses. So it's part of operating income, but not reflected in the gross margin. So the total of those 2 things obviously are impacting operating income, but the only impact to gross profit is based on the inventory adjustment. Without those adjustments, we would have been at around 25% margin in the segment, which is what we're expecting. We have seen in round about that number in the last couple of quarters, and we're expecting that to be the low end of the range for the future. Aaron Grey: Okay. Great. Sales to provincial boards saw some nice growth both on a quarter-over-quarter and year-over-year basis. Any specific drivers there? And anything to think about in terms of the mix within that shipment timing for how we think about that line segment going forward? Because it does seem like that growth outpaced some of what we're seeing from the third-party POS data. Alberto Paredero-Quiros: Yes, indeed, we're seeing the same softness overall in the sales to the provincial boards from Cannabis Operations. We know that it's not driven by our own segment as we continue to gain momentum there, and we'll continue to see growth. But we have seen some softness in third-party retail. Obviously, we don't have full visibility to the inventory numbers of the provincial boards. So an element of the slowdown could be as well driven by that. But overall, that we have seen over the last couple of quarters, a slowdown in third-party retail, that we're working on, obviously trying to create some additional momentum and with the changes in new products and innovation, we believe that we're going to be regaining momentum there. Zachary George: And just to add to Alberto's comments. We are seeing great progress in specific categories, including edibles, pre-roll and vape. And so that's enabled us to keep a great pace relative to the broader market. Aaron Grey: Okay. Great. Last 1 for me. I know you've been increasing your efforts internationally. I think you said 4.2% in the quarter. So how best to think about international sales going forward, how big of a part of the business do you feel like that could be within the next 12 to 18 months? Alberto Paredero-Quiros: It does keep to -- continue to gain momentum. We have been increasing quarterly-over-quarter since the beginning of the year. We have a strong demand. We have a lot of purchase orders for the fourth quarter as well. We are bullish as well with the outlook for 2026. A lot of our international partners, they are exploring options to continue increasing purchases from us. They're struggling with reliability of supply from some of their other partners that they have, and they have been very pleased with our performance so far. So yes, we believe and we're anticipating that, that number will continue growing in the future. Zachary George: Worth mentioning that we are continuing to ramp production at our Atholville, New Brunswick facility. The benefits from extremely attractive relative power pricing. And so we should see monthly production based on our targets north of 15,000 kilograms a month in 2026. And so we expect the bulk of that biomass to be directed at international markets. And there are a number of other both 2.0 and other growth opportunities that we're looking at. Operator: [Operator Instructions] Our next question will be coming from the line of Frederico Gomes of ATB Capital Markets. Frederico Yokota Gomes: First question just on the 1CM transaction that still hasn't closed. You said you're waiting regulatory approval in Ontario. So is there anything specific that's been an issue with that approval. I'm just thinking about the previous history year back when you had the [ Indiva ] transaction, and I believe that there was a hold up there in Ontario. So just any comments on that? Zachary George: Fred, we don't have any additional information to share. We thought this would be -- the review would be completed late October. It's early November. There are a number of retail licenses, both applications that have been submitted by affiliated entities as well as third parties that are still moving to the pipeline in Ontario. So we'll update the market as soon as we have greater clarity. Frederico Yokota Gomes: And then second question, just on Cannabis Retail. I guess we saw good same-store sales growth this quarter again, record numbers in gross profit, operating income as well. Just broader comments about what you're seeing in that market right now? Are you seeing opportunities to increase prices and margins? Are you seeing a good pipeline of M&A? Or is it going to be concentrated more on organic growth, obviously, excluding the 1CM transaction? Just some broader color on the outlook for Cannabis Retail in Canada right now. Zachary George: It's a great question. We are seeing maturity. It's really a province-by-province assessment. We've seen extreme saturation start to settle in Alberta. And as you well know, Frederico, Alberta was 1 of the quickest provinces out of the gate in terms of its pace of door count growth. You're seeing signs emerging of maturity in markets like Ontario as well, although there's still -- we still think there's opportunity there. And I think that the days of easy kind of double-digit, high single-digit same-store sales growth upon opening locations and managing a discount retail strategy are going to be in the rearview very quickly. Execution on the floor and owning the consumer relationship with a very convenient and attractive experience for customers is critical at this point. So we are very much focused on our consumer and owning that relationship. Alberto Paredero-Quiros: I would add, Frederico, if you compare to the same period of last year, you have probably noticed in the third quarter that our same-store sales have slowed down somewhat compared to first half of the year. On the other side, we're seeing a significant increase, a 90 basis points improvement in gross margin. The main reason last year, as of the third quarter, we started to run more aggressive promotional activities. That obviously put a little bit the top line but tempered the gross margin. as we are lapping that strong promo activity this year, we're seeing the margin progression, obviously somehow a little bit of a slowdown on same store sales revenue growth. It will probably be a similar dynamic in the fourth quarter, but we still see some -- we've seen margins somewhat stabilizing for the long run. There is always an opportunity to increase efficiencies and manage mix a little bit better and gain marginally on the gross margin. But clearly, yes, as Zach said, on the revenue growth and the market growth, we're assuming -- we're expecting it would stay in the low single digits going forward. Frederico Yokota Gomes: That's very helpful. And then just a final question, just, I guess, related to that as well, just on the Rise Rewards program, now that you have some more time with that. Anything you can share in terms of how the rollout is occurring relative to your expectations? And any data points regarding members of the program, economics, et cetera? Zachary George: Frederico, we're still early days. We're just several months into this launch, but it is tracking quite well. The engagement we're getting from loyalty members is extremely strong. We're excited to roll out a similar and parallel program for our Liquor business in the coming quarters and think that there'll be an interesting opportunity and some very rich data that we can receive from that. We're going to update the market on this program, but wanted to get a couple of quarters of performance underneath our belt before sharing more detailed stats. Operator: Thank you. This does conclude the Q&A session for today. I would like to turn the call back over to Zach George for closing remarks. Please go ahead. Zachary George: Thanks all for joining us today. I appreciate your support, and we look forward to updating you on our progress in the near future. Thank you. Operator: This concludes today's conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.
Operator: Good morning, ladies and gentlemen, and welcome to Henry Schein's Third Quarter 2025 Earnings Conference Call. [Operator Instructions] As a reminder, this call is being recorded. I would now like to introduce your host for today's call, Graham Stanley, Henry Schein's Vice President of Investor Relations and Strategic Financial Project Officer. Please go ahead, Graham. Graham Stanley: Thank you, operator, and thanks to each of you for joining us today to discuss Henry Schein's financial results for the 2025 third quarter. With me on today's call are Stanley Bergman, Chairman of the Board and Chief Executive Officer of Henry Schein; and Ron South, Senior Vice President and Chief Financial Officer. Before we begin, I'd like to state that certain comments made during this call will include information that's forward-looking. Risks and uncertainties involved in the company's business may affect the matters referred to in forward-looking statements, and the company's performance may materially differ from those expressed in or indicated by such statements. These forward-looking statements are qualified in their entirety by the cautionary statements contained in Henry Schein's filings with the Securities and Exchange Commission and included in the Risk Factors section of those filings. In addition, all comments about the markets we serve, including end market growth rates and market share, are based on the company's internal analysis and estimates. Today's remarks will include both GAAP and non-GAAP financial results. We believe the non-GAAP financial measures provide investors with useful supplemental information about the financial performance of our business, enable the comparison of financial results between periods where certain items may vary independently of business performance and allow for greater transparency with respect to key metrics used by management in operating our business. These non-GAAP financial measures are presented solely for informational and comparative purposes and should not be regarded as a replacement for corresponding GAAP measures. Reconciliations between GAAP and non-GAAP measures are included in Exhibit B of today's press release and can be found in the Financials and Filings section of our Investor Relations website under the Supplemental Information heading and in our quarterly earnings presentation also posted on our website. The content of this conference call contains time-sensitive information that is accurate only as of the date of the live broadcast, November 4, 2025. Henry Schein undertakes no obligation to revise or update any forward-looking statements to reflect events or circumstances after the date of this call. Lastly, during today's Q&A session, please limit yourself to a single question so that we can accommodate questions from as many of you as possible. And with that, I'd like to turn the call over to Stanley Bergman. Stanley Bergman: Good morning, everyone. Thank you, Graham. Thank you for joining us. We are pleased with our financial results for the third quarter with sales growth accelerating in each of our reportable segments, including solid market share gains in our distribution businesses as we are once again focused on driving growth now that the cyber incident is fully behind us. The strong sales performance was a key driver of the underlying improvement in our operating income. Our successful execution of the BOLD+1 strategy, including the financial performance of our investments in high-growth, high-margin businesses also sets the foundation for strong future growth. With the continued input from KKR, we have made good progress on advancing the value creation initiatives we announced last year -- last quarter, actually. Based on our first phase of work, we believe we have the opportunity to deliver over $200 million of improvements to operating income over the next few years. We have begun executing on these multiyear projects with key areas of focus that include centralization of support services, indirect procurement, automating and simplifying processes and accelerating sales of corporate brand products. These initiatives support a return to our long-term goal of high single-digit, low double-digit earnings growth. In addition, our Board has approved an amendment to the strategic partnership agreement, giving KKR the right to increase its HSIC stock ownership up to 19.9% through the purchases -- through purchases in the open market. Next, let me touch on a few key highlights from the quarter that advanced our BOLD+1 strategy. We remain on track to achieve our goal of over 50% of non-GAAP operating income coming from high-growth, high-margin businesses by the end of 2027, which is the current strategic planning cycle. And that's -- in addition, we expect more than 10% coming from our corporate brands. So that's in total about 60% of our non-GAAP operating income coming from these high-growth, high-margin businesses and corporate brands. While we have continued to strategically invest in our business, we have focused recent capital deployment on accelerating the repurchase of the company's shares. Our Board recently approved a $750 million increase in this program, and our current expectation is to continue to execute buybacks at a similar pace to the past quarter. Building on the momentum from our successful launch of our new HenrySchein.com Global eCommerce Platform in the U.K. and Ireland, we are rolling out a phased launch in North America. We expect to start the European rollout in 2026. Turning now to a review of our business units. I'll start with the global distribution and value-added services group. Here, we delivered solid sales growth in the third quarter across our global distribution group in both merchandise and equipment sales. In general, patient traffic remained steady throughout the quarter. Notably, sales growth accelerated in the U.S. merchandise area, which reflects strong corporate brand sales growth as well as the positive impact of targeted promotional programs we initiated during the second quarter, resulting in continued increase in our market share in the United States. If we turn now to the U.S. dental equipment sales, which increased in the low single digits with digital equipment delivering double-digit growth. We continue to experience a lower average selling price in digital equipment, but this is offset by strong volume growth. Traditional equipment sales declined slightly. However, it's important to notice, we believe this is a result of the timing of installations. We introduced a new online financing program, which we believe contributed to the good growth in the U.S. equipment arena. Our order intake at DS World was good this year, and we expect this to help our equipment results in the fourth quarter. We expect to maintain overall U.S. equipment growth in the fourth quarter. Turning to the U.S. Medical business. Sales grew in the mid-single digits for the quarter. The growth reflects Strong demand for medical products and for pharmaceuticals and particularly in the dialysis business, along with continued strong performance in Home Solutions. This was partially offset by lower demand for respiratory diagnostic products and a decline in influenza vaccine sales. Our international dental merchandise sales were stable, increasing in the low single digits in constant currencies. If we look at the international equipment sales, here, we have strong growth. Value-added services sales grew modestly with sales growth driven by consulting services, which includes our eAssist revenue cycle management business. Now let's turn to the Global Specialty Products Group. As a reminder, this group includes implants and biomaterials as well as endodontics, orthodontics and orthopedic products. The third quarter sales reflected continued strength in implants and biomaterials as well as endodontics. We were particularly pleased with our implant performance, which built on last quarter's solid trends. Sales growth was in the mid-single digits in constant currency, and we believe we continue to gain market share across most implant markets, in particular, the ones where we have our strength. So where we service the market, we have resources on the ground, we believe we're doing quite well in those implant markets. Sales growth was led by our value segment. Both SIN and Biotech Dental implant systems performed exceptionally well, each posting double-digit gains. This was complemented by steady low single-digit growth in our premium brand, BioHorizons Camlog, demonstrating the strength of our broad portfolio of offerings. In the U.S., implant and biomaterials sales grew in the low single digits against a challenging prior year comparison. This growth, of course, reflects increased traction from our rollout of our BioHorizons Tapered Pro Conical implant and ongoing growth we achieved in the SmartShape Healers abutment . We expect growth in these products to continue. The Tapered Pro Conical product now represents approximately 1/3 of our U.S. implant sales. And it's important to understand that our customer feedback on this product offering is very, very positive. International implant sales increased high single digits, once again driven by strong double-digit growth across the DACH region and Latin America, reflecting strong patient demand and execution by our regional team, which continues to be very good. Our endodontics business delivered mid-single-digit growth for the quarter, benefiting from expanded sales reach through our U.S. distribution team. Orthodontics, while still a small component of our specialty products has stabilized, and we remain focused on improving the profitability of the orthodontics business. And finally, our Orthopedics specialty business posted solid double-digit sales growth. So looking ahead, we are encouraged by the momentum across our specialty business. Now on the Global Technology Group side. Here, we continue to accelerate our growth during the third quarter driven by strong growth in the adoption of our core practice management solutions business, particularly our cloud-based platforms, including Dentrix Ascend and Dentally as well as strong growth in our revenue cycle management solutions, including eClaims electronic billing and patient messaging. As a result, we are seeing growth in annual recurring SaaS subscription revenues as well as in transactional services. Practice management software sales growth was again in the high mid-double digits this quarter, driven by 20% year-over-year increase in the number of cloud-based customers, primarily from new Henry Schein One accounts. The whole cloud-based strategy for us is doing very, very well. We now have over 10,500 Dentrix Ascend and Dentally subscribers. Revenue growth also benefited from recently launched revenue cycle management solutions now being adopted by practitioners as they seek to drive revenue and improve operating efficiencies. There are also some exciting new developments in AI in our technology group. Yesterday, we announced a partnership with Amazon Web Services to integrate its generative AI technology with Dentrix Ascend and Dentally. Among the benefits are a real-time documentation system that uses AI to capture and summarize patient interaction, voice-activated charting, scheduling and communication tools to further personalize the patient experience and predictive business intelligence that automates claims validation and facilitates dynamic pricing tools. We believe this will be a significant addition to the Henry Schein One offering. And we expect these will help our customers drive incremental revenue and greater productivity in their practices. Let me now comment on the announcement we made earlier this year that I'll be retiring as CEO at the end of the year while continuing to serve as Chairman of the Board. As we discussed on our last conference call, the Board started a formal search process supported by a nationally recognized executive search firm considering internal and external candidates and remains on track to announce my successor by the end of the year. Of course, I remain committed to ensuring a smooth and seamless transition. With that, now let me turn over the call to Ron to review our third quarter financial results and discuss 2025 guidance. Ron, please. Ronald South: Thank you, Stanley, and good morning, everyone. As usual, today, I will review the financial highlights for the quarter and would like to remind investors that on our Investor Relations website, we also have included a financial presentation containing additional detailed financial information, including certain reportable segment information. Starting with our third quarter sales results, I will provide details on total sales, total sales growth as well as constant currency sales growth compared with the prior year. Global sales were $3.3 billion with sales growth of 5.2% compared to the third quarter of 2024, reflecting constant currency sales growth of 4.0% and a 1.2% increase resulting from foreign currency exchange. Acquisitions contributed 0.7% sales growth to the quarter. Our GAAP operating margin for the third quarter of 2025 was 4.88%, a decrease of 6 basis points compared to the prior year GAAP operating margin. On a non-GAAP basis, the operating margin for the third quarter was 7.83%, an increase of 19 basis points compared to the prior year non-GAAP operating margin. Operating margin improvement was driven by lower operating expenses as a percentage of sales, partially offset by lower gross margin. We continue to drive improved operational efficiency by integrating acquisitions, restructuring and executing our new value creation programs. Gross margin was down 56 basis points year-over-year, primarily related to product mix in our Global Distribution Group and in our Global Specialty Products segment. Sequentially, gross margins versus the second quarter declined primarily due to the seasonality of flu vaccine sales in our medical business. Of note, gross margins stabilized in the U.S. dental distribution business. Turning to taxes. Our effective tax rate for the third quarter of 2025 on a non-GAAP basis was 22.9%. The lower effective tax rate reflects the nontaxable nature of the remeasurement gain recognized in the quarter. This compares with an effective tax rate of 24.9% for the third quarter of 2024. We expect the effective tax rate to be in the 24% to 25% range in the fourth quarter, which is more in line with recent historical rates. Third quarter 2025 GAAP net income was $101 million or $0.84 per diluted share. This compares with prior year GAAP net income of $99 million or $0.78 per diluted share. Our third quarter 2025 non-GAAP net income was $167 million or $1.38 per diluted share. This compares with prior year non-GAAP net income of $155 million or $1.22 per diluted share. Foreign currency exchange favorably impacted our third quarter diluted EPS by approximately $0.01 versus the prior year. Our third quarter results include a remeasurement gain resulting from the purchase of a controlling interest of a previously held noncontrolling equity investment. That business has performed well since we made our initial investment. And as a result, we recognized a pretax remeasurement gain of $28 million this quarter. This compares to a pretax remeasurement gain of $19 million in the third quarter of 2024. The remeasurement gain in the third quarter of 2025 and its related tax treatment contributed approximately $0.23 to EPS, which is approximately $0.08 more than the remeasurement gain recognized in the third quarter of 2024. Adjusted EBITDA for the third quarter of 2025 was $295 million compared with third quarter 2024 adjusted EBITDA of $268 million, representing growth of 10%. Turning to our sales results. The components of sales growth for the third quarter are included in Exhibit A in this morning's earnings release. So I will provide the primary highlights of the main sales drivers for each reporting segment, starting with our Global Distribution and value-added services group, whose sales grew by 4.8%. Within this segment, U.S. dental merchandise sales grew 3.3% and U.S. dental equipment sales grew 1.2% with strong growth in digital equipment. We ended the quarter with a good equipment order backlog for fourth quarter sales. U.S. medical distribution sales grew 4.7% despite lower demand for influenza vaccines and respiratory diagnostic products. Our Home Solutions business had another strong quarter, growing over 20% on an as-reported basis and 6% excluding acquisitions. International dental merchandise sales grew 6.0% or 2.5% in constant currency, driven by sales growth in Brazil, Canada, Italy, Spain and Australia. International dental equipment sales were strong with 10.1% total growth with constant currency growth of 5.7%, driven by sales in Germany, the U.K., Canada and Australia. And finally, Global value-added services sales grew 3.3%, driven by consulting services. Turning to the Global Specialty Products Group. Sales grew 5.9% or 3.9% in constant currency. Our implant and biomaterial business experienced solid growth in the third quarter, including double-digit growth in value implants and low single-digit growth in premium implants. We achieved modest implant sales growth in a stable U.S. market due to a high prior year comparable and high single-digit sales growth in Europe, including low double-digit growth in Germany. We also had strong results in the Global Technology Group with total sales growth of 9.7% with 9.0% in constant currency. In the U.S., sales growth was driven by practice management software with double-digit growth in Dentrix Ascend as well as solid growth in our revenue cycle management business. Internationally, sales growth was primarily driven by double-digit growth in our Dentally cloud-based practice management solutions products. Turning to our restructuring program. From the restructuring program announced in August of 2024, the company recorded restructuring expenses of $34 million or $0.20 per share during the third quarter of 2025. We expect to achieve annual run rate savings of more than $100 million from that restructuring program. Additionally, from the value creation initiatives announced last quarter, we believe the opportunity should deliver over $200 million of operating income improvement over the next few years. Therefore, we are extending our restructuring plan, and we will continue to record restructuring charges in 2026 and 2027. We expect these initiatives to support a return to our long-term goal of high single-digit, low double-digit earnings growth. Regarding share repurchases, during the third quarter of 2025, the company repurchased approximately 3.3 million shares of common stock at an average price of $68.62 per share for a total of $229 million. At the end of the quarter, Henry Schein had $980 million authorized and available for future share repurchases, which includes $750 million that the Board of Directors authorized in September. As Stan mentioned, our expectation is to continue to execute buybacks at a similar pace to this past quarter. Turning to our cash flow. We generated strong operating cash flow of $174 million in the third quarter of 2025 and continue to expect operating cash flow to exceed net income for the full year. This compares with operating cash flow of $151 million in the third quarter of 2024. Our accounts receivable increased slightly during the quarter, in line with sales growth as third quarter revenues were approximately $100 million higher than the second quarter revenues. Let me conclude my remarks with a discussion of our updated financial guidance. At this time, we are still not able to provide without unreasonable effort, an estimate of restructuring costs associated with the restructuring plan for 2025. Therefore, we are not providing GAAP guidance. We are raising our 2025 financial guidance as follows. We now expect non-GAAP diluted EPS attributable to Henry Schein, Inc. to be in the range of $4.88 per share to $4.96 per share, reflecting stable markets and good third quarter financial results as well as the remeasurement gain realized in the third quarter. 2025 sales growth is now expected to be 3% to 4% over 2024. We expect a full year non-GAAP effective tax rate of approximately 24% to 25%, and we are maintaining our 2025 adjusted EBITDA guidance, which is expected to grow in the mid-single digits versus 2024 adjusted EBITDA of $1.1 billion. Our guidance also assumes that foreign currency exchange rates will remain generally consistent with current levels and that the effects of tariffs can be mitigated. Our 2025 guidance is for current continuing operations and acquisitions that have closed. With that, I'll now turn the call back to Stanley. Stanley Bergman: Thank you, Ron. I'd like to give you -- this is very unusual for our calls, a bit of a reflection on the past 30 years as a public company. Tomorrow, we will be ringing the opening bell at the NASDAQ Stock Exchange to celebrate our 30th anniversary since our IPO. That's 120 quarterly calls. The growth on the journey from IPO in '95 to today has been quite significant, with sales growth over this period growing at over 11% compounded average growth rate. From a market capitalization of $280 million, the value of the company has grown at almost 12% compounded average growth rate, including the value of the Animal Health business we spun off in 2019. So this 12% compounded annual average growth rate over this 30 years as a public company. Like all rapidly growing businesses, there have been some significant ups and downs along the way. When we merged Sullivan Dental and Meer Dental back in 1997, skeptics questioned whether we could integrate 3 distinct cultures and turn our business from a dental mail-order company to a dental full-service operation, including a field sales organization and equipment sales and service while integrating these 3 cultures. That year, we also acquired Dentrix Dental Systems, creating what some call a 3-legged chair, selling products, services and technology. Shortly thereafter, we had a dental and aesthetic recall issue. When our stock price fell, we chose the difficult path of continuing the journey of creating the world's largest full-service dental distribution and dental practice management software businesses. Within a short period of time, our customers saw the value of our one-stop shop of products and related services. Then came our bold expansion into Europe, which was accelerated in 2004 with the acquisition of Demedis, the recently spun out distribution business of Sirona. This created a global platform, which changed the level of discussion within the industry to a global one, new markets, new regulations, new cultures, new common values. When the 2008 financial crisis struck, we were forced to make difficult decisions while staying true to our values. We tightened our belt but kept investing in our people and our future. Fast forward to 2020, COVID temporarily closed down the dental market. There were empty offices, disrupted supply chains and uncertainty everywhere. But Team Schein adapted and using our world-class supply chain network played a key role with governments in supplying personal protective equipment, mainly masks as well as COVID tests to, of course, health care professionals, health care practices throughout the world. When the world reopened, we bounced back. The business was growing well until October of '23 when the cyber event hit us. For a moment, it felt like everything we built was vulnerable to an invisible threat. But once again, our team rallied, restored our systems and began the recovery. Some customers took a while to return, but appreciated our offering in the end. This is now behind us, not forgotten, but overcome by this incredible Team Schein, which is once again focused on driving sales. Each challenge made us sharper, more resilient and more united, which brings us to today's BOLD+1 strategy, which accelerates us into product development, innovation, expanding our digital capabilities, deepening customer partnership and our owned brands. All of this enables us to provide our customers with solutions to operate a more efficient practice so that our customers can focus on providing better patient care. Our recent results demonstrate the success of the strategy. In addition to the outstanding growth over the past 30 years, I'm particularly satisfied with the work of the company and all Team Schein members who have undertaken this incredible journey to make an impact on the profession and the communities we serve around the world. We have become a leader and a model with our work to create and strengthen public-private partnerships, whether it's in the profession or in the local markets that we serve or even on a global basis that have expanded access to care around the world. We have made a difference in enhancing global health preparedness and reinforced the vital link between oral and overall health, including, as I've said, access to care. This has been a big goal of ours and has driven our brand and driven our sales and related profits. In closing, I have huge confidence in the management team who are talented, motivated, working diligently to execute our strategies, including our value creation programs, which we provided further clarity today, and I'm quite in fact, very optimistic about where this will go and how this will drive up operating income and therefore, shareholder value. So before we take questions, let me thank all 25,000 Team Schein members around the world, our incredible Board, our suppliers, those investors that have confidence in us. I believe you will be well rewarded in the years to come. Thank you for supporting us for the past 30 years. I personally wish to thank those on this call that I've known for so many years, many analysts for decades, many investors since the beginning, it's been a true wonderful journey. It's been wonderful getting to know all those constituents that are active in supporting the office-based dental and medical practitioners. So with that in mind, let me turn over the call now to the operator to answer some questions. Thank you very much. And sorry for the add and lengthy words here, but I just -- 120 calls later. I think I should be able to make a couple of extra words. Thank you. Operator: [Operator Instructions] Our first question is from the line of Jason Bednar with Piper Sandler. Jason Bednar: Nice quarter. And Stan, it's been a pleasure working with you. Congrats on everything. I'll try to stick with the single question request, but I may bend the rule here with a multipart question. I wanted to focus on the comments you're making about future earnings growth. The third quarter performance might suggest you're back to posting better top line growth. It also seems like you're picking up some benefit from the restructuring program that's been ongoing. And then you have the first phase of the value creation targeting $200 million in EBIT benefit. When you say that you're returning to your long-term goal of high single to low double-digit EPS growth, I guess my question is whether that's a comment that's applicable to 2026. And that $200 million benefit is pretty large. I think it's larger than a lot of us were expecting today. Shouldn't that program alone get you in that EPS CAGR range before we even think about core revenue growth and capital allocation opportunities? Stanley Bergman: So Jason, thank you. And I think you're one of the 2 analysts that have the longest experience in our space and really know it. So thank you for sticking with Dental. I think Dental will present good rates of return to investors over time. So I think it's a good place to focus from an analyst point of view. But just I'll deal with the sales momentum. I think we're very comfortable now that the cyber incident is behind us. Our salespeople are out aggressively going after business. It's not a matter anymore of explaining what happened in terms of cyber incident. I think it's quite clear now that many in health care, unfortunately, have been through this, it's kind of almost normalized. And I think a lot of our customers have tried alternative options to save $0.01 here or there, but realize that the service we provide from a supply chain and all the value-added services makes it really worthwhile. So I would say the organization, we've got great management throughout, in particular, as it relates to sales, the sales management, the marketing management is great throughout the world. And so the momentum is very good. We're attracting excellent representatives to join our sales representatives. So the momentum is there, and I think that's indicative of the fact that we upped our sales guidance. Now Ron, as it relates to the financials, your thoughts. Ronald South: Yes. Certainly, Jason. With reference to 2026, as you can appreciate, this is a kind of a multiyear plan to deliver the $200 million in operating income improvements. Having said that, we do expect some operating improvements in 2026. So as we assess the plan and as we kind of work through the sequence that will be necessary to deliver that $200 million, we'll be able to determine the estimated impact and the estimated benefit that will be in 2026, and we'll reflect that in our 2026 guidance when we provide that in February. Operator: The next question comes from the line of John Block with Stifel. Jonathan Block: Stanley certainly echo everyone else's congratulations. A quick one for me. Ron, the midpoint of '25 EPS guidance came up by $0.05, if I've got that correct. The remeasurement was $0.08 above last year. So maybe if you can talk about what was embedded in the original guidance and clarify that. And then just taking a step back, and maybe this one is for you, Stanley. Just the quarter -- the third quarter was certainly better relative to 2Q. You mentioned some share gains, but I'm just curious, how much of that was market improving versus Henry Schein execution? And maybe any early comments on October? Ronald South: Okay. I'll start with the guide and Stanley, if -- you can do the back half. On the guide, John, with the remeasurement gain, there's a range of outcomes that we have to estimate there because until you actually complete the transaction, it's difficult to assess exactly how much we will be there. So it was slightly higher perhaps than what we would have expected, but was within the range of our expectations. So the $0.05 has a little bit of a benefit from that remeasurement gain, but it also reflects, I think, the momentum we feel like we have in sales growth. I mean if you look at year-over-year for us and strip out the remeasurement gain, strip out the $28 million in the third quarter on a pretax basis this year, strip out the $19 million on a pretax basis last year and take a look at our non-GAAP operating income, we did achieve about 4.5% operating income growth. And that's -- we think that's pointing us in the right direction. And so we're confident with the momentum we're seeing coming out of the third quarter going into the fourth quarter, and that's reflected in the revised guide for this year. Stan, do you want to do... Stanley Bergman: Yes. Thank you, Ron. John, -- and thank you also for following us in the dental industry for so long. The markets are, I would say, generally stable. Of course, there are some markets that are a little bit better, some that are not. But generally, the big markets are stable. I think units are pretty constant in the markets. It's most encouraging that this time now, we don't see pricing going down too much. It's pretty stable, I would say. I don't think customers are moving significantly to lower-priced national brands, there was a movement in that area. Having said that, our own brands have increased -- continue to increase now for the last few quarters. I think there's good momentum there. There is a little bit of tariff inflation, maybe 100 or so basis points in the United States, but not a lot. We've been able to talk to some manufacturers about absorbing the tariffs. Others -- for some products, we've switched to U.S. manufacturing, perhaps a few items, more than a few to markets where the tariffs a little bit less. So generally, the market is stable with a tad of inflation, 100% or so. Glove pricing has stabilized. Units are little bit up now for us. We are gaining net market share there. But generally, I would say, from a Henry Schein point of view, we believe we're gaining market share. And I'm talking about distribution now. Where it becomes a bit clearer is on the implants and related bone regeneration there, we believe we definitely are growing faster than the market. Maybe there's one manufacturer doing a bit better than us in certain markets that we are not focused on. But generally, I would say we are doing quite well in the implant field, where the market is relatively stable. And endodontics, relatively stable. We're gaining market share. On the medical side, -- generally, pharmaceutical side at Henry Schein has done well. I think it's stable. I don't think there's much in the generics to report this quarter for medical equipment, med-surg products relatively stable. There has been a decrease in testing and respiratory products. It's just not been -- people have not been very sick this season. But overall, I think the 4%, 5% we're growing in medical in the U.S. is indicative of the market with not a significant amount of inflation, and I think we are picking up market share there. And of course, on the software side, it's quite clear we're doing extremely well. And that's driven by our cloud-based system, systems growth, our various value-added products that we've added to electronic medical record system. And overall, I would say we're doing generally quite well. We've listed countries where we're doing a little bit better. And obviously, those are countries where it's largely market share growth because the markets throughout the world are relatively stable. Operator: Your next question is from the line of Elizabeth Anderson with Evercore ISI. Elizabeth Anderson: Stanley, congrats. Very excited for you and you've achieved so much in this company over the years. So I appreciate all of your work there. Maybe just going -- you talked about, I think, during the call, some of the stabilization in the gross margin in the distribution business. Ron, I was wondering if you could expand on that a bit and sort of talk through the puts and takes of that and sort of how you see that developing maybe in the fourth quarter and as we think about going forward? Ronald South: Certainly. So yes, on the U.S. -- specifically, I was making reference to the U.S. dental side. We did see stabilization in the margins there as Glove pricing stabilized. So that definitely helped and we returned to a more normal level of promotional activity in the quarter. So the Q3 gross margins in U.S. Dental are consistent with what we saw in the second quarter. And I would expect that to continue into the fourth quarter as well as largely driven by continued stabilization in PPE, specifically clubs because that is a very important product category. Within Medical, we did have a little bit of product mix there as influenza vaccine sales tend to be very strong in the third quarter relative to the rest of the year, even though they were down year-over-year, and that is a lower margin product. Also, medical saw very good sales growth in their pharmaceutical products in the quarter, and those tend to be a little lower margin than the overall margin in medical. But very pleased with the sales growth we got in medical and believe we can continue to see that continue into the fourth quarter. Stanley Bergman: Firstly, thank you, Elizabeth, for your comment. But Ron, if you could answer -- I forgot to answer John's question on October. Ronald South: Yes, certainly. And with reference to October, we continue to see, I think, the similar trends to what we saw in the third quarter. As we work through October and looked at the results, we've seen a -- there may have been some forward buying a little bit as people are trying to get out in front of tariffs, but we didn't really see that impact October negatively for us. Medical will be -- often is driven by the timing of the respiratory season. So we're anticipating some improvement in our diagnostic kit sales in the fourth quarter, depending on the timing of the respiratory season as well. And on the equipment side, while we had very good in the third quarter, digital equipment revenues -- our traditional equipment revenues were relatively flat or down a little bit in the U.S., mostly just due to the timing of some installations, and we're very comfortable with the equipment backlog we saw. We're beginning to see some of that benefit in October and kind of running into the fourth quarter as well. Operator: Our next question comes from the line of John Stansel with JPMorgan. John Stansel: Congratulations, Stanley, on all your accomplishments as CEO across the career. Just want to quickly talk about Specialty Products operating profit. I appreciate it was up significantly year-over-year, but with the $28 million remeasurement gain, it looks like it would be, call it, flat to down stripping that out. And I think you've highlighted some solid top line trends that you're seeing across implants. Can you just talk about what you're seeing on the margin side of the Specialty Products Group and what might be driving that? Ronald South: Certainly, John. I think a couple of things in the year-over-year on the specialty side. Yes, you're right, we do have to look at it kind of ex the $28 million remeasurement gain. Last year, we did have a relatively strong quarter on the U.S. implant business. That did develop a little bit of a strong or difficult comparable for them. But also what we are seeing in the market is -- and we mentioned this in the prepared remarks that the value implant growth was in the low double digits, while premium implants were really kind of growing in the low single digits. And we do get better margins on those premium implants versus the value implants. So while it's great to see the growth in value, it does dilute that margin a little bit. And I think that the combination of the comp to the prior year and a little bit of a dilution in that gross margin is creating the dynamic that you're referring to there. Operator: Our next question comes from the line of Allen Lutz with Bank of America. Allen Lutz: Stan, congrats again on the retirement. I appreciate all the time and insights over the years. A question for Ron. Just a follow-up on that last question around the specialty growth trajectory. As we think about the lower, I guess, gross profit dollar contribution from value implants relative to premium, can you talk about what you need to see in the model for EBIT dollars within that specialty business to go up in 2026? Not looking for guidance on 2026, but how does the model have to behave in order for that part of the business to grow next year? Ronald South: Well, I mean, I think, Allen, the obvious answer would be greater growth in the premium implants. But I do think that continued growth in value implants can give us gross profit dollar growth ultimately and then recovery -- a slight recovery in the market for premium. would also benefit that. Endodontic sales, which is also within that specialty area, continue to be steady and should continue to provide some gross profit dollar growth. And I would say that the -- within the orthodontics, we have made some significant operating changes there, and I would expect that to begin being more of a contributor to some growth in 2026 as well, albeit it's still a small part of that segment, but I think it can provide some greater contribution to gross profit growth. Stanley Bergman: One other thing, thanks. There's a lot of work going on in that group on value creation, consolidating front office procedures, consolidating facilities, consolidating manufacturing. That has all been planned over the last couple of years being executed. And I think we'll see some good results in '26. In particular, also, Ron mentioned the orthodontics. I don't think we're going to invest heavily in marketing of orthodontics. It just doesn't give us the traction that I think we can get by using those dollars and investing in other parts of the specialty area. So we have some orthodontic products. They sell nicely through the Henry Schein sales force, but we're reducing our focus on orthodontic field sales force. And generally, these various consolidation concepts I mentioned, this should all drive up operating income on the specialty product side. Operator: Our next question is from the line of Jeff Johnson with Baird. Jeffrey Johnson: Stanley, thank you for the walk down memory lane there in your prepared remarks. It's been a heck of a run. And obviously, we all wish you nothing but the best. Ron, I was hoping maybe -- or Stanley, hoping I could maybe ask kind of a phasing question. I know you're not really talking about 2026 at this point. But in that $200 million now in op income cost savings, are you expecting that to be, one, a net number then inclusive of any kind of reinvestments back into the business, number one? And number two, should we split that over the next 3 years, kind of $70, $70, $70 million something in that ballpark? And on top of that phasing question, maybe just the remeasurement gain, that $28 million, can we expect something similar next year? Or should we not have something like that in our model next year just as we think about the year-over-year comparable there? Ronald South: Jeff, yes, thanks for the question. I think that I'll start with the $200 million. And as we said, this is a multiyear plan. I don't -- we're not in a position yet to kind of commit to what we expect the phasing of that to be. As you've inferred, it will be phased over a period of time. And we are currently assessing what we believe the 2026 benefits may be from these value creation initiatives as we get started on them as -- and many of them are actually kind of in process now, those initiatives, right? So we'll be able to have a more accurate assessment of what we think the '26 benefit will be, and we'll reflect that within our 2026 guidance. With reference to a remeasurement gain, what I can say is that they've been a regular part of our business, and they've popped up in the last few years in our results. There's always further opportunities to invest in these types of affiliates, but we're not expecting anything significant in the near future. So to the extent that in 2026, if we believe there's not going to be something significant, we will make sure that, that is clear when we provide that guidance. If we believe that there is something out there, we will try to provide some color as to what magnitude that could be. But the -- I would expect it to be a -- it has to be an integral part of our guidance when we provide that. And then with reference to the $200 million, is it net? I mean, as we've said in the press release, this is $200 million of operating income improvement. So yes, it is net. There will be some additional investment that will be necessary that we think we can do with the cash we generate from these value creation initiatives. So there will be some areas that we have to invest in that might create some costs. But over time, we think that this is a $200 million net opportunity for us to the operating income improvement. Operator: Our next question is from the line of Michael Cherny with Leerink Partners. Michael Cherny: Yes, Stan, not a ton more to add there, but I appreciate all the time over the years. Maybe if I could just think about the market a little bit again. You talked about the share gains. Obviously, your biggest competitor has had a change in structure, change in management. As you think about the pathway of getting back to a normalized growth rate, what are the assumptions for share gains on the merchandise on the equipment side going forward? Stanley Bergman: So I don't know if -- we haven't really given guidance on assumptions for '26. So I think -- I mean, unless Ron has something specific, I don't think that's... Ronald South: No. I mean the only thing I would add is we've -- we're confident we've been taking some share over a period of time, and we're confident that some of the promotional activity that we deployed earlier this year has assisted in some of the market share gains that we believe we had in the third quarter. And so it's simply a matter of continuing with that type of activity in a thoughtful way such that we can assume some level of market share gains. But at this point in time, if we think it's a relevant assumption when talking about our 2026 guidance, we can provide more color there. Stanley Bergman: Thanks, Ron. Having said that, we did give guidance on sales growth for this balance of the year. I think it's implicit in there that we feel strength in the business. Really, when you're in one of these cyber incidents, you don't realize, systems were up and running, et cetera, but you don't realize what work has to get done to get the customers back in the door because some of those customers tried alternate sources. Maybe they got a better deal. Maybe there was a program that was offered, maybe Coke at the end of the aisle was at a lower price. I think a lot of that is behind us. Our sales organization is highly motivated right now, dental, medical in the United States abroad, they've got their systems back. There's a lot of tools they've gotten that were promised and worked on before the cyber incident that are there. They can see that the GEP, the henryschein.com system is working in a number of parts of the world. There's huge enthusiasm with that. And generally, we're getting some salespeople that are knocking on our door from our competitors, just not one, but multiple competitors. And generally, and I'm talking about distribution now, the distribution part of Henry Schein has gained momentum. It's back in its stride. We're winning, we're fighting. Our equipment business is solid. Our consumable business is doing quite well, units, pricing. We've got a great offering. And generally, the move amongst our sales organization is great, both in the field, the telesales group, which was largely focused on customer service for at least 1.5 years is back aggressively selling. Our e-commerce services generally, that group is doing very well. The whole social media group is doing well. And I might add, our relationship with our major suppliers is good. Our suppliers want to work with Henry Schein. And then if you put -- you add to that the -- in the leveraging, leveraging relationships amongst our different businesses, I think you'll see the programs are working. We have a great group that is just focused now on our owned brands, products, specialty products that we're selling through distribution. That group is doing very well, the [ Dental ] part, the Clinician's Choice part, the bone regeneration part. There just is a lot of good momentum in the business. And it sort of started getting better a couple of quarters ago. We gave that push of the promotion last quarter. That's now stuck. And generally, I think the momentum is good, and that's reflected in the increase in sales guidance that we've given. And I can't see why that kind of momentum wouldn't go into '26, although I don't think we should be talking about specific numbers for '26 on this call. Operator: Our next question is from the line of Kevin Caliendo with UBS. Kevin Caliendo: And Stan, it's been a pleasure to get to know you over these past 20-plus years. I really appreciate everything. My question is around the Heartland relationship, how -- where we stand with that? It was sort of a key debate a couple of months ago and drew some worry from investors. I guess I just want to sort of -- if there's any update on that relationship, if it's going to continue at the same level? And I guess to that point, how successful has the company been with been able to push through the higher costs related to tariffs and things if you can maybe give us an update on that. Stanley Bergman: Thanks, Kevin. Thanks for that question. Thanks for your good wishes. I don't think we have ever spoken about specific DSO or even IDN relationships. I don't think that's something we should talk about when we gain account, when we lose an account. We never talk about that. Maybe we did 10 years ago, but we stopped doing that. Our relationships with our DSOs are generally quite good. In fact, I think there are DSOs, specifically the regional ones that are moving over to us. And we definitely have something that others don't have. The supply chain is superb. Supply chain solutions are, I believe, and I'm sure many will tell you the best in the industry, both in terms of dental and medical, the value-added services, the combination of software, the DSOs that get the consumables from us, their software from us, those that are also have moved to our implant business. In fact, we've just gained another decent movement from a DSO into the implant arena. All of this, you put this all together, and we offer a very good offering and actually, I think the most compelling offering. So I don't think we will talk about any specific customer moving one way or the other. As analysts, of course, your job is to try to find out what's going on, but I don't think it's going to come to us, it can't. It's not right. So I'm sure you'll hear through the marketplace about any of the specific DSOs, but generally, we feel very comfortable with our business. I can't imagine any DSO saying to Henry Schein, you know what, we're not going to test your pricing. We want better pricing. They all -- which is standards what they do for looming. And our job to go into the marketplace to get the best pricing we can for our customers. That's our job. As it relates to the tariffs, generally, we've been able to find a way in which we can move product locally. We can negotiate with the manufacturer, find alternative countries. And there's been somewhat of an increase, I think, 1% or so of inflation here. I would say a lot of that has to do with tariffs, not much to do with general pricing increases. So generally, it's sticking. And it's not that our -- that our customers think we're trying to take advantage of them. They know we're doing the best we can to get the best pricing, best pricing options, moving to private brand if the national brands are insisting on increasing pricing. So I think overall, it's working okay at this point. I think there's been some reduction in tariffs in a couple of important countries. And I think -- I mean, it's hard to tell where this is going to go. But I think generally, we're doing okay on the tariff side at the moment. Operator: We have time for one last question coming from the line of Brandon Vazquez with William Blair. Brandon Vazquez: Stan, I'll echo everyone's congrats on a great career at Henry Schein. I wanted to ask on the update around KKR and the Board's approval for KKR to take an even bigger stake in the company. Just curious if you could talk a little bit about the impetus of that decision? What kind of conversations are happening there? And should we think about as KKR continues to take bigger and bigger slugs of the equity ownership here potentially, does the partnership become a little more -- I don't know the right word for it, but maybe a little more intimate. Are you guys working a little bit closer to the strategies on a go-forward basis for Henry Schein see more meaningful changes as they become a bigger and bigger shareholder of this company? Stanley Bergman: Thank you, Brandon. Thank you. You guys have followed us since the day we went public, in fact, it took us public. So thank you. As it relates to KKR, we didn't approach them. They came to us I think they've gained an appreciation of the company. They studied the dental space for, I don't know, for a long time, arguably over a decade. They know a lot about the space, the consumables, the providers, the software and value-added service providers. I think they like our company. So they came to us and asked that they could go up. Our Board had a discussion. Our Board ensured that -- the Board was fully aware of all the factors involved in taking this number up to 19.9%. And they made a decision. I think the decision was based on all of substance, not on any particular promises or anything from Henry Schein to KKR, was a pure decision they made on the value they see within the company and the future and the potential. KKR's Capstone Group did work with us on selecting the 2 consulting firms. We've been involved in discussions with our management team. Andrea Albertini and Tom Popeck are running the value creation project. KKR is aware of the project. They've given us some input on best practices. They helped us also with some of the indirect spending. They have some good relationships with providers of services that has helped us. So I would say it's a very good relationship. The 2 members on the Board are very active. One is experts in health care. The other one understands the dental market very well, expert on various kinds of supply chain methodology, et cetera, and they've been very helpful. So I would say it's been a good relationship and things have worked out quite well. That's why they asked to increase their position in Henry Schein. And our Board, as I said, discussed that and made the decision to approve that the request to go up to 19.9%. So Graham, we are done -- well, let me just end by saying, I think you've heard to my voice, to my words, I think the company is in very good shape. We have a great team in place. The team is motivated. The team is winning. The management team in each of the areas of responsibility, the business units, the functions, good management all around. And I think the BOLD+1 plan with the addition of the value creation program, which centers around simplicity for a lot of businesses. We've advanced in a lot of businesses, how do we make the business more simple? How do we take out costs? How do we manage our margins in the best way possible? This is all a supplement to the BOLD+1 initiative or refinement as we're calling it internally. So I think we've got a good plan. We've got a good road map. We've got the team to execute on this. Obviously, there will be some ups and downs as they always are in any business. But I think this team is highly enthusiastic and ready to continue to advance the business in accordance with the plans, BOLD+1 and this value creation program that we've added. So with that in mind, I thank everyone for the support over 30 years. It's been a great experience. I've enjoyed getting to know the Wall Street analysts, the community, the investors. There have been a lot of great strategic investors over the years. There's been those that have invested short term and then exited and come back. These are all the components of Wall Street. I've enjoyed understanding how this works. I've learned a lot. The team has learned a lot. And I look forward to seeing people at conferences in the future, although not as Henry Schein CEO, but as a keen follower of what goes on in health care. So thank you all for your interest, and appreciate everything. Tomorrow, you can see us on -- I think, on the NASDAQ media for the opening of the stock exchange or the NASDAQ. And I appreciate everything. Thank you. Thank you. Thank you. Operator: This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.
Operator: Good day, and welcome to the Ingredion Q3 2025 Earnings Call. [Operator Instructions] At this time, that today's conference is being recorded. I would now like to hand the conference over to your speaker, Mr. Noah Weiss, Vice President of Investor Relations. Please go ahead. Noah Weiss: Good morning, and welcome to Ingredion's Third Quarter 2025 Earnings Call. I'm Noah Weiss, Vice President of Investor Relations. Joining me on today's call are Jim Zallie, our President and CEO; and Jim Gray, our Executive Vice President and CFO. The press release we issued today as well as the presentation we will reference for the third quarter results can be found on our website, ingredion.com, in the Investors section. As a reminder, our commitment -- our comments within the presentation may contain forward-looking statements. These statements are subject to various risks and uncertainties and include expectations and assumptions regarding the company's future operations and financial performance. Actual results could differ materially from those estimated in the forward-looking statements, and Ingredion assumes no obligation to update them in the future as or if circumstances change. Additional information concerning factors that could cause actual results to differ materially from those discussed during today's conference call or in this morning's press release can be found in the company's most recently filed annual report on Form 10-K and subsequent reports on Forms 10-Q and 8-K. During the call, we also refer to certain non-GAAP financial measures, including adjusted earnings per share, adjusted operating income and adjusted effective tax rate, which are reconciled to U.S. GAAP measures in Note 2 non-GAAP information included in our press release and in today's presentation appendix. With that, I will turn the call over to Jim Zallie. James Zallie: Thank you, Noah, and good morning, everyone. The third quarter was more challenging than we expected, with net sales and adjusted operating income down more than our previous guidance. Despite Q3's results, we are, however, confident that Ingredion's diversified business portfolio will deliver another full year of operating income growth. As we discussed the performance in the quarter, we will highlight the progress we are making to improve upon recent and near-term operating challenges while navigating with agility, pockets of economic weakness and uncertainty by remaining focused on driving innovation and operating excellence to deliver profit growth. Turning to the next slide. Let's start with a summary of our net sales volume growth for the quarter. Texture & Healthful Solutions delivered a solid performance with 4% sales volume growth across U.S., Canada and EMEA, including double-digit sales increases for clean-label ingredient solutions. Growth in foodservice channels globally as well as for convenient grab-and-go offerings at retail drove increased demand for our batter and breading ingredients in the quarter. Additionally, our solutions portfolio continues to grow, outpacing the segment's net sales growth, thanks to increased demand for specialty blends that help customers address affordability, eliminate artificial ingredients and simplify labels. In Food & Industrial Ingredients, LatAm. The main driver of the sales volume decrease came from softer brewing industry volumes with customers attributing it to cooler, wetter weather for some of the seasonal decline. More broadly, weaker LatAm demand became increasingly evident as higher inflation and interest rates impacted consumer spending. Our Food & Industrial Ingredients U.S./Canada segment experienced a 5% decline in net sales volume, largely due to our inability to meet customer demand requirements from continued production challenges at our Chicago plant as well as overall softness in beverage and food volumes. In contrast, we saw increasing volume demand for industrial starches to our major corrugating and paper and packaging customers. Moving to the next slide. I would like to take a moment to elaborate on the primary factor contributing to our Food & Industrial Ingredients U.S./Canada performance, and that is the ongoing operational challenges at our Argo facility outside of Chicago. For background, Argo is one of the largest plants in our network and accounts for more than 40% of the segment's net sales. Following a fire in our feed dryer at the end of quarter 2, which halted the entire plant's production we faced several challenges while plant operations recovered during the third quarter. This quickly and directly contributed to tighter inventories being available for incremental sales. Given the size of the volumes that move through this plant on a daily basis, we estimate that the cumulative operating income impact to the segment was approximately $22 million across both the second and third quarters with $12 million of that operating income impact being felt in quarter 3. Production rates remained challenged in July and August before improving in September. In quarter 4, our team remains focused on stabilizing production and rebuilding inventories. Also in the quarter, we experienced the overall market demand for sweetener products weakening in July and August before bouncing back in September. We believe many beverage and food customers were experiencing slowing demand as a result of price increases that were put into effect to offset anticipated rising packaging costs, particularly from aluminum and tin plate. Turning to the next slide, our Food & Industrial Ingredients, LatAm segment saw a decrease in operating income this quarter, down 11% versus last year. The reduction is primarily attributable to the strategic realignment of our brewing customer mix as well as lower brewing industry volumes. We are making good progress strategically diversifying our customer and product mix in LatAm towards higher-margin sweeteners that serve food and confectionery customers. We will continue to repurpose our grind to improve the consistency of profit margins over time. Beyond what we believe was a transitory impact from the brewing segment in the quarter. We are monitoring softer consumer demand in general across LatAm, which became increasingly evident in quarter 3 as higher inflation and rising interest rates weigh upon GDP growth and consumer spending. Turning to the next slide. It is important to reinforce the fact that we have made considerable progress to expand the company's gross margins over the last 3 years through a combination of service differentiation, operational excellence and solutions selling. We are focused on not only sustaining the performance but steadily improving upon it by executing against our strategic pillars to drive mix improvement and enterprise productivity. Let me now update you on progress against our 3 strategic pillars. To start I'd like to highlight our focus on driving profitable growth, particularly within Texture & Healthful Solutions segment where we continue to expand our leadership in clean label ingredients and solutions globally. North America and Asia Pac experienced double-digit clean label growth this quarter, reflecting a growing demand from customers and consumers for greater transparency and simplicity in ingredient labeling. This trend has become mainstream with both private label and CPG consumer -- customers reformulating products at an accelerated pace. Additionally, demand for protein isolates remains robust as evidenced by our record sales for protein fortification during the quarter and the fact that we are already more than 50% contracted for isolates for 2026. Our high-value pea protein isolates offer notable functional advantages and benefits from labeling preferences compared to other protein sources across various food categories with our new product introductions being preferred for their taste and overall quality. Moving now to our second pillar, innovation. Our focus on integrated solutions continues to favorably impact Texture & Healthful's results with solutions-based sales growing at a faster rate than the overall segment's net sales growth for the quarter. Furthermore, as food inflation -- food inflation pressures persist, affordability remains a key catalyst for recipe reformulation across our customer base. Brands are actively seeking our assistance with cost-effective ingredient solutions that allow them to maintain quality and shelf life while reducing input costs. Our latest innovations in egg and cocoa replacement solutions delivered cost savings, improved functionality and enhanced flavor profiles. By enabling customers to reformulate recipes without compromising taste or texture, we're helping them differentiate their products and respond quickly to market trends. As consumer demand for natural sweeteners continues to increase, Ingredion is advancing development partnerships for sweet proteins and novel customized clean taste solutions containing stevia and sweet proteins. We believe this will further strengthen Ingredion's position as a leader in sugar reduction innovation. Lastly, I'd like to comment on our operational excellence pillar. Our operational focus has translated into meaningful benefits at our Indianapolis facility, where we've taken steps to maximize asset utilization across our starch network. By modernizing the plant layout and reengineering slurry transfer systems, we've created flexibility to run specialty starch operations in a more integrated manner with downstream operations. This means fewer bottlenecks, better load balancing and improved throughput. These changes reduce inventory requirements, enhance service levels and deliver meaningful savings, all while better positioning the plant to support future growth for texture solutions. Additionally, we feel confident we will surpass our $50 million run-rate Cost2Compete savings target, and we'll realize more than $55 million in run-rate savings by the end of 2025. This achievement reflects a relentless focus on operational efficiency and disciplined cost management across the organization. By optimizing processes, eliminating waste, leveraging technology and driving continuous improvement initiatives, we've been able to unlock significant savings. Last month, we hosted our first ever Supplier Day, bringing together strategic partners from across our supply chain globally in the pursuit of shared value creation. This was a valuable forum for collaboration, knowledge sharing and strengthening of relationships. The event created increased awareness and understanding by our suppliers of our business and is already leading to new opportunities for value creation for us and them. Lastly, in October, we held a Global AI Forum for our entire employee base to accelerate adoption for the responsible usage of AI. Our AI priorities for value creation are focused on enhancing the customer experience, driving supply chain and manufacturing efficiency and accelerating innovation. Now I'm pleased to hand it off to Jim Gray for the financial review. Jim? Jim Gray: Thank you, Jim, and good morning, everyone. Moving to our income statement. Net sales for the third quarter were $1.8 billion, down 3% versus prior year. Gross profit dollars decreased by 5% and with gross margin slightly lower at 25.1% as volume headwinds are partially offset by lower input costs. Reported and adjusted operating income were $249 million and $254 million, respectively. Turning to our Q3 net sales bridge. The 3% decrease was driven by $39 million in lower volume and $30 million in lower price mix, offset partially by $15 million of favorable foreign exchange. Moving to the next slide. We highlight net sales drivers for the third quarter. Texture & Healthful Solutions net sales were up 1%, driven by sales volume growth of 4% and foreign exchange favorability of 2%, partially offset by price/mix. Food & Industrial Ingredients LatAm reported a net sales decrease of minus 6%, largely attributed to a reduction in sales volumes, which was mainly influenced by weaker brewing demand as well as slower macroeconomic growth across the segment. Food & Industrial Ingredients U.S./CAN net sales declined 7%. The sales volume decline of 5% was impacted by the extended recovery time to normalize production at our Argo plant as well as softness in sweetener volume demand. Now let's turn to a summary of results by segment. For the third quarter 2025, Texture & Healthful Solutions net sales was up 1% and operating income was up 9%, equating to a 17.4% operating income margin, significantly higher than prior year. This result has been driven by lower raw material costs, as well as favorable volume impact, partially offset by unfavorable price/mix. In Food & Industrial Ingredients, LatAm, net sales were down 6% versus last year. Operating income declined to $116 million with an operating income margin at 19.8%, holding strong. Moving to Food & Industrial Ingredients, U.S./CAN, third quarter net sales were down 7%. Operating income was $81 million, down 18% or $18 million. driven by production challenges at our Argo plant and lower-than-expected beverage and food volume demand. As we stated earlier, we estimate that this disruption has had a $12 million operating loss impact on the quarter's results. For the all other group of businesses, the 17% increase in net sales was driven by increases across the board. Operating income was flat versus the prior year as protein fortification gains were offset by lower profits from the Pakistan business. Turning to our earnings bridge. On the top half, you can see the reconciliation from reported to adjusted earnings per share. Operationally, we saw a decrease of $0.31 per share for the quarter, driven by a decrease in operating margin of $0.22 and a volume of minus $0.12, partially offset by foreign exchange of $0.03 per share. Moving to the change in nonoperational items. We had an increase of $0.01 per share. Shares outstanding had a favorable impact of $0.05 and a lower tax rate equivalent had a $0.02 per share impact, partially offset by higher financing costs of minus $0.06 per share. Shifting to our year-to-date income statement highlights. Net sales for the first 9 months were approximately $5.5 billion, down 3% versus prior year. Gross profit dollars grew by 4% and gross margin has increased to 25.6%, up 180 basis points. Reported and adjusted operating income were $796 million and $800 million, an increase of 10% and 4%, respectively. Turning to our year-to-date earnings bridge. The result is an increase of $0.58 per share. Operationally, we saw an increase of $0.36 per share for the 9 months. The increase was driven by an operating margin increase of $0.61 as well as favorable other income of $0.14 per share, primarily from our Argentina joint venture, and these were partially offset by volume of minus $0.38. Moving to the change in nonoperational items. We had an increase of $0.22 per share, primarily driven by fewer shares outstanding of $0.15 as well as lower financing costs and tax rate of $0.03 per share each. Moving to cash flow. Year-to-date cash from operations was $539 million which includes an investment in working capital in the current year. Year-to-date capital expenditures net of disposals were $298 million. The company expects to invest in organic growth initiatives that provide a significantly higher return than our cost of capital. Lastly, we have repurchased $134 million of outstanding common shares, exceeding our share repurchase target of $100 million. We have paid out $157 million in dividends and increased the dividend per share to $0.82 for the quarter, which represents our 11th consecutive annual dividend increase. Now let me turn to our updated outlook for the year. For the full year 2025, we anticipate net sales to be flat to down low single digits with our outlook reflecting lower price/mix due to pass-through of corn costs and an updated view of the effects of foreign exchange. We anticipate that adjusted operating income will be up low single digits to mid-single digits for the full year. Our 2025 financing cost estimate will now be in the range of $35 million to $40 million, reflecting year-to-date foreign exchange impact. For the full year 2025, we expect a reported effective tax rate of 25.5% to 26.5%, and adjusted effective tax rate of 26% to 27%. We are narrowing our full year adjusted EPS range to be $11.10 to $11.30. Given the macroeconomic softness evident in the third quarter for Latin American economies and the incremental issues that we absorbed related to F&II U.S./CAN segment's Chicago plant outage. We anticipate our 2025 cash from operations will now be in the range of $800 million to $900 million. Our guidance reflects current tariff levels in effect at the end of 2025. In addition, this guidance excludes any acquisition-related integration or restructuring costs as well as any potential impairment costs. Turning to the full year outlook for each segment where we have made updates. For Texture & Healthful Solutions, our estimate for net sales is to be up low single digits. We have raised our operating income profit growth to now be up high double digits. For F&II LatAm, we have lowered our net sales outlook to be down mid-single digits and operating profit to be flat to up low single digits. For F&II U.S./Canada, we have now lowered our outlook for net sales to be down mid-single digits and operating income to be down low double digits based upon operating challenges. That concludes my comments, and I'll turn it back over to Jim. James Zallie: Thank you, Jim. As we conclude today's call, I want to emphasize the focus we have on our operational and strategic priorities. Clearly, we have a near-term focus on improving productivity at Argo and rebuilding inventories and driving sales recovery in our U.S. Food & Industrial Ingredients segment. Complementing this focus on operational excellence, the entire organization is committed to exceeding its Cost to Compete target, delivering $55 million of run rate savings by year-end. We will continue to deploy capital towards organic growth opportunities to expand and strengthen our Texture & Healthful Solutions portfolio. Lastly, we remain committed to returning capital to shareholders through share repurchases. As of the end of September, we exceeded our full year target by purchasing $134 million worth of shares and have increased our 2025 share repurchase target to $200 million, underscoring our commitment to maximizing shareholder value and reflecting our confidence in the future, we are announcing that our Board has authorized a new share repurchase program of up to 8 million shares over the next 3 years. Now let's open the call for questions. Operator: [Operator Instructions] And our first question will come from the line of Andrew Strelzik with BMO Capital Markets. Andrew Strelzik: I wanted to start on the demand environment, and I apologize if you covered some of this in the prepared remarks that I missed. But I guess I'm just curious that you're seeing that evolve. It certainly seems a bit softer than anticipated. And so I guess, are you seeing it continue sequentially to slow? Or are you seeing any signs of stabilization? In the release, you mentioned some customer mix management. I was hoping you could maybe elaborate on that as well. James Zallie: Yes, Andrew I'm going... Operator: Ladies and gentlemen, please remain on the line. Your conference will resume shortly. Once again, ladies and gentlemen, please remain on the line. Mr. Strelzik, I just want to make sure that you can hear me. Andrew Strelzik: I can, yes. Operator: Speakers? James Zallie: Yes. We're back. Operator: Okay. You're loud and clear, and we still have Andrew on the line for his question. James Zallie: Okay. Andrew, I'm going to start back with the response related to what's happening in LatAm and with Mexico and Brazil, I think that's where the line got cut off. Is that correct? Andrew Strelzik: Yes. I mean the question was broadly about the demand backdrop and if you're seeing any signs of stabilization, but then there was the comment. I think it was on LatAm about the mix management, customer mix management. I was hoping you could elaborate on. James Zallie: Right, right. Yes. So in Brazil and in Mexico, we're seeing inflation, elevated prices that are impacting the consumer. Interest rates are relatively high versus history and we do believe that's impacting consumer spending and confidence. Mexico GDP is forecasted to only grow 0.5% and Brazil's GDP is forecasted to grow only 2% It's just noteworthy to remind everyone that food spending represents approximately 20% to 30% of disposable income for the LatAm consumer. And thus, when we see softness and thus, we're seeing the cumulative impacts related to softness in beverage and multiple food categories. Moving to the United States, we saw demand for sweeteners in particular decrease in July and August. That's what the industry data showed. It was a pretty notable drop in July and August, but it did recover nicely in September. So -- but for the quarter, July and August was impacted. And of course, we, at the same time, in those months, had issues related to Argo depletion of inventories inability to sell, but things picked up in September. And again, as it relates to Texture & Healthful, we didn't see that kind of decline. In fact, the U.S. market contributed most to volume, net sales and operating income growth, but all 3 geographies grew operating income high single digits for Global and Texture & Healthful. Hopefully, that answers the question. Andrew Strelzik: It does. And as a follow-up, I was hoping you could drill down a little bit more on the Texture & Healthful Solutions segment. The change in the outlook there. Is that -- what kind of is the biggest driver of that piece? Is it more what you saw in 3Q? Is it more what your expectation is for the 4Q? I was just looking for a little more color on the guidance change there. James Zallie: Jim Gray, I'm going to let you take that . Jim Gray: Andrew, I mean, I think that as we look at Q4, we have from prior years, kind of a slightly easier lap. But I think more importantly, when we look across Texture & Healthful, it's really a diversity of customers. And so we have some of our largest customers that are in foodservice. We also have customers that are into private label as well as kind of branded CPG. So when affordability and value against either the U.S. or the European consumer, we're already benefiting a bit from what that sort of food service traffic and food service ticket looks like as well as whether it's store brands or private label brand. I think we're seeing a nice balance of our volume demand across all of our customers. And so we feel like that's a well diversified and very solid business right now that has some growth right in front of it. James Zallie: And we're also benefiting from a focus with a well-defined definition for solutions selling, where we went through a complete retraining of our go-to-market sales and technical service force. And we're into the second full year of, I would say, more advanced solution selling than we've ever had in relationship to selling differentiating ingredients, customized blends and solutions all around consumer benefit platforms around affordability, health and wellness, which are really aligned to the trends. And that's why I think we're seeing the strength in our clean label solutions growth, which again grew double digits in the U.S. and Asia Pac. Operator: One moment for our next question. That will come from the line of Kristen Owen with Oppenheimer. Kristen Owen: Jim, I did want to follow up on the F&II businesses. You gave some helpful color on Argo in the prepared remarks. But can you just help us unpack how much of the volume was sort of this macro weakening that you addressed in the first question, how much of that was sort of these company-specific events like the Chicago plant or this transition in your brewery business in LatAm? And I'm just trying to think how much of those onetime items kind of roll off in the fourth quarter and what sticks with that? If we could start there and then I'll have a follow-up. Jim Gray: Kristen, can we just clarify which segment? So U.S./CAN F&II first. James Zallie: Yes. Let's take -- why don't we take U.S./CANADA F&II first, Jim, and then maybe I'll take the LatAm F&II. Jim Gray: Yes. Okay. Is that okay, Kristen. Yes. Kristen Owen: Yes, I was hoping to get both. Jim Gray: So I think with regard to U.S./CAN F&II, so first of all, as Jim mentioned on the prerecording that the feed dryer is very much at the end of the process. When that goes down, the entire plant has to shut down and so then as we looked at those, we just -- we wanted to bring up the full recovery of the plant. And so we had a couple of impacts in terms of you have some lower value from your coproducts that you got to clear out. You also had some periodic halting of the grind, which impacted a variety of the refinery processes. And so we didn't have as much volume available. We also had to absorb some fixed costs and then as we've got running to kind of normal production rates in September, you can really put a kind of cap on those costs, and that cap is around $12 million impact to Q3. Don't really anticipate that, that's going to repeat, right? I mean, we want to work on reliability. We think about our planning as we go forward. And obviously, we plan to run at normal to full capacities in 2026. So I really don't think we're going to overlap this maintenance and the idle plant charges within U.S./CAN F&II. James Zallie: So $12 million of the $18 million decline, we would attribute to the Argo issues. The remainder related to the market weakness that we saw, which was very curious with the drop off in July and August, but the good news is we saw industry recovery in September. So let me pivot and I'll talk about LatAm. For the LatAm F&II segment, approximately 40% of the revenue decline year-on-year was attributable to soft brewing volumes. Now the largest contributing factor was related to the impact of the terms and timing of purchases associated with the rollover of significant customers multiyear agreement. That situation is now satisfactorily resolved and it should not repeat. So for color, in the quarter, Mexico was down 10% with half of the net sales decline due to brewing related situations to that unique customer situation. And in Brazil, 90% of the decline was due to brewing demand, again, predominantly related to that customer situation. And because brewing adjunct represents 18% of net sales for F&II/LatAm and a larger percentage of our volume what we've been doing is we're actively pursuing alternative paths to utilize our grind more profitably by trading up to support higher-margin products in food and confectionery. We believe this represents an exciting incremental opportunity to diversify beyond brewing and valorize our grind more profitably. So hopefully, that answers the question related to the -- what we believe is some transitory aspects in F&II with about half of the decline in LatAm was due to the brewing transitory nature, and Jim indicated about 2/3 of the decline in F&II US/Canada was related to the Argo situation. Hopefully, that's clear. Kristen Owen: No, really, I appreciate all of that color. That is very helpful in helping us understand what goes the way in the fourth quarter. My follow-up question is actually as far as thinking about fourth quarter contracting season, I understand it's a little early on 2026. But just given some of these onetime items in '25 I'm wondering if you can give us a sense of how you're thinking about price cost dynamics into 2026. I mean we've had a lot of volatility on the input cost side. And then you've got some of these onetime items on the cost side. So just some of the big buckets that we should think about from a price cost perspective into 2026 would be very helpful. James Zallie: Yes. I would say, just as it relates to contracting, obviously, we're early in the process. I would say that we're currently midway through firm price contracting in the U.S. and in Europe. So still a long way to go. And as it relates to inflationary pressures, which there are on input costs, along with U.S. cost of corn projected to be higher in '26 versus '25, we anticipate this is going to prolong customer commitments and that contracting will not be completed until late in the year. And obviously, we always do a, we think, a pretty good job of balancing all of the puts and takes, especially given the pricing centers of excellence that we have stood up over the last few years that have served us very well during the inflationary period, and now as we manage a more benign but yet still sticky inflationary period. We're cautiously optimistic that 2026 contracting will position us for another year of modest profit growth based on everything that's happening in the economies globally along with the backdrop of uncertainty. Operator: One moment for our next question. And that will come from the line of Ben Theurer with Barclays. Benjamin Theurer: I wanted to follow up on T&H, just the dynamics in the quarter and the outlook. So the first question really is related, if you could elaborate maybe with a few examples on what's been driving the negative price mix in Texture & Healthful Solutions, which at minus 5% look pretty high. So that's the first thing I would like to understand. And then I have a quick follow-up. James Zallie: Let me have Jim make that comment, Jim? Jim Gray: So Ben, on the price mix, when you look quarter-over-quarter, right? So some of the pricing that we had coming into the beginning of 2025 from Europe. We had some higher energy costs that were evident in '24. And so as energy costs had come down, that was part of our pricing mix. That's been kind of true all year as well as some of the corn -- corn was about equal, but we've also seen some higher expected corn costs and like basis for some of our specialty grains. So that's literally -- in the prior year, that was there. And then as there's been more plentiful corn some of that basis has come down year-over-year. So it's really more of a pass-through, I think, of some of the -- either net corn costs or the inputs. Benjamin Theurer: Okay. Perfect. And then my follow-up question is really coming back to some of the dynamics in Food & Industrial, Latin America and the outlook in particular. So as you're probably aware of, in Mexico, there is a proposal out which is about to be approved for a significant increase on taxation for soft drinks which would not only affect the ones with caloric content but also the ones with no sugar in it. So no caloric content at all. It's still being taxed. And the bottler is down there [indiscernible] expectation that there's going to be a significant need to pass pricing because of these taxes and with an expectation of large volume declines. So I wanted to understand what is your provisioning? And how can you kind of like protect maybe volume? Or what are you doing in order -- on your contracting side, particularly in Mexico, as it relates to the sweeteners piece, but also the non-caloric sweeteners as alternatives, which both are going to be impacted by the taxation into 2026? James Zallie: Jim, why don't you take first, and then I'll pick up on it. Jim Gray: So obviously, what Ben, you're discussing is this kind of sweetness tax that is across both caloric as well as non-caloric or light beverages that will impact in Mexico. I think that legislation is up for vote or maybe it's approved, but the effective date, I thought was January 1, 2026. So on the caloric side, clearly, the bottlers in Mexico have a choice between kind of liquefied sugar and HFCS, and we think that as you look at the cost competitiveness and the formulation for HFCS, it should lean a little bit more towards kind of the use of HFCS and then just -- and what we've also seen historically when we've seen kind of taxes go into place on beverages is that usually, there's an initial sort of sticker shock. But then after that, I think consumers generally kind of sort of accept or work that in to their overall cost of their grocery basket or their cost of lunch on the go or dinner. And so there's always usually an initial impact for anywhere between a month to 3, 4, 5 months. And then it sort of -- it works through. I think the customers that we have also are very much thoughtful around their pack -- their price pack architecture, and we'll think about value in those trade-offs. I think for non-caloric sweeteners, it's more of an interesting issue, right, which is there's a consumption tax going in will you see any separation for beverages that we sell like maybe a stevia solution into where you have where you have maybe a unique proposition on that beverage and that might be able to withstand that tax increase. James Zallie: Yes. What I would also say, Ben, is that this proposed increase, which I think is $0.17 a liter on sugary drinks. And again, nonsugary drinks but sweetened with artificial sweeteners as well that will go into effect. It's coming now maybe 8 years later than first 6.8% tax that was put in place. And as Jim said, when that went into effect, there was a dampening for 6 months to 9 months on purchases. And then what was interesting, is consumer behavior was modified and the tax actually had unintended consequences and impacted purchases of other products outside even the food category, where people then went back to products that they liked, which were some of the caloric beverages, especially consumed by laborers and the construction workers, et cetera. And we actually observe that. Now we'll see what's going to happen this time. But the other important point, Jim, that I think is important for us to highlight is we do not export a lot of, say, HFCS into Mexico. In fact, it's a very small quantity because we produce locally and we're not a large HFCS producer locally. We're much more of a glucose producer locally. So from a standpoint of how directly -- so I use the word directly going to be impacted, I don't foresee it will have a direct impact, how it impacts the industry and what indirect effects are kind of remains to be seen. But I do think it won't be a 1 for 1 that is prolonged, it will -- consumers will adjust as they did when that tax went into effect in 2016, '17 and we'll see then what happens from there. Operator: One moment for our next question. And that will come from the line of Pooran Sharma with Stephens. Pooran Sharma: I just wanted to ask about U.S./Canada F&II . I think you mentioned it in the prepared comments and in the Q&A here. I think you called out $12 million weakness from Argo and $6 million from a softer market and just parsing into that further, you mentioned softness in July and August, but a recovery in September. Were you speaking on a volume basis? And are you able to kind of share if that recovery has held into October? Or what you're seeing thus far quarter-to-date? James Zallie: Yes. I think you've summarized it accurately as it relates to U.S./Canada. And the comments that we made about July and August in U.S./Canada related to volume shipments in the industry of sweeteners, which is what we were specifically talking about and that recovery in September was also volume related and related to sweeteners. I would say it's early yet in the quarter for quarter 4, but we're not, I don't believe, going to see the July and August step-downs that we saw from an order of magnitude, and we do really believe that it was related to a subset of brand companies -- brand food companies in both beverages and packaged foods, taking price, promoting less and absorbing higher aluminum and tinplate packaging costs, passing those on. Because the 232 tariffs that went into effect actually were announced, I believe, in March. And by the time they started to be manifested at the retail level, we believe that, that onetime impact was experienced in those months. And the manufacturers were optimizing their approach to how they were going to price and thus the impact was felt by consumers. The adjustments have occurred and again, September was evidence of that. That's how we have interpreted it. And again, we need more data points going forward to really be conclusive, but that's our best understanding of what took place and how we would explain the impact in the quarter. Pooran Sharma: Great. Great. I appreciate that detail there. And just maybe wanted to understand just Argo a little bit better. Maybe I was wrong in my thinking, but I think last time we had spoke or last earnings call, you were expecting to get some of the volumes back as we work through 3Q and 4Q. So I was just wondering what you are all facing from like a production challenge standpoint. And do you see these manufacturing issues abating by 2026? Or what kind of time line should we be thinking of here? James Zallie: Yes. No, you are correct in what we had expected and what we thought was possible. The point we wanted to make and the point we'll make again is that Argo is a big complex facility factory. And when it runs well, we can make up for a lot of lost ground. And what we were expecting was that it was going to recover more quickly than it did. And unfortunately, the recovery lasted into the quarter. So not to be repetitive, but when a factory like that of that size goes down, the first challenge that we have because it impacted what we call the back end, which is the coproducts and the feed is we then lose the valorization premium on coproducts. And we have to get the plant up and running, and we have to dispose of the coproducts so it doesn't become a bottleneck and it takes time to normalize the quality of those coproducts to get the valorization. In addition, you then have periodic halting of the grind that impacts the downstream refinery processes, and then that leads to product downgrades and then that leads to under-absorption of fixed costs and unplanned maintenance costs, and we incurred all of that. The -- again, the production impacts that we experienced separate from what we saw in the industry from a standpoint of volume for us was particularly acute in July and August, but September returned to normal production rates. So the team right now is very focused. We don't want to declare victory. They are -- we're seeing steady recovery, stabilization and we're hopeful that certainly quarter 4 is going to be better than quarter 3. And then as we go into the winter, assuming we don't hit -- we've lived through polar vortexes and those kind of things. Assuming we don't have anything like that, we should be on a steady road to recovery at Argo. Operator: One moment for our next question and that will come from the line of Josh Spector from UBS. Joshua Spector: So a follow-up on the U.S./Canada side. Just specific for our fourth quarter I mean it looks like on your guidance for the year, down low double digits, it maybe implies that your fourth quarter is around $70 million in EBIT. So you're still down around $10 million year-over-year I guess, is that right? And is that primarily just comments around weaker market buying and seasonality? Or are there any other effects there? And I guess I'll ask my follow-up in addition here that around -- does that carry into the first half of next year with some of the comments around weaker consumer buying or not? Jim Gray: Josh, this is Jim Gray. I think with regard to how we think about the momentum going into Q4, we don't really expect any kind of operational issues or onetime issues, whether -- if it's the U.S./CAN Chicago plant operations or kind of the LatAm brewing what we did want to come back and just say for U.S./CAN market for the demand for beverages and food, for kind of our sweetener serves. I think we do see some customers not just branded but also private label taking price in the market. They are overcoming package -- expected package cost inflation. And our markets are always -- consumer is always going to be a little elastic. And we've seen this before. It's not dramatic in terms of the overall cost inflation that we're seeing in the market. But you are seeing some unit price increases show up in the kind of the scanner data. And I do anticipate that, that will carry into Q4 and so that's kind of what's shaped our guidance a little bit. But overall, it's not a shock. I think the U.S. consumer is in a good spot with regard to wages and affordability is always top of mind, but I think there is some necessary, if not modest pricing inflation on behalf of some beverage and food customers, and that's going to always slow the demand for sweeteners. But we're in a good spot if that sweetener demand does pick up in Q4, and that's kind of part of our guidance. Operator: One moment for our next question. And that will come from the line of Heather Jones with Heather Jones Research. Heather Jones: And apologies if I repeat anything. I got on the call late. I was wondering you talk about LatAm and as you're thinking about '26 and the Mexico tax issue that you discussed and then just the broader inflation challenges for the consumer. Just wondering -- I know you're not giving '26 guidance yet, but just wondering now, how you're thinking about that setup for next year, particularly given it's had a couple of really good years. Just I was hoping you could give us some color on that. . James Zallie: Yes. We -- let me just make a comment. We just actually celebrated our 100th year operating in Mexico. In fact, we had a Board meeting in Mexico, and we were able to meet with government officials, and we were able to hear from economists in relationship to the pulse on the economy. And definitely, the government's budget deficit in Mexico has presented a challenge along with the muted GDP growth. So we are seeing a softer Mexican economy and also some of the companies that we sell to there export to the U.S. and export to a Hispanic community in the U.S. from a standpoint of some of their products and brands. So -- and we all have read from CPG companies in the U.S. about a weaker Hispanic consumer here in the U.S. So clearly, that manifested itself in the shipments that we make to these customers in the third quarter, not really prior to that. It's starting. And you're going to have an overhang as well in relationship to USMCA negotiations that will need to be resolved or postponed by July of '26. So there will be, we believe, some uncertainty that will hang over certainly the Mexican economy and that's kind of what we're anticipating as we exit the year and as we head into the year. That all being said, the position that we hold in the Mexican market is a very solid position, very strong position. And the overall Mexican consumer has been resilient and affordability is going to be very, very important that plays to one of our strengths from a standpoint of how we work with customers on recipe development. And -- we also really know how to optimize our network down there. We've got 3 great plants, and the team is working very hard to optimize supply chains and look at cost management. So that's kind of the backdrop, and that's how we're approaching it right now. But it's early. It's really early to project too much forward what we've seen in Q3 into '26 at this point in time. Heather Jones: Okay. And then my next question is just on the share repo. This is a throwback to years ago, but I remember at one point, your shares weren't as liquid as far as how they trade and all. And so that sort of limited the optionality on the magnitude of share repurchases. So I was just wondering if you could update us as far as your thinking on that? Is there a limit to how many you want to repurchase ultimately and just update it. Thank you on that. Jim Gray: Yes. Well, first of all, I mean, why the new authorization from our Board on our share repurchase program. So our -- the program that we had in place was set to expire at the end of '25. I think overall, we're confident in the growth strategy for the company and believe that organic investment is going to continue to favorably impact cash flow growth. And so if you look at that going forward, then our capital allocation priorities are still around reliability capital, organic growth investment supporting the dividend. But after that, we have strategic cash to deploy, and we have a healthy cash balance today. And so I think we look at our repurchase history for 2024 and now for 2025 with trying to exceed $200 million of share repurchases in 2025. So we're going to anticipate that we're going to have kind of more share repurchases in '26, '27, '28 and thus the need to come back and renew and reauthorize it at 8 million shares over that time period. Operator: I'm showing no further questions in the queue at this time. I would now like to turn the call back over to Mr. Jim Zallie for any closing remarks. . James Zallie: Thank you, operator, and I want to thank all of you for joining us this morning. We look forward to seeing many of you at our upcoming investor events in the next engagement being the Stephens Annual Investment Conference in mid-November. And at this time, I just want to thank everybody again for your continued interest in Ingredion. Operator: This concludes today's program. Thank you all for participating. You may now disconnect.
Operator: [Foreign Language] Good morning, ladies and gentlemen. Thank you for standing by, and welcome to the 5N Plus Inc. Third Quarter 2025 Results Conference Call. [Operator Instructions] And now, I would like to turn the conference over to your speaker today, Richard Perron, President and Chief Financial Officer. Please go ahead, sir. Richard Perron: Good morning, everyone, and thank you for joining us for our Q3 2025 Results Conference Call and Webcast. We will begin with a short presentation followed by a question period with financial analysts. Joining me this morning is Gervais Jacques, our CEO. We issued our financial results yesterday, and posted a short presentation on the Investors section of our website. I would like to draw your attention to Slide 2 of this presentation. Information in this presentation and remarks made by speakers today will contain statements about expected future events and financial results that are forward-looking and therefore, subject to risks and uncertainties. A detailed description of the risk factors that may affect future results is contained in our management discussion and analysis of 2024 dated February 25, 2025, available on our website in our public filings. In the analysis of our quarterly results, you will note that we use and discuss certain non-IFRS measures, which definitions may differ from those used by other companies. For further information, please refer to our management discussion and analysis. I would now turn the conference call over to Gervais. Gervais Jacques: Good morning. Thank you, Richard, and thank you all for joining us this morning. This quarter marks another financial milestone for 5N Plus, with our strongest quarterly revenue in a decade, record adjusted gross margin and a new high for quarterly adjusted EBITDA. These results reflect strong performance across strategic sectors, reinforced by our global sourcing, our manufacturing capabilities and our focus on high-growth and high-value markets. These trends have continued consistently throughout the year. In a complex environment, we are executing our growth strategy with discipline, focusing on the factors within our control. We are building on our unique advanced materials capabilities and leveraging our market positioning as the trusted partner of choice. Entering the year with incredible momentum, our performance has exceeded our expectations, improving quarter after quarter. This is reflected in the latest upward revision to our annual adjusted EBITDA guidance and sets a high bar for the year ahead. Now, let's start with an overview of our Specialty Semiconductor segment. In terrestrial renewable energy, demand remained very strong in the third quarter, with revenue for this sector up 53% over the past year. We continue to ship increased volumes to our key strategic customer under the terms of the expanded supply agreement, which we announced along with our Q2 results in August. Under the new terms, semiconductor compound supply volumes are set to rise approximately 33% above initial contract levels for 2025-2026 period, with a further 25% increase expected over the subsequent 2-year term. Our teams in Montreal and in Germany are working diligently to meet this higher demand, building on our experience from previous expansions. New equipment has mostly been installed, and we are now progressively ramping up effective capacity, with a focus on hiring and training new staff and on maximizing efficiency and productivity. Turning to space power sector. AZUR's revenues increased 43% compared to the same period last year. We have a robust long-term project pipeline firmly in place. At our Heilbronn site, the ramp-up of solar cell production is on track to add an additional 30% by year-end as planned. We continue to explore further opportunities to expand our operations and capture growing demand. On the Performance Materials side, we continue to benefit from exceptional margins despite lower volumes. This once again reflects our unique positioning in a volatile business environment and the strength of our strategic diversified global supply. Thanks to our market leadership and competitive advantages, we will continue to solidify our position as the strategic partner of choice. Looking to 2026, several demand trends are expected to support our continued growth. As discussed last quarter, domestic solar energy is expected to remain a key component of the U.S. energy equation despite shifts in U.S. energy policy. 5N Plus is poised to benefit as a key strategic North American supplier within our U.S.-based customers value chain as reflected in our expanded supply agreement. This outlook is further reinforced by the acceleration in AI adoption, which will rely on abundant clean power and seamless global connectivity. We are uniquely positioned at the intersection of both these megatrends. We can deliver the advanced semiconductor compounds required for the thin-film photovoltaics on earth as well as space solar cells using germanium substrates, which are needed for clean energy and satellite infrastructure. Although the global business environment remains unpredictable, our unique expertise and manufacturing footprint position us to grow organically while we also pursue external growth opportunities. Before moving to financial details, I would like to say a few words about Richard, who, as we announced last week, was appointed President on November 1 and will succeed me as CEO at the end of May. Having worked closely with Richard over the past 5 years, I have full confidence in his leadership, strategic insight and ability to drive 5N Plus forward. He has been instrumental in shaping our growth strategy and strengthening our operations, making him exceptionally well placed to lead the company into its next phase. This transition also comes at the right time for 5N Plus, ensuring continuity at a time of strong momentum. We believe this positions for 5N Plus to maintain its market leadership, execute on growth initiatives and continue delivering for our shareholders. For my part, I look forward to taking on the new role of Executive Chair upon Richard's appointment as CEO next May. In that capacity, I will continue to support the leadership team in the execution of our strategic priorities, ensuring that we remain steadfast in our focus on long-term value creation. With that, I'll pass it over to Richard for a review of our financial results. Richard Perron: Good morning, everyone, and thank you, Gervais, for your kind words. I appreciate your trust and support. I'm honored by this appointment, and I look forward to taking on increased responsibilities as President and to leading 5N Plus into its next chapter. I have a strong foundation and a clear strategy and a great team. I also look forward to continuing to work closely with Gervais and the rest of the Board to keep 5N Plus on its path for growth. On that note, let's move to our financial results. Another record quarter that highlights the continued strength of our strategy and operations. Increase in revenue, earnings and margins this quarter reflects the accelerating demand we have seen since the beginning of the year in the terrestrial renewable energy and space solar power sectors as well as strong pricing for bismuth-based products. Once again, these results speak for themselves. In today's complex environment, our unique positioning, expertise and agile global supply chain makes us the reliable partner of choice across our strategic sectors. We remain one of the few businesses in our sector and geographies that can both source critical minerals and recycle or refine secondary materials, a key competitive advantage in the current geopolitical context. Starting with our consolidated results, revenue in Q3 increased by 33%, reaching $104.9 million and marking a 10-year high, while year-to-date revenue reached $289.1 million. We delivered record quarterly adjusted gross margin, both in terms of dollars and as a percentage of sales. In dollars, adjusted gross margin increased by 58% to $38.7 million and came in at 36.9% of sales. Adjusted gross margin year-to-date was $102.1 million and 35.3% of sales. We also generated our highest adjusted EBITDA, which increased by 86% to a record $29.1 million in Q3 and grew to $74 million year-to-date 2025, an 81% increase compared to year-to-date 2024. Turning now to our segments, starting with Specialty Semiconductors, where we saw strong volumes across our strategic sectors, better pricing that outpaced inflation and continued benefits from economies of scale. Segment revenue was $75.2 million compared to $53 million in Q3 last year. Year-to-date revenue was $209.2 million compared to $150.5 million last year. Adjusted gross margin was 30.8% of sales compared to 24.8% in Q3 last year. Year-to-date, it was 32.7% compared to 29% last year, favorably impacted by economies of scale due to higher production and higher pricing, net of inflation. Adjusted EBITDA increased by 120% to reach $19.2 million in Q3 and year-to-date $24.5 million -- increased by $24.5 million to $55.8 million. Backlog for Specialty Semiconductors was maxed out at 365 days of annualized revenue as per our definition. However, the effective backlog in reality surpassed the next 12 months at quarter end, given our strong pipeline of locked-in orders. Turning now to Performance Materials, where we continue to experience extraordinary margins, thanks to a combination of favorable inventory positioning, strong pricing conditions over metal output -- input costs. Segment revenue was $29.7 million in Q3 compared to $25.9 million in Q3 last year, where year-to-date revenue was $79.9 million compared to $68 million year-to-date last year. Adjusted gross margin was a record 53.1% of sales in Q3 this year compared to 44.4% in Q3 last year and 42.9% for year-to-date this year versus 36.5% year-to-date last year. Adjusted EBITDA in Q3 increased by 39% to $13.3 million. Adjusted EBITDA year-to-date increased by $9 million to $27.4 million. Backlog for Performance Materials was 104 days, 23 days lower than on June. Combined with Specialty Semiconductors, this bring our consolidated backlog to 311 days of annualized revenue at quarter end, 14 days higher than in the previous quarter. Looking now at our financial position. Net debt was once again maintained at a low level of $63.3 million. This represents a decrease of $26.8 million compared to year-end. That brings our net debt-to-EBITDA ratio to 0.74x at quarter end. Our strong balance sheet and borrowing capacity continue to give us the flexibility to pursue growth opportunities. We are actively assessing potential acquisitions with a preference for the U.S., but we will take the time needed to find the right fit. In parallel, we remain highly focused on hitting our increased capacity targets, optimizing production and identifying more opportunities to expand capacity to meet anticipated demand. Turning now to guidance. For the remainder of 2025, we anticipate demand under Specialty Semiconductors from both the terrestrial renewable energy and space solar power markets to remain strong as customers look to secure advanced materials from trusted and reliable partners. Performance Materials volumes are expected to be slightly lower compared to the first half of the year, consistent with historical trends. Margins will continue to benefit from our strategic global supply chain and sourcing capabilities in today's volatile business environment. Based on our financial performance year-to-date, along with anticipated seasonality and other operational factors, we have increased our adjusted EBITDA guidance from a range of $65 million to $70 million to a new range of $85 million to $90 million. This means that 2025 will be a truly exceptional year from an earnings generation perspective, and the whole team deserves recognition for making this possible. Now, we must remain focused on execution through the end of the year. We look forward to providing 2026 guidance in conjunction with our Q4 results released in February of next year. Looking ahead, we remain prudent in an evolving geopolitical environment that could have impacts on operating costs. As a preferred supplier of ultra-high purity and high-quality advanced materials, we are well positioned to continue solidifying our leadership in key markets through the end of 2025 and into 2026. That concludes our formal remarks. I will now turn the call back over to the operator for the Q&A session with financial analysts. Operator: [Operator Instructions] Your first question comes from Amr Ezzat with Ventum Capital Markets. Amr Ezzat: Congrats on the outstanding quarter. Gervais Jacques: Thanks. Amr Ezzat: Yes, on a personal note, I'd like to congratulate both of you on the leadership transition. I'm sure I speak for many when I say it's great to see both of you continuing to play a key role in the company. Gervais Jacques: Thank you. Amr Ezzat: On to that outstanding quarter, Performance Materials, like 53% gross margin just blew my mind. You noted in the MD&A and in your prepared remarks, support from higher business pricing, product mix and favorable inventory position. Can you help disaggregate how much of that uplift actually came from pricing power versus inventory timing or other one-offs? Richard Perron: The most -- if you have to weigh the various factors, the most important factor remains the better pricing over the input metal costs, okay, supported by our unique supply chain. The inventory position is a factor, but it's not the most important in realizing the great margins that we've done in Q3. Amr Ezzat: Understood. That's great to hear. So looking ahead, how should we think about the structural floor for Performance Materials when it comes to gross margins? I've always thought of this as a 30% to 35% sort of gross margin business is like 40% plus like the new sort of bands? Or how do I think of that? Richard Perron: I have to be honest. This year's performance for that segment is also a surprise for us. But ultimately, when you look back, I mean, it's the -- we're realizing those margins because of all the different things we've done over the years. And now based on the current geopolitical environment, we're doing even better than ever anticipated. So to answer your question, looking forward, this quarter was exceptional. I'll be more inclined to look at the performance or the average performance of the first 2 quarters going forward, which still represent a fairly high gross margin. Amr Ezzat: Yes, indeed. Okay. Then on your updated 2025 EBITDA guidance of $85 million to $90 million, it implies a material step down in Q4, especially considering the last couple of quarters have just been blockbuster quarters. Can you walk us through the moving pieces driving the implied Q4 EBITDA? Is it mostly like Performance Materials maybe like coming back down to what you consider to be a normal quarter? Or is there some costs maybe embedded in Q4 that we should think about? Richard Perron: Well, there's a factor that remains under Performance Materials. Typically, if you leave aside the pricing over the metal cost, volume tends to be lower in the second half, and it's in Q4 that it occurs the most, okay? It has the biggest impact from a seasonality perspective. For Specialty Semiconductors, the volume is definitely better than in previous periods in our overall financial performance. But we're in a situation where we're going to take advantage of this Q4 to most likely accelerate some of our annual maintenance announced to start 2026 on a more stronger foot than ever, okay? We've been pushing hard on all of our teams and equipment this year. So this year, we're going to be bringing forward some of our annual maintenance that were originally planned for 2026 and other things around our operations to start 2026 in perfect shape. Amr Ezzat: Okay. Understood. So that's just like... Richard Perron: So, we are moving -- we're going to be moving maintenance schedule essentially and other projects forward. Gervais Jacques: In order to meet the growing demand for 2026, you need to be -- we need to make sure that all the equipment are in great shape. Amr Ezzat: Understood. So, you're moving forward some OpEx from 2026 into Q4? Richard Perron: It's going to have an impact, both on OpEx because we're going to be accelerating some of our planned maintenance expenses of next year. And it may have some impact also on volume that will be most likely realized starting in the new year. Amr Ezzat: Yes. Understood. And ensuring that, you've got a good first year as President and CEO. Then maybe one last one for me. On the First Solar conference call, an announcement, they were speaking about their new 3.7 gigawatt facility in the U.S. And like, obviously, the theme we've been following the reshoring, I guess, from Southeast Asia. I'm just wondering if we should think of this as incremental demand for 5N? Or is it just part of the agreement you guys just announced or the expanded agreement, I should say, that you guys announced last quarter? And if it is part of the agreement you announced last quarter, is there a potential for you guys to start to see some like pull forward of volumes into the second half of 2026 as this facility comes online? Maybe just some of your thoughts on that. Gervais Jacques: Well first of all, it's a great news to see First Solar investing in North America. I think it supports our strategy, and it's a great news. Secondly, the announcement was related to a finishing line. Then it's not the full line that they are moving. It's really the finishing part of the panels. Then we don't expect that to have an impact directly on our volume, though it was already embedded in the new contract we signed for the existing line. It does not mean that further investment will not happen for First Solar. But for the time being, it does not have a material impact on the volume we're producing to them. Remember, we're growing 33% for '25 and '26 and an additional 25% for '27 and '28. Richard Perron: But as Gervais said, it remains a very important announcement because that confirms that they're definitely extremely competitive in the U.S. market, which is one of the most important growing market. Amr Ezzat: Congratulations again to both of you. Gervais Jacques: Thank you. Richard Perron: Thanks. Operator: Your next question comes from Michael Glen with Raymond James. Michael Glen: I'll just echo Amr's comments. Congratulations on the promotion and for all of the progress made at 5N Plus since you stepped into the role as well. Gervais Jacques: Thanks. Richard Perron: Thanks. Michael Glen: Just to come back to the pricing dynamic on business. Is it natural to think, or is there a scenario where if you're getting this better pricing on the business, you will have to eventually flow that through to some of the end customers in the market? Richard Perron: No, no, no. I'm not sure I understand your question, but there's essentially the way it works, it's a bit different from one product to another. But for many of our key products that are especially performing well this year, we charge a premium over the most recent notation. And then anything that we have from a positioning or supply advantage becomes part of the profit on top. Michael Glen: So, you're able to hold on to whatever that input cost pricing is? Richard Perron: Yes, yes. That gets repriced every period or -- yes. Michael Glen: And moving over to some of the critical materials that you're involved with on the AZUR and First Solar side, germanium availability, have you seen any limiting factors with germanium availability in your global supply chain? And maybe as well, if you could comment on tellurium as well. Gervais Jacques: Well, in terms of germanium, there's definitely no problem on availability. On pricing, though, it costs more. And you've seen the germanium price increase over the last few months. But in terms of availability, there's no -- it's not an issue for us. In terms of tellurium, again, same thing. Pricing has been evolving over the last few months. But in terms of availability, we have a strategy to capture all the tellurium available outside of China. Michael Glen: And just circling in on germanium, we do get a lot of questions about sourcing of the material. Can you give us some sense as to how you source your internal needs for germanium, where the material comes from? And is there still material that does get supplied from Chinese sources in... Gervais Jacques: No. Without disclosing names, our germanium is coming from Canada, coming from Europe and some small volume from the U.S. Richard Perron: Germanium is not exclusive to China. Germanium comes from zinc and coal operations. So, there's definitely germanium available outside China. And germanium usage consumption for space applications remain quite small compared to other sectors like fiber optics and others. Gervais Jacques: And currently, there's a lot of germanium being landfilled, not being valorized. Now at the new pricing, some companies that are currently not valorizing germanium, they're looking at projects to start valorizing it. One example is Kennecott Utah Copper. They're not valorizing their germanium so far. Michael Glen: Interesting. And just one final. Just with AZUR, can you speak to what we should think about in terms of margin tailwinds at AZUR? Is there still -- for '26, '27, is there still pricing tailwinds, mix tailwinds? Just trying to think about what's still there from a margin expansion perspective. Richard Perron: Okay. On an absolute basis, as you're aware, we've been adding constantly capacity. So, you're going to have economies of scale from producing more. From a pricing perspective, we expect that we'll be able to adjust pricing over and above inflation and/or cost of the key input materials. So, that's what we foresee forward. So economies of scale from our production, while at the same time being able to adjust price based on inflation and input costs. Operator: Next question comes from Michael Doumet with National Bank. Michael Doumet: Again, congratulations on the results and obviously, congratulations on the [indiscernible]. The first question I had, and it really, I guess, leads up to the previous one. I was wondering if there was any change or evolution in how the company is currently securing China metals this year. I think you already talked about germanium, but in the previous question. But I'd like to hear a little bit more on the business side versus prior years and whether or not that's leading to [indiscernible] margins? Richard Perron: Look, we have not changed anything. We're just -- we just have, as you know, adjusted our footprint over the years in our product portfolio. And today, we've been holding on to the best of the best products, the best combination of clients and products, while at the same time, we've been investing in our assets. So today, we're in that position where we can source business at a very good price, while at the same time, products that we're making and supplying to our clients are critical, and our clients are extremely happy to rely on us for that key material. Michael Doumet: And then I guess turning to AZUR, you talked about how well that business performed in the quarter. At what point do you think you'll have enough visibility to consider another capacity expansion beyond the 30% [indiscernible]. Gervais Jacques: The way we work, and we've been super consistent on that, we are securing the contracts. And when the backlog is large enough, we're investing. Then we've been doing that since the acquisition of AZUR, and we will continue to adopt this strategy. Then so far, most of the sales for next year are already being done. We're securing contracts for '27, '28. We already have some volume after '28 already secured. Then once we're going to feel comfortable enough, we will look at further increasing the capacity. Michael Doumet: So not quite there yet, but presumably getting closer. Maybe just a third question, I guess. On the M&A piece, you spent -- it sounds like quite a bit of time doing diligence and M&A opportunities. So, I'm assuming you've refined, I guess, what you're looking at this point. Any way you can outline for us the framework or how investors should think about next deal could look like for the company? Richard Perron: It's a bit early to give details, but I guess we can say what it won't be. It won't be a start-up, and it won't be a business that does not generate EBITDA today. It's going to be a quality asset in the material technology field and/or specialty chemical field that ideally has those 3 key attributes that are behind today's success for the company, manufacturing and selling enablers to our clients, remaining a small cost component to our clients' products and ideally the relationship this business will have with its clients will be one that is referred to as a partnership rather than making and trying to sell stuff. Operator: Your next question comes from Nick Boychuk with Cormark Securities. Nicholas Boychuk: On the AZUR pipeline and capacity expansion in Germany, can you give us a little bit of color on how you're thinking about where that capacity expansion is going to happen and how much you can take the Heilbronn facility higher? And at that point, what the next step would look like? Gervais Jacques: Well, at Heilbronn, I think we have the space to further grow the capacity. Then I think we're not limited by the physical space of the Heilbronn facility. It will most likely -- the expansion will most likely happen in Germany to take on the benefit of having all the experts located at Heilbronn. Then it's really a matter of making sure that we have all the contracts on hand before further increasing the capacity. Richard Perron: We believe we still have a few rounds of capacity expansions. We're working the layout and using the available space. Nicholas Boychuk: Got it. And then switching to margins within the specialty semiconductor space. I'm hoping you can maybe unpack a little bit how much of the year-over-year improvement was due specifically to price versus economies of scale. Obviously, it's tough with First Solar given the new contracts, but how should we be thinking about what that margin profile looks like now going forward, given that effectively all of the volume with First Solar is now contracted and no longer spot? Richard Perron: Well, if you look at it from a year-to-date perspective, that should be a good level to go forward. Obviously, we'll continue to be positively impacted by economies of scale. But as we've been mentioning, being quite vocal, we expect some costs to increase due to inflation and other geopolitical factors. Nicholas Boychuk: And then last one, can you give us a little bit of an update on some of the other maybe longer-tail growth initiatives you have ongoing, things like MRI applications in defense with germanium, long-duration storage, any of those programs progressing and advancing as you'd like to see? Gervais Jacques: Well, in the case of medical imaging, I think we're collaborating with different customers. We've been developing products with them together with the different customers. They are now -- they've been testing it. They've been producing their spect scan or their photon counting detectors, depending on their products. And some of them are currently into commercialization like Siemens. Other one will soon launch their products. Then we're getting closer and closer to see the demand increasing. We have all the capacity available at our St. George, facility in Montreal. Now it's a matter of meeting the demand when the demand will be there. Then we're quite confident to see the volume increasing next year, but significantly in year 2 and 3. Richard Perron: Yes. How it's going to evolve most likely will go from spot business to long-term contracts. Nicholas Boychuk: And is that the same kind of picture that we're seeing with some of the long-duration storage and defense applications? Richard Perron: Yes, most likely, similar scenario. Gervais Jacques: Similar scenario as well, yes. Operator: [Operator Instructions] Your next question comes from Frederic Tremblay with Desjardins. Frederic Tremblay: I wanted to ask on AZUR, if you've seen any notable changes in the business environment there, whether it's from a competition perspective or customer demand in the space sector, just your update on the business environment in space? Gervais Jacques: Well, so far, if you look at the supply -- the fundamental supply and demand, we believe that the market is still stretched, meaning that the demand is currently exceeding the supply. Then we're taking -- because we were the first one to move and install additional capacity, we're taking full benefit of securing these contracts. Our competitors is also currently -- one of them is currently investing, increasing its capacity. It will have an impact on 2027 onwards. Then we have another year ahead of us to secure more contract and taking the full advantage of being the first mover. Frederic Tremblay: Great. And then obviously, in terrestrial, we know about your key customer there. But for AZUR, how is the customer concentration landscape? Is the customer base pretty broad? Or is there 1 or 2 that are the bulk of the business? Maybe just a reminder on that would be helpful. Gervais Jacques: The way it works is we're earning contracts. Then every year, if you look at our top 5 customers, there's a lot of movement. It's not the same 5 customers year after year. We do have one, which has been there for the last 2 years because we developed the product together, then they are already -- they are always on the top 5. But the remaining list is quite in motion depending on the contract we earn. Then if I look at the year to come, we will see again some changes on the top 5 list. Richard Perron: So, you have somewhere between 5 and 10 really active clients. And from one year to another, the actual revenue level changes based on the projects that we've earned with these guys. But it does not have the concentration that we have on the renewable energy. Frederic Tremblay: Understood. And then lastly, just on CapEx, maybe as we look to next year, I know it's probably tough to tell right now. But directionally speaking, should we expect CapEx to move up slightly or perhaps meaningfully if there's something to do at AZUR? Richard Perron: It's most likely going to be at a similar level than this year. Operator: There are no further questions at this time. I will now turn the call over to Mr. Perron for closing remarks. Richard Perron: Okay. Well, we would like to thank you all for joining us this morning, and we wish you all a good day. Gervais Jacques: Thank you. Operator: Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines.
Operator: Good day, everyone, and welcome to the Marriott International Q3 2025 Earnings. [Operator Instructions] Please be advised that today's call is being recorded. [Operator Instructions] I'd now like to turn the floor over to Jackie McConagha, Senior Vice President, Investor Relations. Please go ahead. Jackie McConagha: Thank you. Good morning, everyone, and welcome to Marriott's Third Quarter 2025 Earnings Call. On the call with me today are Tony Capuano, our President and Chief Executive Officer; Leeny Oberg, our Chief Financial Officer; and Executive Vice President, Development; and Pilar Fernandez, our Senior Director of Investor Relations. Before we begin, I would like to remind everyone that many of our comments today are not historical facts and are considered forward-looking statements under federal securities laws. These statements are subject to numerous risks and uncertainties as described in our SEC filings, which could cause future results to differ materially from those expressed in or implied by our comments. Unless otherwise stated, our RevPAR occupancy, average daily rate and property level revenues comments reflect system-wide constant currency results for comparable hotels and all changes refer to year-over-year changes for the comparable period. Statements in our comments and the press release we issued earlier today are effective only today and will not be updated as actual events unfold. You can find our earnings release and reconciliations of all non-GAAP financial measures referred to in our remarks today on our Investor Relations website. And now I will turn the call over to Tony. Anthony Capuano: Thanks, Jackie, and good morning, everyone. We are pleased with our third quarter financial results, which were ahead of our previous expectations. Development activity remained strong, and we grew our industry-leading global portfolio of rooms by 4.7% year-over-year to over 1.75 million rooms across more than 9,700 properties at the end of September. As expected, RevPAR growth in the quarter was modest, reflecting ongoing global macroeconomic uncertainty. Our hotels continued to gain RevPAR index. Third full quarter global RevPAR rose 0.5%. International RevPAR grew 2.6%, again outperforming the U.S. & Canada, where RevPAR was down 0.4%. By region, RevPAR growth was strongest in APEC, which has been benefiting from solid macroeconomic growth in many countries and double-digit rooms growth. Third quarter RevPAR in APEC increased nearly 5% driven by robust ADR growth and higher demand from international travelers, particularly from Greater China and Europe. Third quarter RevPAR in EMEA rose 2.5% on increases in both ADR and occupancy, led by strong regional demand. Excluding the impact of the Olympics in France and the Euro 2024 in Germany last year, EMEA RevPAR would have been up 5%. RevPAR in CALA rose nearly 3% with gains in both ADR and occupancy and helped by citywide events in Puerto Rico and Rio. City Express hotels across the region are seeing meaningful benefit from being integrated into our ecosystem and are performing very well. The operating environment in Greater China remains challenged by weaker macro conditions, though our market share across the region continued to grow. With year-over-year comps easing and demand stabilizing, RevPAR was flat and would have been slightly positive, excluding the impact of multiple typhoons. Leisure demand was solid, offsetting a decline in business transient demand. The slight RevPAR decrease in the U.S. & Canada was driven by declines in select service brands, which offset nice gains in luxury along with calendar shifts impacting group. Third quarter group RevPAR decreased 3% while leisure was up slightly and business transient was down slightly compared to last year. Business transient was further impacted by government RevPAR declining 14%. Globally, RevPAR growth was again strongest at the higher end as high-end consumers have demonstrated resilience to macroeconomic uncertainties and continue to prioritize traffic. Luxury RevPAR rose 4% as performance weakened down the chain scales. Our portfolio is well positioned to benefit from outperformance at the upper end as 10% of our rooms are in the luxury segment and another 42% are in the full-service premium segment. By customer segment on a global basis, leisure transient continue to lead RevPAR performance, rising 1%. Business transient RevPAR was flat and group RevPAR declined 2%, reflecting timing of events. As Leeny will discuss further, RevPAR growth is anticipated to accelerate from the third quarter, with RevPAR expected to increase 1% to 2% in Q4 compared to the prior year. Full year 2025 RevPAR is still anticipated to rise between 1.5% and 2.5% year-over-year. We also still expect strong net rooms growth in 2025 and beyond, as owners continue to show preference for our brands. Despite higher construction costs and the challenging financing environment in both the U.S. and Europe, we still have excellent momentum in our global signings. During the first 9 months of the year, signings reached a record year-to-date level. Our pipeline grew to a new high of more than 596,000 rooms at quarter end with over 250,000 pipeline rooms under construction. Conversions remain a key driver of our portfolio expansion, reflecting the many revenue and cost-related benefits of being part of the Marriott ecosystem. Conversions accounted for around 30% of both signings and openings in the first 9 months of the year. We remain keenly focused on driving growth and are being in more places around the world with the best brands and experiences. In September, we launched outdoor collection by Marriott Bonvoy, which includes Postcard cabins and Trailborn hotels. This new portfolio offers guests unique outdoor-focused stays with easy access to popular activities like skiing, snowboarding, biking and hiking. We also announced the U.S. debut of Series by Marriott less than 3 months after the brand's initial launch with an agreement to convert 5 select-service found hotels in major U.S. cities. As the largest global lodging loyalty program, Marriott Bonvoy serves as a powerful engine for guest engagement and bring significant value to our owners and franchisees. Membership grew to nearly 260 million members at the end of September, up 18% year-over-year. The power of Marriott Bonvoy is evident across our many adjacent businesses, including Marriott Bonvoy boutiques, Marriott Media Network, Homes & Villas by Marriott Bonvoy and our portfolio of 32 co-branded credit cards across 11 countries. Our U.S. cards are by far the largest contributor of our credit card fees. Our current U.S. deals were signed in 2017 and extended in 2020 and we are currently in active discussions with our current credit card partners. Our best estimate right now is that we could have new deals in place, sometimes next -- sometime next year that reflect the increased relevance of Marriott Bonvoy and the significant growth of our global lodging portfolio. On the technology front, we continue to progress in the multiyear evolution of our property management, reservations and loyalty platforms and the deployment of new cloud-based systems across our global portfolio, which we believe will enable Marriott to have an industry-leading technology stack, leveraging best-in-class technology architecture and proprietary innovations, this tech transformation is expected to deliver a new ecosystem of capabilities and revenue-driving opportunities on property. Owners are excited about the potential top and bottom line benefits at their hotels. The first few hotels recently started to transition onto the new systems and associates have shared very positive feedback about the new capabilities and how they empower them to deliver on the customer experience. We plan to continue deploying our systems to hotels around the world over the next few years. We're also excited about increasingly leveraging AI across our business with a focus on areas like content creation, augmented business intelligence for associates and more efficient processes that help associates deliver elevated customer experiences. Before I turn the call over to Leeny, I want to thank our fantastic teams around the world for all that they do. Their commitment and perseverance are invaluable to our continued success and among the many reasons I remain incredibly optimistic about Marriott's future. Leeny? Kathleen Oberg: Thank you, Tony. Our results today demonstrate the power of Marriott's business model and the numerous levers driving our earnings growth. Despite continued macroeconomic uncertainty and modest global RevPAR growth, our third quarter adjusted EBITDA rose 10% and our adjusted EPS grew 9%. As Tony noted, third quarter global RevPAR increased 50 basis points, in line with expectations, driven by nearly 1% ADR growth, offsetting a 30 basis point decline in occupancy. Third quarter total gross fee revenues increased 4% year-over-year to $1.34 billion. The increase primarily reflects rooms growth and strong co-branded credit card fee growth. Co-branded credit card fees rose 13%, reflecting robust card acquisitions and meaningfully higher global card spending as well as the timing of point transfer promotions. Fees from our international cards, which continue to ramp nicely, rose nearly 20%, driven by particularly strong performance in Japan and the UAE. Incentive management fees, or IMF, totaled $148 million higher than previously anticipated, down 7% year-over-year. The change was primarily due to declines in the U.S. & Canada, reflecting some large hotels undergoing renovations in the third quarter this year and certain hotels in Florida benefiting from insurance proceeds in the third quarter last year. Owned, leased and other revenue, net of expenses, surpassed expectations, rising 16% compared to the prior year. The year-over-year increase was largely driven by contributions from the Sheraton Grand Chicago, which we purchased in the fourth quarter last year as well as improved performance at other hotels in the portfolio. Third quarter G&A declined 15% compared to last year's third quarter, which included a $19 million operating guarantee reserve for a U.S. hotel. The year-over-year decline also reflects timing and lower compensation costs as we continue to benefit from the work we did last year across the enterprise to enhance our efficiency and productivity. The strong growth in gross fee revenues and owned leased and other net coupled with the decline in G&A led to adjusted EBITDA increasing 10% to $1.35 billion, above the high end of our guidance. Now let's talk about our outlook. With ongoing economic uncertainty, we expect global RevPAR to increase 1% to 2% in the fourth quarter. The acceleration in global RevPAR growth from the third quarter to the fourth quarter is partially due to calendar shifts and onetime events. RevPAR growth is anticipated to still be meaningfully stronger internationally than in the U.S. & Canada, and higher-end chain scales are expected to continue to outperform lower-end chain scales. As we look ahead to next year, while we're still working on our budget, our preliminary view is that 2026 year-over-year global RevPAR growth could be similar to the 1.5% to 2.5% growth expected this year. Growth is expected to again be higher internationally than in the U.S. & Canada. And next summer's World Cup could contribute around 30 to 35 basis points to full year global RevPAR growth. Turning to this year's P&L in the fourth quarter. Gross fee growth could be in the 4% to 5% range. Compared to prior expectations, this outlook reflects slightly lower expectations for IMF and fees on F&B revenues in Asia. Fourth quarter IMF are now expected to rise in the low to mid-single-digit range, partially reflecting the timing of some fees that shifted to the third quarter. Full year IMFs are anticipated to be around flat with last year. Fourth quarter RevPAR fee growth will still be impacted by the timing of residential branding fees, which are expected to be down year-over-year. Fourth quarter adjusted EBITDA is expected to increase 7% to 9%. For the full year, we expect gross fees to increase around 4.5% to 5% year-over-year. Full year co-brand credit card fees are now anticipated to grow roughly 9%, primarily reflecting stronger-than-expected third quarter performance. Timeshare fees are still expected to be around $110 million, and full year residential branding fees are now anticipated to decline around 20%, a meaningful improvement compared to expectations at the beginning of the year, reflecting the continued success of our residential business and the volatility in the timing of residential project sales. Owned, leased and other revenue, net of expenses, is expected to total around $370 million. 2025 G&A expense is anticipated to decline 8% to 9% to $975 million to $985 million. This decline reflects roughly $90 million of above property savings from our enterprise-wide initiatives to enhance our effectiveness and efficiency across the company that is also expected to yield cost savings to our owners. Full year adjusted EBITDA could increase between 7% and 8% to $5.35 billion to $5.38 billion. Full year adjusted EPS could total $9.98 to $10.06. Our full year adjusted effective tax rate is expected to be just over 1 percentage point higher than a year ago, given the shift in earnings to higher tax rate jurisdictions. Our underlying full year core cash tax rate is still anticipated to be in the low 20% range. Our 2025 net rooms growth is still anticipated to approach 5%. As we look ahead to the next few years with our strong momentum in global signings and conversions in particular, we still expect global net rooms growth in the mid-single-digit range. Full year total advertisement spending is expected to be roughly $1.1 billion or $1.45 billion, you include around $350 million for the citizenM transaction. Our capital allocation philosophy remains the same. We're committed to our investment-grade rating, investing in growth that is accretive to shareholder value, and then returning excess capital to shareholders through a combination of a modest cash dividend, which has risen meaningfully over time and share repurchases. We're pleased with the company's strong year-to-date cash flow performance and outlook. Given strong cash flow generation, we expect full year capital returns to shareholders to be roughly $4 billion while maintaining our leverage in the lower part of our net debt-to-EBITDA range of 3 to 3.5x. The operator can now open the lines for questions. Please ask just one question each so we can speak to as many of you as possible. Thank you. Operator: [Operator Instructions] We'll take our first question from Shaun Kelley with Bank of America. Shaun Kelley: Tony or Leeny, obviously, the language around the credit card program and renewal conversation there is new. So I think we're going to field a lot of questions on the parameters of what that deal could look like. So obviously, these things are delicate while they're in negotiation. But maybe you could put it in perspective, a couple of things for us. One, just current size of the program; two, how we should think about maybe what's on the table or what could be renegotiated relative to maybe some of the growth rates that you saw back when you combined the programs and did the renegotiation back in 2017? I think just some parameters around that would be helpful. And then third, if I can sort of add it into the general gist. Earlier late in the year would be helpful just because it could be a meaningful earnings contributor. So just any timing refinement would be useful, too. Anthony Capuano: Thank you, Shaun. Well, the good news is you've been asking for a few quarters, so I'm going to make you happy that we talked about it. That news, I'm probably not going to give you the specificity you want for exactly the reason you described that we are still -- we are in active and fluid negotiations. But maybe I can give you a little bit of atmospherics around how we're thinking about it. And then if it would be helpful, I might ask Leeny, just to remind you about how the mechanics of the program work. As we said in the prepared remarks, we're in active discussions with our current partners. The power of Bonvoy, the value that Bonvoy owing to our customers, the strength of the portfolio and the brands, the broad array of experiences that we offer without question, make us one of the most attractive customer groups in any industry for our partners in financial services as they think about credit card products. Number one. Number two, as Bonvoy continues to grow, that growth translates to more cardholders, more spend. And we expect to see that reflected in growing co-brand credit card fees. And you heard Leeny talk a little bit about that. And then I would just remind you that when we did the deals originally in 2017 and then extended them in '20, the value that Marriott and Bonvoy brings to these partnerships has grown exponentially. So I mean, when we did the deal in '17, Bonvoy didn't even exist. We launched it in '19. The membership in our loyalty platform has more than doubled from 110 million members back in '17 to the nearly 260 million that we described earlier in the call. Since the end of '17, the number of co-brand accounts and global spending on our cards have both grown by about 80%. And our system size has grown from around -- or has grown around 50% from 6,400 properties globally back in 2017 to over 9,700 at the end of Q3. So with that, Leeny, I might ask you to remind Shaun and the rest of the participants just exactly how the mechanics of the program work. Kathleen Oberg: Sure. And thanks for the question, Shaun. I think it's definitely too early to talk about potential upside from these deals. But I think kind of a reminder about how the basic economics of the credit card partnerships work is useful. Our credit card partners basically pay us overwhelmingly variable amounts with the funding mostly based on the volume of cardholder spend with some additional smaller payments based on items like number of free night certificates, et cetera, a number of loyalty program points actually purchased by cardholders. And it's really worth remembering that the co-brand card payments actually account for more than half of the Marriott Bonvoy program funding. And the co-brand financial services companies actually pay a higher amount per point than what our hotel owners pay. So it's an important part of the overall benefit to our hotel owners and frankly, to the power of Marriott Bonvoy and what we can provide in value to our Bonvoy members. And then as you think about what then flows into Marriott's income statement, obviously, we recognized revenue in our franchise schemes that gives a compensation for the licensing of our intellectual property. And so we take a royalty rate to earnings that is essentially a percentage of the total credit card funding. And so as we move forward, well, it would actually, of course, not make any sense for us to talk about specifics in the negotiations, I think Tony was clear in pointing out the increased relevance of Bonvoy overall. And we're very excited about the how our cards have done and how they continue to perform and are very optimistic about the outcome next year of these discussions. Anthony Capuano: And then I think, Shaun, your last question was you were hoping for some specificity on timing. Again, we are in the throes of negotiation, hard to give you a specific other than to tell you, given the value we think these projects will unlock for our financial services partners, for Bonvoy and our owner community and for Marriott International, the teams will work diligently to try to get them done as reasonably quickly as possible. Kathleen Oberg: And just as a reminder about how we're performing this year, in 2024, our credit card branding fees were $660 million, and we're looking at that growing this year, 9% in 2025 from, again, the continued powerful of the credit card partners and Marriott Bonvoy. Operator: We'll hear next from Michael Bellisario with Baird. Michael Bellisario: Can we dig into the health of the franchise, I think just this year, you've reduced loyalty chargebacks, you've expanded your renovation scopes framework, I think, to our brands. And obviously, RevPAR has slowed. So I guess 2 parts. What are owners still asking for? What else can you provide them to ensure that economics remain attractive and you can go back to your mid-single-digit net unit growth target? Anthony Capuano: Yes. So there's a lot in that question. I'll try to unwrap. I think the fact that through the first 9 months of the year, we have on a global basis, achieved record signings is indicative that I think we're hitting the right mark with the owner and franchise community. We are focused on driving enhanced top line performance. And we think that, that's one of the most compelling features of technology transformation journey that we're on. We think that represents some really exciting opportunity to continue to drive top line. The reduction in the loyalty charge-out rate was an example of an ongoing effort to identify across the landscape opportunities to reduce affiliation costs. And then we continue from the work we started last year, not just to lower corporate G&A expense, but to look for opportunities for margin enhancement across the portfolio. Kathleen Oberg: And I'd just add to that, that as we do all the normal comparisons of our affiliation costs against our competitors, we believe we have the lowest affiliation costs relative to revenue in the industry, and we expect that our economies of scale to continue to work on improving that even more. Operator: We'll go now to David Katz with Jefferies. David Katz: One of the observations is the investment spending has sort of moved up to the high -- I think the higher end of the range for what the guidance was before. I can venture some guesses as to what's driving that, but I'd love to have you sort of unpack that a little bit. And in particular, give us some color on key money and how that is trending because I suspect that's one of the drivers there. Kathleen Oberg: Yes. Well, thanks, David very much for the question. I'm happy to. As you remember, when we talked at the beginning of the year, we talked about these expenses, these investments breaking up into roughly 3 fairly even categories, which is key money, tech investments and then CapEx expenditures in our owned, leased and existing portfolio. And from that standpoint, it's actually not development-related key money. The increase is really around clear visibility around the nondevelopment-related expenditures. So for example, the timing of tech transformation investments, owned, leased CapEx, timing, investment in our existing hotel base when there may be a particular asset sale, et cetera. So in that regard, it's really not reflective of any sort of change in our key money philosophy or actually the amounts that we're spending relative to key money. As you know, very often, the deals that you signed or for hotels that are either converting over the next year or so or for new build hotels, which then don't actually open for several years. And the comments that we've made about our key money used in new unit development are actually quite consistent in terms of both amounts and the way that we're using it. Operator: We'll turn now to Dan Politzer with JPMorgan. Daniel Politzer: I wanted to go back to the 2026 outlook, the 1.5% to 2%, 2.5% RevPAR growth. I mean it seems like you guys are kind of extending or assuming a status quo mostly hold here, but maybe you can unpack that a bit in terms of what you're seeing across leisure, business transient and group for next year? And any kind of color on pacing there, too. Kathleen Oberg: Yes. sure. Absolutely. We'd be happy talk about that. So first of all, just a reminder that we have talked -- we said in our prepared remarks, we continue to expect that U.S. will be lower than international and that overall, broadly speaking, we'd expect it to be roughly the same globally. I will say that we would expect the U.S. to end up slightly higher next year than this year, and a lot of that benefit is related to the World Cup. So when you think about the World Cup next year, having a very healthy impact on U.S. and Canada that from that standpoint, this extra 30 to 35 basis points globally is heavily squarely in the U.S. and Canada benefit side of things. When I think about group, I think it is, again, very encouraging to see that our group pace for next year is up 7%. That's similar to a year -- to a quarter ago. And actually, group pace for the U.S. is up 8%. So I think as we look into next year, I do agree with you that I expect leisure to continue to be a stronger performer on a relative basis and particularly in the upper chain scales. But overall, a fairly similar environment globally. Anthony Capuano: Yes. And I might just reemphasize the comment I made in the prepared remarks, and that is to remind yourself of the distribution of our portfolio with 10% of the rooms in the luxury tier and another 42% in upper upscale. We've had questions the last couple of quarters about the sustainability of the high end and to post another quarter with 4% RevPAR index leading the charge, I think, is a pretty powerful illustration of the strength and appetite of that luxury consumer. Operator: We'll go next to Conor Cunningham with Melius Research. Conor Cunningham: Sorry to go back to the credit card for a quick second here. Can you talk about the benefits of being between Amex and Chase? Is there anything that that's helpful having 2 partners rather than one? And then if you could just high-level talk a little bit about the opportunity there. Like is it further -- is there just like a scale opportunity from having 2 different providers in general? Anthony Capuano: Yes. Thanks for the question. Happy to take it. We are obviously delighted with the success of the dual insurer strategy we've had since 2017. Having 2 issuers, it's really the success of that strategy is demonstrated by the growth of our branding fees and our partners' contributions to the loyalty program. And you heard Leeny provides some context to that. Going with the dual issuer approach gives us access to what we think are 2 very complementary customer bases, gives us the ability to achieve really broad market coverage while providing customers with a unique set of choices. So we think it's a really powerful opportunity for us. It also gives us -- gives our cardholders greater trial and point transfer sales with their proprietary card base. Operator: We'll go now to Stephen Grambling with Morgan Stanley. Stephen Grambling: Just wanted to dig into the pipeline a little bit. I think you touched on this a little bit in your intro remarks, but it looks like you had a sequential improvement in the under construction in particular, also grew pretty substantially year-over-year. So just curious where some of that strength is coming from? And if you've seen any kind of change in the environment from changes in rates or otherwise? Kathleen Oberg: Yes. Sure, absolutely. First, I'm going to point out, Stephen, what has continued -- which continues to be a real trend, and that's all around conversions. So the momentum around conversions has not stopped, and that obviously feeds into our under-construction pipeline in a material way. And we fully expect 1/3 of our room openings this year to be conversion rooms. And frankly, when you look at our signings that trend, it's not doing anything except staying the same, if not actually moving up a little bit. So I think that's very encouraging as you look at rooms growth. But when you talk about the under construction pipeline is probably a good reminder that in the U.S. that Marriott has kind of the leading share of both signings for new build construction hotels as well, it's actually what's under construction at 29% of signed and 28% of under construction. And we did see a pickup in Q3 of rooms going under actually digging the shovel in the ground. But I would say overall, the trend is fairly similar. We are still meaningfully below construction starts for compared to 2019. And when you think about the environment, we don't see a major trend. Clearly, as you look at dropping rates that should help. We are seeing a bit of a pickup in asset sale transactions in proven markets with proven brands. But I would say we still need to see more improvement on the financing environment to see a dramatic pickup in new build construction starts. But again, every little bit of momentum is appreciated that we are seeing a little bit. Operator: We'll go next to Patrick Scholes with Truist. Charles Scholes: In relation to the last question, can we drill down a little bit about the development -- the latest trends in the development environment and APAC and China? Kathleen Oberg: Yes, sure. So basically, we're thrilled with what we see in terms of both rooms growth and continued signings in Asia. Let me talk first about Greater China, again, broadly speaking, both areas are seeing double-digit rooms growth and continued disproportionate share of signings as we move forward. So when you look at the pipeline, I would say we've got a situation where in APAC, you've got 8% of our existing rooms while 15% of our pipeline and in Greater China 11% of our existing rooms and 18% of our pipeline. So really great progress there. And they have different situations where in APAC, you've got a number of economies that are growing rapidly and meaningful need of greater lodging supply to meet the demand growth. And so when we think about markets like India, Indonesia, Japan, we just see continued outperformance for Marriott as compared to our competitors in signing new deals across all the chain scales. We're continuing to do lots of premium deals there, but also now seeing more extension down into the upscale and even mid-scale space. In Greater China, it's obviously a little bit of a different story, where there, while we see the same big increase in signings growth, it is much more concentrated in the upscale tier. And from that standpoint, you're seeing investors appreciate the relatively lower volatility and lower unit costs for developing a hotel as compared to a luxury hotel in a Tier 1 city, for example. So as we see the continued growing strength of our brands in Greater China, the demand for a strong model that has the power of Marriott Bonvoy and also very competitive affiliation costs and operating costs, those brands are doing particularly well. So we've seen very strong improvement there. And again, just as a reminder from a Greater China perspective, we are right now still seeing a bit higher percentage of domestic travelers than we did pre-COVID in the low 80 percentage. And I think it's a good reminder that our hotels provide jobs for Chinese citizens. They're overwhelmingly for Chinese customers. And as our brands grow in strength, you are seeing this growth across markets and across chain scales for Marriott International. Anthony Capuano: And Patrick, just to quantify some of that greater China momentum that Leeny described. Year-to-date through the end of the third quarter, our room signings in Greater China are up 24% year-over-year. Operator: We'll hear next from Brandt Montour with Barclays. Brandt Montour: I was hoping we could double-click on business transient. It doesn't sound like you guys are baking in a dramatic recovery in the fourth quarter or your comments on '26, but trends did seem to sort of worsen as of late. So just wondering how much of that was the government shutdown or government-related and ex government, have you seen trends stabilize or any sort of green shoots there you can talk about? Anthony Capuano: Yes. Let me give it a try. The global business transient in the quarter was effectively flat, but there was a sequential improvement versus Q2 when global BT was down 2%. Global BT RevPAR, if you exclude government, to your point, was actually up 1% year-over-year, but we saw government transient down 15% year-over-year. And I think as we look into 2026, a little bit more of the same, the larger companies that make up BT, we're seeing actually pretty encouraging strength, but you are seeing a bit of hesitancy from some of the SMEs as they try to navigate the volatile economic environment. Kathleen Oberg: And the only thing I'll add is that on a -- from a kind of relative basis of the larger corporate BT versus the small and medium-sized businesses, we did see relatively more weakness in the smaller and medium-sized businesses, which, as you might imagine, has a bit greater impact on our select service brands. Operator: Your next from Aryeh Klein with BMO. Aryeh Klein: Going back to the credit cards, there's been some pretty big program renewals for premium cards at both Capes and Amex with their own offerings. I'm curious if you view that as competition in any way? And what, if anything, that might mean for the upcoming renewals? Anthony Capuano: Yes. Listen, I think it's not limited to those companies. There is a broad recognition across the financial services players about the strength and the long runway for travel-related spending. Certainly, in the context of the discussions we've been having with our partners, we think those cards can exist and be complementary. But it's something that will be incorporated into the ongoing discussions. Operator: We'll hear next from Richard Clarke with Bernstein. Richard Clarke: I guess you gave some helpful color on how you're using AI artificial intelligence internally. Just any comments on the sort of external use, making your hotel discoverable, bookable through ChatGPT and other platforms. Do you see that as an opportunity? Is that something that's being worked on at Marriott? Anthony Capuano: Yes. Without question, when we think about our distribution strategy broadly, we are increasingly certain that AI platforms can and will be helpful new distribution channel for us. More and more guests are going to use them for trip suggestions, trip planning. While the search and the commerce models are still, you could argue in their infancy, we are certainly optimizing the content across our platforms to take advantage of GenAI services. Our channel strategy broadly is designed to ensure we've got broad reach across all traditional and emerging channels. And certainly, generative AI, Agentic AI falls squarely in that emerging category. Operator: We'll turn now to Duane Pfennigwerth with Evercore ISI. Duane Pfennigwerth: Wanted to ask you about any changes you're seeing in underlying seasonality. One of the things we've heard from the airlines has been a shift in the underlying seasonality to Europe, a little less focus on peak summer, July and August and better trend in the fall with October seeing more demand versus maybe the pre-pandemic period. I wonder if you're seeing this elongated peak seasonality too? And can you just remind us how much of your Europe demand comes from U.S. point of sale? Anthony Capuano: Yes. While Leeny's pointing that, I want to give you the precise number, I'll give you maybe a more anecdotal answer. I've been on the road for the last 6 or 7 weeks. I was in a few cities in Europe, I was in Rome and Milan and Venice. And walking around in October in those markets felt like the traditional rounds in June and July. I do think some of that is weather related. I was in Florence talking to our teams there, and they said the pretty significant press coverage about elevated temperatures during traditional peak season caused a bunch of rebookings into the fall. As I talk to our operators across Europe, there is certainly a view that the season, it's extending earlier into the spring and later into the fall. And Leeny and I were in Japan for the opening of our new JW Marriott in Tokyo. And I think we saw the same thing there, a really strong extension of peak season into the fall. Kathleen Oberg: Yes. So just from a just straightforward numbers perspective, the mix of U.S. customers in Europe in Q3 this year was 36%. For the full year last year, it was 33%. So there's not really a huge shift. I think, generally speaking, looking to see if there are any other of kind of categories that look meaningfully higher. And just a little bit more from certain other parts like APAC, et cetera. But I'd say overwhelmingly, pretty similar. You would have thought that with FX, with the weakening dollar that you might have seen more of an impact, but we still saw a very strong summer results. And then just as a reminder, there were certain events that happened in Q3 a year ago as compared to this Q3, like the Paris Olympics, which I think also is just a point to mention. But from an overall seasonality, we've got the boomers, obviously traveling all over, but I'd say no major shifts. Operator: We'll go next to Smedes Rose with Citi. Bennett Rose: I just wanted to go back to the rooms growth expectations. Just a little bit, just because we keep hearing a lot of discussion, which we have for some time now around kind of the K economy, the lower end consumer not doing that well, and we certainly see it showing up in kind of select service, limited service RevPAR numbers and that softness, I think, in general, it is expected to continue. Do you have a sense of how developers in the U.S. are thinking about returns on that kind of products have they come down? Do you feel like you'll take more share given the strength of your brands within what is being built? Or just kind of curious like how does the developer decide to put a shovel on the ground now given what we're seeing, at least on the revenue side? Kathleen Oberg: So I'm going to talk about 2 effects of this, and one is on conversions and one is on new build because I do appreciate the opportunity to have a little advertisement regarding our growth in mid-scale. We've only been in the mid-scale space a couple of years. We've already got 200 rooms open, and we've got well over 200 more in the pipeline in the mid-scale space across our StudioRes, City Express and Four Points Flex. Anthony Capuano: Hotels. Kathleen Oberg: Hotels. Yes. And in the U.S. and Canada, for example, we've got 150 mid-scale hotels in the pipeline. So it's really very excited about the opportunities there. And to your point, we actually see meaningful interest in the conversions to our brands for the strength that we provide relative to revenues as well as extremely competitive affiliation costs. I think on the new build side, there continues to be a host of factors that have meant that there is a bit more reluctance and part of this is around expectations on interest rates, i.e., when might it be that money is cheaper on the financing side and when the constraints around exactly how much debt and equity have to be put in, whether that will change. Now we've also got the reality that you've seen labor cost and construction costs also have gone up meaningfully over the last few years. And so seeing those moderates would be helpful as well. That being said, we continue to see a steady drumbeat of new hotels going under construction. But I think we all have to recognize that compared to 2019 when the financing costs were close to 0, that it is a different environment. But we think from an attractiveness of the asset standpoint that it still fits many of the qualities for a limited service hotel, where you see strong cash on cash yields, fairly steady performance over time and a good environment. So I think some of this is about standing on the sidelines and waiting to go back in rather than not doing the deals at all. Operator: We'll go now to Lizzie Dove with Goldman Sachs. Elizabeth Dove: I just wanted to ask if you have any kind of appetite for whether it's kind of small tuck-in M&A or partnerships similar to kind of citizenM. And if so, if there's any kind of areas of the portfolio you'd be looking to kind of fill out more? Anthony Capuano: Sure. So at the risk of being repetitive, I'll give you the answer I've given you in the past, which is I don't think the team feels any burning need to chase M&A in pursuit of scale. Thankfully, we enjoy industry-leading scale. We'll apply the same lens that we've applied historically to opportunities that may present themselves. And the lenses we have applied if we see a geographic area that we think represents real opportunity for growth and/or represents an important outbound demand generation market, and we are dissatisfied with our pace of organic growth, we might look for an opportunity. If we scan our brand architecture and we see a gap that we think is more effectively filled by a tuck-in M&A acquisition versus the launch of an organic platform, we would consider it there. But again, I think we'll be quite deliberate and will apply same financial rigor that we always do and as was evidenced in a deal like citizenM. Operator: We'll turn now to Meredith Jensen with HSBC. Meredith Prichard Jensen: Maybe following on a little bit from what Richard and Lizzie asked. On the launch of the Bonvoy Outdoor, I was hoping you might speak a little bit about how this sort of dedicated digital vertical within Bonvoy might sort of serve as a framework for future loyalty sub kind of ecosystems or if this was more opportunistic given that homes and villas and some of the properties were already on a sort of separate platform for digital integration. And maybe just to add on to that, if sort of looking at these platforms like citizenM or the outdoor platform sort of shift your way of thinking about digital distribution in a broader sense. Anthony Capuano: Yes. Let me give it a try. The -- some of this is really inexorably linked to the central reservations transformation, which we think will be quite reflective of how our customers want to shop. So the ability to search our portfolio through passions as opposed to simply a geographic search. Homes and villas is a good example of that. Outdoor collection is a great example of that. So rather than saying I want to go to Costa Rica or I want to go to Hawaii, I made search surfing options within the portfolio. And the new central res system will give our guests a seamless ability to do that. CitizenM, I would view as a little more traditional. It's a terrific product, but I think that will likely benefit from a more traditional geographic search. Kathleen Oberg: I think the only thing I would add is as you talk about kind of the broader view of what our digital channels provide and how we think about that platform, obviously, we want people to be coming to the Bonvoy platform and then being able to do their shopping and their communication with us however they choose, whether it's by city or whether it's by activity. But one thing just as a really critical piece that we view an ultimate critical component of it is that we control the experience that our customers have. And that is where we really want to be the providers of fantastic experiences of being able to communicate with them about what they want, what they need, how they want that to go. And so while yes, the digital shopping is very important, at the end of the day, the face-to-face person-to-person way that people experience their lodging stays is something that we feel very strongly about, and we'll want that to be part of the overall advantage. Operator: And ladies and gentlemen, with no further questions at this time. I'd like to turn the floor back over to Tony Capuano for any additional or closing comments. Anthony Capuano: Great. Well, thank you all again for your continued interest and coverage of Marriott. Leeny and I have both been on the road quite a bit. We have some extraordinary hotels and some new additions to the portfolio. Our teams continue to be as passionate as engaged as you would hope, and we look forward to seeing you on the road and hosting you. Have a great afternoon. Operator: Thank you. Ladies and gentlemen, that will conclude today's event. Thank you for your participation. You may disconnect at this time, and have a wonderful rest of your day.
Operator: Good day, and welcome to the Costamare Third Quarter 2025 Financial Results Conference Call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Gregory Zikos, CFO. Please go ahead. Gregory Zikos: Thank you, and good morning, ladies and gentlemen. During the third quarter of the year, the company generated net income of about $99 million. After the spin-off of Costamare Partners Holdings Limited, Costamare Inc. remains the sole shareholder of 69 containerships as well as the controlling shareholder of Neptune Maritime Leasing. In September, following up from our previously announced order of 3,100 TEU capacity containerships, we exercised our option for 2 more sister ships to be delivered in Q1 2028. Upon delivery, they will also commence an 8-year time charter with the first-class liner company. Since last quarter, we have also fixed 8 vessels with a forward start for periods ranging from 12 to 38 months. These transactions resulted in increased contracted revenues of about $310 million. Our fleet deployment stands at 100% and 80% for 2025 and '26, respectively. Total contracted revenues amount to $2.6 billion, with a remaining time charter duration of about 3.2 years. Regarding the market, the positive outcome from the latest trade discussion between U.S. and China and the delay in the implementation of port fees should positively contribute to global increased trade flows. Without the fleet of less than 1%, the charter market remains strong with rates fixed at healthy and stable levels on the back of vessel shortage and steady demand. Finally, with regards to Neptune Maritime Leasing, the growing leasing platform, 50 shipping assets have been funded or are committed and total investments and commitments are exceeding $650 million. Moving now to the slide presentation. On Slide 3, you can see our third quarter results. Adjusted net income was $98 million or $0.81 per share. Net income for the quarter was around $93 million or $0.77 per share. Our liquidity stands at about $560 million. Slide 4. We have concluded newbuild contracts for another 3,100 TEU containerships with expected delivery in Q1 '28, bringing the total number of newbuilding orders to 6. Upon delivery, each vessel will commence an 8-year charter with a leading liner company. On the employment side, we have increased our contracted revenues through new chartering agreements by more than $310 million. In addition, our revenue days are 100% fixed for '25 and 80% for '26, while our contracted revenues are $2.6 billion with a TEU-weighted remaining duration of 3.2 years. Moving to Slide 5. Regarding our financing arrangements, we have agreed to the pre- and post-delivery financing of our 4 newbuilding's. We have no major maturities till 2027. On the S&P side, we have concluded the acquisition of 6,500 TEU container vessel. Slide 6. On our leasing platform, we have invested around $180 million. NML has funded or committed to fund 50 shipping assets for a total amount of more than $650 million. Finally, we continue to have a long uninterrupted dividend track record. Moving to Slide 7, the last slide. Charter rates in the containership market remain at firm levels. The idle fleet remains at low levels at about 0.9%, indicating a fully employed market. With that, we can conclude our presentation, and we can now take questions. Thank you. Operator, we can take questions now. Operator: [Operator Instructions] The first question comes from Omar Nokta with Jefferies. Omar Nokta: Just a couple from me. Obviously, just looking at your chartering activity, you've been able to add a good amount of visibility forward fixing several ships. It looks like maybe an average of at least 2 years or so from what's on the -- from where they were before. But I just wanted to get your sense in terms of how has chartering activity in general sort of developed here over the past maybe couple of months because you've had obviously a very volatile year for, say, the underlying freight market where there's been huge swings upwards and downwards for freight rates. They bottomed about a month ago. Now they've jumped. Just want to get a sense from you, given just how active you are in the chartering market, have you noticed any shift in liner appetite? Have things changed here over the past several weeks? Any kind of color you can give on developments on charter it would be great. Gregory Zikos: Sure. First of all, regarding the box rates, you are right. I mean, last week and last month in general, box rates have been up, especially on the U.S. West Coast trade route. Now regarding the charter market, there is a shortage of ships, especially larger vessels. So I mean, whichever ships come out, there are definitely candidates to have them chartered in. So still the market remains at very healthy levels. There is demand and ships are easily absorbed. And I think the main indicator, or someone needs to look at is the idle vessels, where if you back out any dry dockings or sort of technical issues, this is less than 1%. So less than 1% idle fleet means that practically we have a fully employed market. So -- and charter rates, in general, they are holding up very well. Now whether this will continue or not, and for how long, it's hard to say because we have a series of geopolitical events that might affect it. But for the time being, it is a healthy market. Liners are generally eager to charter in vessels. Now you can argue that probably they may not want to go for longer periods in general compared to the past. But still, you still see like a 2- or 3-year time charter for secondhand vessels on a forward basis. So in that respect, I think that the fundamentals, as they stand today, considering that the supply of vessels is quite thin, the fundamentals are quite tight and quite positive, I would say. Omar Nokta: And then maybe just a follow-up. I wanted to ask about the secondhand acquisition you mentioned. You bought the 06 built 6,000 TEU vessel. That looks like it's on contract to Maersk. Is that -- could you maybe talk about kind of the -- how that came about? Was this a direct acquisition from Maersk with a charter back to them? Are there more opportunities like that, do you think in the sale and purchase? Gregory Zikos: Yes. I think this vessel has been chartered back to Maersk. This is a structure sale and leaseback deal. There may be more opportunities like that in the future. I mean we haven't come across anything that -- something like that, that probably would make sense. And as -- but definitely, there may be. And as you've seen, we have been focusing on all the new buildings for the 3,100 TEU ships, we had concluded 4 previously announced in the Q2 results. We have added 2 more options now. Those are going to be delivered in Q1 '28. On a back-to-back basis, we have pretty much arranged the charter for the first 4 -- sorry, the financing for the first 4, and we are closing the commitment of the financing for the last 2. So which is something that also makes sense. And we are generally active. So either secondhand or even new buildings, assuming that we feel comfortable with the residual value risk of our equity, I think we are -- we will be quite active. Operator: The next question is from Climent Molins with Value Investors. Climent Molins: Following up on Omar's question on the first one. Could you talk a bit about whether you believe the recent increase in freight rates is sustainable? It seems it was mostly a function of front running as tensions between the U.S. and China increased, but those have been lowered since. So how do you think about the trade-off of having more visibility versus the front running? Gregory Zikos: Yes. For the freight rates, I mean, the box rates, this is something that could also be directly addressed to the liners who sort of may have a better visibility. I agree with you that last week and last month, freight rates push has been because of front running, may have to do with the pushback of the port fees, et cetera, rearrangement of schedules of the liner companies. Now to what extent they are sort of medium or long-term sustainable, I cannot comment on that. They are sort of -- because if you look historically at the 3 or 6 months or like 1-year box rates, they have been on a negative trend. But I'm afraid I cannot forecast where box rates are going to be starting from today over the next 3 to 6 months. To some extent, this is something that also liner companies. I think they do have a greater visibility on that. Climent Molins: Yes, makes sense. No one can really forecast that. And also following up on Omar's second question, it seems the Maersk Puelo is fully committed until next October, but Maersk has options to extend employment until 2031. Could you talk about how likely those are to be exercised given the rate? Gregory Zikos: Okay. I'm afraid these are charter risk option. So as mentioned, it's up to the charter to have them exercised. So again, I cannot forecast what a third party will be doing. So I think market levels will dictate whether the charter will take those options or not. But on a committed basis, you are right, this is a 1-year charter. And from our side, we have run the numbers to -- so that being conservative, we have been factoring in this 1-year time charter period. After that, it's up to the charter to decide based on its needs, based on market rates, based on the cargo demand to see whether those options one by one are going to be subsequently exercised. Operator: This concludes our Q&A or question-and-answer session. I would like to turn the conference back over to Gregory Zikos for any closing remarks. Gregory Zikos: Yes. Thank you for dialing in today and for your interest in Costamare Inc. We are looking forward to speaking with you again during the Q4 and year-end results call. Thank you. Operator, I think we have concluded. Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect. Gregory Zikos: Thank you.
Operator: Good day, and welcome to the Chicago Atlantic Real Estate Finance, Inc. Third Quarter 2025 Earnings Call. [Operator Instructions] Please note that today's event is being recorded. I would now like to turn the conference over to Tripp Sullivan of Investor Relations. Please go ahead. Harry Sullivan: Thank you. Good morning. Welcome to the Chicago Atlantic Real Estate Finance Conference Call to review the company's results. On the call today will be Peter Sack, Co-Chief Executive Officer; David Kite, Chief Operating Officer; and Phillip Silverman, Chief Financial Officer. Our results were released this morning in our earnings press release, which can be found on the Investor Relations section of our website, along with our supplemental filed with the SEC. A live audio webcast of this call is being made available today. For those who listen to the replay of this webcast, we remind you that the remarks made herein are as of today and will not be updated subsequent to this call. During this call, certain comments and statements we make may be deemed forward-looking statements within the meaning prescribed by the securities laws, including statements related to the future performance of our portfolio, our pipeline of potential loans and other investments, future dividends and financing activities. All forward-looking statements represent Chicago Atlantic's judgment as of the date of this conference call and are subject to risks and uncertainties that can cause actual results to differ materially from our current expectations. Investors are urged to carefully review various disclosures made by the company, including the risk and other information disclosed in the company's filings with the SEC. We also will discuss certain non-GAAP measures, including, but not limited to, distributable earnings. Definitions of these non-GAAP measures and reconciliations to the most comparable GAAP measures are included in our filings with the SEC. I'll now turn the call over to Peter Sack. Please go ahead. Peter Sack: Thank you, Tripp. Good morning, everyone. This quarter, against the backdrop of a volatile private credit environment, we demonstrated another consistent period of execution and performance. The benefits of our consistent approach and disciplined focus on principal protection yielded a strong quarter and this quarter's gross originations have us on pace to hit our goal of net growth in the loan portfolio. Challenges in private credit markets have created newfound concern in the investor community. Declining interest rates impacted lenders with floating rate portfolios. The syndicated loan market experienced high-profile fears of fraud and excess capital in the market underlies perceived lack of underwriting standards. I suspect that these broader concerns have caused us to trade at a sizable discount to our book value rather than the premium we long enjoyed since our IPO nearly 4 years ago. Noting this disconnect from the reality of our portfolio, our management team and Board of Directors recently purchased shares on the open market, bringing our collective ownership of the common stock to nearly 1.8 million shares on a fully diluted basis. There are several reasons why we're so confident with what we've created at Chicago Atlantic. The first is that we have a cannabis pipeline that currently stands at approximately $441 million. We believe that this pipeline of opportunities is unrivaled in the industry and is diversified across growth investments, maturities in the market, M&A activity related to operational and balance sheet restructurings and potential ESOP sale transactions. Secondly, we have the most robust platform and capital to meet the growth of the industry. We deploy capital with consumer and product-focused operators in limited license jurisdictions at low leverage profiles to support fundamentally sound growth initiatives. I can't think of a better example of our commitment to the industry than Chicago Atlantic's funding this quarter of what we believe to be the largest real estate-backed revolving credit facility among U.S. operators in the history of the industry, a $75 million 3-year secured revolver with Verano. Lastly, we've constructed a portfolio with differentiated and low levered risk return profile that is insulated from both Cannabis Equity and interest rate volatility. As David will break down for you in a moment, because we have structured our floating loans with interest rate floors, only approximately 14% of our total loan portfolio is exposed to any further rate declines based on today's 7% prime rate. That discipline provides a meaningful measure of protection to the portfolio. We are focused on outperforming and delivering the kind of returns that we all expect to shareholders. Confidence in the strategy is important. And hopefully, I've provided some insight into why we are enthusiastic and why we, as a management team, executed share repurchases in recent weeks. But execution on our plan matters even more and I look forward to reporting on our continued progress over the balance of the year. David, why don't you take it from here? David Kite: Thank you, Peter. As of September 30, our loan portfolio principal totaled approximately $400 million across 26 portfolio companies with a weighted average yield to maturity of 16.5% compared with 16.8% for the second quarter. Gross originations during the quarter were $39.5 million of principal fundings of which $11 million was advanced to a new borrower and $20 million was related to the new Verano credit facility that Peter mentioned earlier. These were offset by unscheduled principal repayments of $62.7 million that we disclosed last quarter. As of September 30, 2025, our portfolio consisted of 36.7% fixed rate loans and 63.3% floating rate loans. The floating rate portion is primarily benchmarked to the prime rate. Following last week's 25 basis point rate reduction, bringing the prime rate to 7%, only 14% of our portfolio remains exposed to further rate decline. The remaining 86% is either fixed rate or protected by primary floors of 7% or higher. Importantly, our floating rate loans are not exposed to interest rate caps. This structural advantage, combined with our rate floor protections positions our portfolio favorably compared to most mortgage REITs. Should the Federal Reserve implement another adjustment to the Fed funds target in December, we are well insulated against the adverse effects of declining interest rates. Total leverage equaled 33% of book equity at September 30 compared with 39% as of June 30. As of September 30, we had $52.4 million outstanding on our senior secured revolving credit facility and $49.3 million outstanding on our unsecured term loan. As of today, we have approximately $69.1 million available on the senior credit facility and total liquidity, net of estimated liabilities of approximately $63 million. I'll now turn it over to Phillip. Phillip Silverman: Thanks, David. Our net interest income of $13.7 million for the third quarter represented a 5.1% decrease from $14.4 million during the second quarter of 2025. The decrease was primarily attributable to nonrecurring prepayment make-whole exit and structuring fees, which amounted to $1.1 million for Q3 2025 compared with $1.5 million in Q2 2025. Additionally, approximately $0.1 million of the decrease in net interest income was attributed to the impact of the 25 basis point rate cut late in September on our floating rate portfolio and interest expense on our revolving credit facility. Total interest expense, including noncash amortization of financing costs for the third quarter was approximately $1.6 million, down from $2.1 million in the second quarter. The weighted average borrowings on our revolving loan decreased $14 million compared to $42.3 million during the second quarter. Our CECL reserve on our loans held for investment as of September 30, 2025, was approximately $5 million compared with $4.4 million as of June 30. On a relative size basis, our reserve for expected credit losses represents approximately 1.25% of our outstanding principal of our loans held for investment. On a weighted average basis, our portfolio maintained strong real estate coverage of 1.2x. Our loans are secured by various forms of other collateral in addition to real estate, including UCC-1, all asset liens on our borrower credit parties. These other collateral types contribute to overall credit quality and lower loan-to-value ratios. Our portfolio has a loan-to-enterprise value ratio on a weighted average basis of 43.5% as of September 30, calculated as senior indebtedness of the borrower divided by the fair value of total collateral to refi. Distributable earnings per weighted average share on a basic and fully diluted basis were approximately $0.50 and $0.49 for the third quarter, a modest decrease from $0.52 and $0.51, respectively, during the second quarter. And in October, we distributed the third quarter dividend of $0.47 per common share declared by our Board in September. Our book value per common share outstanding was $14.71 as of September 30, 2025, and there are approximately 21.5 million common shares outstanding on a fully diluted basis as of such date. We continue to expect to maintain a dividend payout ratio based on our basic distributable earnings per share of 90% to 100% for the 2025 tax year. If our taxable income requires additional distributions more than the regular quarter dividend to meet our taxable income requirements, we expect to meet that requirement with a special dividend in the fourth quarter. Operator, we're now ready to take questions. Operator: [Operator Instructions] At this time we will take today's first question from Aaron Grey with Alliance Global Partners. Aaron Grey: First question for me. I just wanted to talk about the pipeline a bit. So $415 million, I know that's down a little bit from prior quarters. So I just wanted to talk about where there are some large potential originations that exited the pipeline. And I know prior quarter, you had talked about ESOPs and potential opportunity there. So I want to see if you still see those as appealing and within the pipeline opportunities. Peter Sack: Yes. ESOPs continue to form a large part of the pipeline. There was no significant exits other than ordinary turnaround of our pipeline quarter-over-quarter. We have -- our pipeline tends to refresh every quarter or so as deals that -- as deals either disappear, get turned down by us or get funded. And so changes quarter-over-quarter were ordinary churn. Aaron Grey: Okay. Great. Glad to hear ESOPs are still a good opportunity for you guys. Second question for me, just in terms of some of the loans that are maturing before year-end. Any color you can talk about in terms of how those conversations are panning out? I know you're still targeting net portfolio growth for the year. So any color on those would be greatly appreciated. Peter Sack: We are in the midst of negotiating the terms under which we may extend to maintain the business and maintain the position. And I expect that the vast majority of those loans that are maturing before the end of the year, we will retain in some form or another. Aaron Grey: Okay. That's great to hear. Last question for me. No direct implications for new cannabis legalization in the election today but some indirect, particularly for Virginia, if there is a new government that comes in that's more pro-cannabis. Particularly looking at that state, I know new states coming online could be a good opportunity for you guys. So how would you guys potentially look at a state like Virginia in terms of the opportunities there and how the regulatory landscape exists today and could exist tomorrow based on pass legislation for retail setup? Peter Sack: We think Virginia is a very attractive medical market due to its very controlled licensure structure and the way in which the regulator has set up the geographic orientation of license holders. And we think it will be an extremely attractive recreational market as well. So as those discussions progress, we'll be looking to expand our relationships in the state and deploy capital. Operator: And today's next question comes from Chris Muller with Citizens Capital Markets. Christopher Muller: Congrats on another solid quarter here. So you guys have done a really great job underwriting a pretty challenging part of the market here. So can you guys talk about your approach to underwriting and what's driving that success? Is it more the type of borrowers you focus on or the geographies or maybe a combination of those? Peter Sack: Yes, I think you've hit on some of the key points. The first -- I think the foundation of our underwriting is an analysis of each of the markets, each of the markets of the 40 states that are legalized medical or recreational cannabis and that underwrite begins before we've deployed a single dollar into that market. And it's not just a focus on the state, it's also a deeper dive into each piece of the supply chain within that market. We focus on limited license jurisdictions because we find that in these spaces, the regulatory moat creates greater predictability of wholesale prices, margins and the competitive environment. Within that framework, we're focused on operators with a diverse source of earnings streams, whether that's earnings coming from a diverse portfolio of retail operations, retail and vertical integration or retail vertical integration spread across multiple limited license states. And then lastly, in addition to -- apologies, in addition to real estate collateral, we're focused on lending to operators at conservative leverage levels of under 2x EBITDA. And the combination of all of these factors, frankly, allows for diversity of repayment, diversity of potential growth opportunities. And then while we're in structuring loans, I think it's important that in the majority of our loans, not only is our capital going towards growth initiatives that drive EBITDA improvement, and the majority of our loans also include amortization. Christopher Muller: Got it. That's all very helpful and I guess... Peter Sack: And so the aim is that our loans will be less risky by their maturity date by virtue of EBITDA growth and loan paydown than they were at the outset and that we can then continue to support those clients in the next phase of their growth, whether that's acquisitions, expansion of cultivation, expansion of retail. And it's really just consistency with what we think are pretty simple fundamentals approach to this industry, a focus on credit quality and a focus on principal protection that's allowed us to maintain the track record through a lot of volatility in equity valuations and in the marketplaces, the operating marketplaces in each of these states. Christopher Muller: Got it. That's very, very helpful. And I guess maybe looking forward a little bit. So looking at the LTVs of your portfolio, they're well below what we see for a typical commercial mortgage REIT. So if we do end up getting some type of reform, whether it's this year or next year, whenever that timing is, what type of normalized LTV would you expect to see in the portfolio? Peter Sack: Well, it's a difficult question to answer because there's a few variables. I would expect that in the case if the reform that we're discussing about is rescheduling, I haven't seen examples of a significant amount of new lenders entering the market in the event of rescheduling. And so I think there's opportunity to increase our loan sizes in many cases with many of our borrowers by nature of the improved cash flow dynamics of operators in a rescheduling environment because of the lack of the impact of 280E taxes. So that's one reason why you might see loan balances go up in a post- rescheduling world because the fundamental cash flow profile of the industry and individual operators has improved significantly. But also on the other hand, I would expect there to be a lot more equity interest in the sector as a result of rescheduling. And so I would expect to see the denominator, the V in that ratio increase significantly starting with public operators and public cannabis valuations. And so the combination of those two, it's difficult to parse exactly what would be the change in LTV. Christopher Muller: Got it. There's a lot of unknowns out there still. So that's very fair. Peter Sack: Yes. But I would note that we focus in our underwriting on the ability of a cannabis operator to service its indebtedness and to pay back that indebtedness. And that was our focus when cannabis companies were valued in the high teens EV to EBITDA. And that's our focus today when cannabis companies are valued in single-digit EV to EBITDA. And so I think it's -- and so that's why the understanding of the cash flow and diversity of cash flows and the collateral is really fundamental to us and more fundamental to us than an ephemeral -- potentially ephemeral market cap, potentially an ephemeral license value. Christopher Muller: Got it. That's all very, very helpful. And I guess just one clarifying one real quick, if I could. Did I hear you guys correctly say that 86% of the portfolio has active floors in place as we sit today? Peter Sack: That's a combination of floors and fixed rate. Operator: And the next question comes from Pablo Zuanic with Zuanic & Associates. Pablo Zuanic: Peter, I realize that every company is different. But for example, IIPR this morning announced an investment outside cannabis, AFC Gamma transforming to a BDC investing outside cannabis. Chicago Atlantic BDC also is investing outside cannabis. Is that something that Chicago Atlantic Real Estate Finance would also consider given the environment in cannabis? Peter Sack: We have, on occasion, invested outside of cannabis, but we find that the risk reward profile for real estate-backed loans in the cannabis space is simply much more attractive than the risk reward in most cases than the risk-reward profile of real estate-backed loans in non-cannabis real estate opportunities. And I think that's what's driving our focus and the overwhelming allocation of the portfolio to cannabis opportunities in refi. But to the extent that changes, to the extent that we find attractive real estate-backed opportunities, we will certainly offer them to refi and may deploy them in refi. But Chicago Atlantic was founded with a focus on idiosyncratic and niche areas of the private credit market and with a focus on cannabis. And that's part of our DNA and that focus on cannabis and our fidelity to the sector is not going to change. And I think it's one of the reasons why we've persisted in this industry and continue to deploy in this industry as the equity markets have experienced significant volatility as other lenders have exited the space. We think that focus and specialization can drive outsized returns and really differentiated returns for our investors and that we can provide a better product, better support, better relationship with our clients, with our borrowers. And we find that consistent presence in the market, that consistent support to our borrowers leads to better relationships, leads to more longevity of relationships and leads to a greater ability for us to build relationships with the next top operator that emerges from the ecosystem. Pablo Zuanic: Right. That's good color. Just moving on in terms of 280E, you explained in the prior question that your main focus is on the company's ability to service debt, right? So how do you think about the uncertain tax provision that most MSOs have, right? The majority of them -- well, most MSOs, not the majority, like pretty much all of them except one, are paying their taxes, declaring taxes as a normal corporation and assuming 280E does not apply and based on lawyers and auditors recommendations, their advice, they are putting an item that's called uncertain tax provisions or benefits as a long-term liability, right? We will see if it's ever due and it doesn't have a maturity date. But how do you factor that in your ability to service debt? Peter Sack: We consider it as another form of leverage. And so we aim to create covenants that limit the ability of our borrowers to incur uncertain tax liabilities above a certain amount. And that amount is set by our comfort of the total leverage profile of the company. Pablo Zuanic: That's good. Look, I know we normally do not talk about specific borrowers, but you mentioned Verano in your prepared remarks. I'm trying to understand here the dynamics. In the case of Verano, Chicago Atlantic, I believe, as a group, not just refi, has about a $300 million facility, $292 million book in Verano due next year, right? And now you have issued these revolvers for $75 million, 3-year revolver. I'm trying to understand the dynamics in terms of why not just restructure the whole thing and just have to restructure the $300 million loan that was due next year? Or given that we don't know what's going to happen in reform, you might just -- I'm just trying to understand why not do that as opposed to issuing a 3-year short-term revolver here? Peter Sack: We have incredible respect for the team at revolver -- at Verano and what the team at Verano has accomplished, what they're executing on today and their growth prospects. And we think their footprint, their asset base and their mindset when approaching the industry is something that we think is really unique within the space and we really value the partnership. And so to the extent that we can support them in any way, we're going to be ready and willing and we'll do our best to further their next growth initiatives and that applies for the rest of our portfolio as well. And so I can't -- I don't want to speak for what the team's aims are and how they wish to structure their balance sheet, except to say that we value their relationship, we value their partnership and we would love to support them in any way we can. And are really excited for what they're executing on within their portfolio. Pablo Zuanic: Okay. And one last one, if I may. I know that we discussed the competition from other sectors before. I was recently at the Blank Rome conference. Bank Needham there, they said that they had issued about $500 million in loans to the cannabis sector, including Curaleaf most recently. They said they would never go to $2 billion, but they implied that they could double the current amount. So my read is that the competition from the regional banks under the current regulatory status quo is increasing, whether it's Valley Bank, Needham or other people. Am I wrong about that read, Peter? Peter Sack: I think those banks that have developed an expertise that have invested in the infrastructure and invested in the relationships of the cannabis space, in general, those banks have done well because they've deployed capital with discipline and conservatism and built relationships with some of the strongest operators in the space. And in many cases, those banks are now opting to go deeper because they've seen -- they've experienced success. And so I think we've seen that among some of the largest banks that have consistently deployed capital in the space that they're seeking to do more, and that's great. We view banks as partners in our deployment strategy. They are leverage providers in both our public and private funds. There are co-lenders in many transactions. There are co-lenders in unitranche transactions in many transactions. And so we think they're an integral part of the lending ecosystem, and they're part of this process of building a mature capital markets for the cannabis industry. And I think to compare -- just to compare where the banking industry sits within the broader private credit ecosystem today, banks are not outside of the cannabis industry. Banks are operators alongside of the private credit space. And the private credit space and whether that's mortgage REITs and/or BDCs operate alongside the banking ecosystem, and they benefit one another significantly and work together as part of this ecosystem. And that's what we hope to see develop in the cannabis industry, and that's what we're trying to build at Chicago Atlantic through our various partnerships with nearly all of the major banks that are operating in the cannabis space today. So long story short, we welcome and have worked to help banking institutions enter the cannabis space and we hope more will do so. Pablo Zuanic: Look, I'm sorry, I want to add one more question if you don't mind, and apologies if there's someone else on the queue here. Can you give an update in terms of your lending program to the New York? I think your loan is to the regulator, right? It's not necessarily or to a fund there, not necessarily to the stores. I think we're up to 251 stores. Obviously, the state continues to expand in terms of retail stores, but I haven't seen necessarily that reflected in your loan book or maybe I'm missing something, but if you can provide an update on that. Peter Sack: I'm sorry, Pablo, I lost you at the beginning of your question. Could you repeat it? Pablo Zuanic: Okay. I'm going to repeat that. I'm talking about New York state in terms of the number of stores and dispensaries in New York continues to grow. We are, I think, north of 250 now. And I thought that given the agreement that you have with the regulator there in terms of the funding, the fund there that as the number of stores increases that your lending to the program will have increased. But I don't see that reflecting in your loan book or maybe I'm missing something. And I'm sorry if it's about connection. Peter Sack: The New York Social Equity Fund has opted not to draw additional capital from our funds. They've supported the construction of close to 23 stores across the state and they've taken a pause on deployments. That being said, we are ready and willing to support them if they decide to continue deployments and continue to grow the portfolio of stores that they're supporting. Operator: This concludes our question-and-answer session for today. I would now like to turn the conference back over to Peter Sack for any closing remarks. Peter Sack: Thank you all for the support and the questions. Glad to follow up offline with any questions and please reach out at any time. Thank you again. Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Operator: Good morning, everyone. Thank you for standing by. Welcome to Pet Valu's Third Quarter 2025 Earnings Conference Call. My name is Harry, and I'll be coordinating today's call. [Operator Instructions] I would now like to turn the call over to James Allison, Investor Relations at Pet Valu. Please go ahead, Mr. Allison. James Allison: Good morning, and thank you for joining Pet Valu's call to discuss our third quarter 2025 results, which were released earlier this morning and can be found on our website at investors.petvalu.com. With me on the call is Greg Ramier, Chief Executive Officer; and Linda Drysdale, Chief Financial Officer. Before we begin, I would like to remind you that management may make forward-looking statements, which include guidance and underlying assumptions. Forward-looking statements are based on expectations that involve risks and uncertainties, which could cause actual results to differ materially from those expressed today. For a broader description of risks related to our business, please see our Q3 2025 MD&A, 2024 annual information form and other filings available on SEDAR+. Today's remarks will also be accompanied by an earnings presentation, which can be viewed through our live webcast and is also available on our website. Now, I'd like to turn the call over to Greg. Greg Ramier: Thank you, James, and good morning, everyone. I'll start by reviewing some of our key highlights from the quarter before handing it over to Linda to discuss our financials and the update to our outlook for 2025. Before I begin, I'd like to express how excited I am to step into the role of CEO. Hard to believe it's been a year since I joined Pet Valu, but in that time, I've seen countless examples firsthand of why millions of devoted pet lovers turn to us for their pets' needs. From how deeply our ACEs and franchisees care about providing the best in-aisle expertise to the scale and quality of our store network, digital channel and supply chain, to the breadth and innovation of our proprietary brand assortment, we truly are unmatched in the Canadian pet. I'm thrilled to have the opportunity to help lead Pet Valu through this next chapter of growth and to add to our legacy of serving Canadians' devoted pet lovers. Now moving to the results. Our business delivered another quarter of growth and healthy margins in Q3 as we continue to navigate an uneven discretionary demand environment. With our growth once again outpacing the market, it's clear devoted pet lovers are increasingly drawn to our unique combination of strength in convenience, value, quality and expertise, which together creates our compelling retail experience unmatched in Canadian pet. System-wide sales increased 4%, supported by continued momentum on a same-store basis as well as our strategic expansion in our industry-leading store network. This translated into 5% revenue growth, including contribution from higher wholesale penetration. We achieved these outcomes through responsible and balanced investments in everyday value across our assortment and new product introductions. And we supplemented these investments with events to drive excitement to invigorate discretionary demand. At the same time, our teams continue to find opportunities to realize operating expense savings to offset inflation. As a result, adjusted EBITDA margins improved sequentially to 22%. The resilience and consistency of our performance speaks to the success of our commercial playbook and long-term strategies working in tandem. Let me unpack a few of the highlights from the quarter. We took several actions in Q3 to help solidify our position as Canada's local and everywhere pet specialty retailer. We and our franchisees opened 16 new stores in the quarter, bringing us to 849 locations coast-to-coast. With 26 stores opened year-to-date, we are well along our way of reaching 40 new stores by year-end. At the same time, we and our franchisees renovated, expanded or relocated another 72 locations, almost all of which related to our enhanced culinary experience, which I'll touch on shortly. Our digital channel continues to scale with all elements, our transactional website, AutoShip and marketplace contributing to its success. In the quarter, we featured a limited time AutoShip offer, providing 20% off first orders of key Made in Canada brands, including our Performatrin family of products; generating strong uptake and helping drive our continued growth in active subscriptions with devoted pet lovers. We are also seeing great ramp-up in our marketplace offering, which complements our other channels. Following a successful first year with Instacart, we plan to add more options for devoted pet lovers in Q4 to further elevate our industry-leading omnichannel offering and convenience. At the same time, we continue to leverage our strengths to deliver the best pet customer experience. Devoted pet lovers are taking note of the everyday value we deliver with strong response to the investments we made in our Fresh 4 Life litter last fall and in particular, to our Performatrin Prime investment this spring, with both programs exceeding expectations in volumes and sales. On the back of this success, we bolstered our everyday value proposition across hundreds of additional items in the latter part of Q3 and early Q4 with our Lower to Lock program, including investments at both retail as well as wholesale, so our franchisees can participate alongside us. While it's still early, these actions strengthen our position to continue to win the monthly shop. We complemented our everyday value with a smart and exciting promotional program, powered by our new pricing and promotions tool, celebrating events like our anniversary sale and the limited time 20% off AutoShip discount. We also broadened the portfolio of brands eligible under our frequent buyer loyalty program, including the exciting addition of Purina Pro Plan in early Q4. Equally important are our investments in innovation and quality. In the quarter, we introduced approximately 150 SKUs of national branded toys, collars and leashes, better aligning our hardlines offering with what devoted pet lovers are looking for. We also continue to innovate with our proprietary brands. This included new product introductions such as plant-based dog kibble and freeze-dried cat treats under our Performatrin Ultra brand. Fresh 4 Life corn litter and opening price point travel carriers and accessories under our Essentials brand. And finally, our enhanced culinary experience. With 70 stores completed in the quarter, including a handful of initial franchise locations, we're pleased with the pace of implementation. While still very early in its deployment, initial data reaffirms the strong lifetime value of culinary customers who visit and spend more than twice that of a traditional customer. We remain on pace to bring this enhanced experience to roughly 120 corporate stores by the end of the year. Now moving to our third focus, to fortify strong retail and wholesale fundamentals. As previously shared, we concluded our supply chain transformation in Q3 with the commissioning of our new Calgary DC in July and the exit of our legacy facility and third-party storage space in that market by the end of September. With over 1.3 million square feet of modern, partially automated distribution capacity in Canada, we have successfully built Canada's strongest supply chain, supporting the pet specialty industry and one that will support our growth over the next decade plus. For those of you who've been with us on this journey over the last several years, you know we haven't had to wait for this moment to realize the compelling benefits this transformation brings. For the past 2 years, these new facilities have enabled efficient new store growth, unlocked our ability to capture higher wholesale penetration with our franchisees and supported inventory leverage. In the third quarter, we reached another important inflection point, delivering year-over-year leverage in our consolidated distribution costs as we began to lap the step-up in fixed costs associated with these new DCs. We believe this is a strong signal for the opportunities ahead to drive profitability and reinvestment as we grow into our upsized capacity. All of these achievements, network expansion, merchandising excellence, transformation of our supply chain would not have been possible without the talent and commitment of our ACEs, our franchisees and leaders across the organization. We are a business built around nurturing the love pet parents share with their pets, and this is only made possible by nurturing and supporting our people and franchisees. We are humbled to have recently been recognized for our efforts, including receiving the 2025 Hall of Fame Award from the Canadian Franchise Association for our leadership and contributions to the Canadian franchising industry, and being named a 2025 Employer of Choice by Canadian HR Reporter. By forming strong relationships and providing safe and rewarding working environments, we help drive stability and tenure with our franchisees and ACEs, which benefits everyone, including our devoted pet lovers. To learn more about how we accomplish this, please see our 2024 ESG report, which was released this morning alongside our Q3 results. With that, I'll pass it over to Linda to review our financials and 2025 outlook. Linda? Linda Drysdale: Thank you, Greg. Overall, our business delivered another quarter of responsible growth and healthy margins in Q3 as devoted pet lovers alongside all Canadians continue to navigate today's uncertain environment. This financial resilience is a direct result of both the right strategies and our strong culture built around providing the best for our customers and relentless pursuit of efficiencies and savings. Let me review some key financial highlights before turning to our refined outlook for the full year. System-wide sales grew 4% in Q3 to $374 million. On a same-store basis, sales increased 2.3%, similar to the pace seen in Q2 and supported by growth in both basket and transactions. Comp trends across categories were relatively consistent to those seen in Q2. From a non-comp basis, we opened 16 stores in the quarter and 45 over the last 12 months, bringing us to 849 sites coast-to-coast at the end of Q3. Q3 revenue was $289 million, representing an increase of 5%, slightly ahead of system-wide sales as we continue to increase wholesale penetration with our franchisees. As expected, the gap between revenue growth and system-wide sales growth eased as we began to lap our wholesale catalog expansion in Q3 last year. Gross profit was $96 million, up 7% from last year. Excluding nonrecurring costs related to the supply chain transformation, gross margin was 33.5%, similar to last year. While we continue to see impacts from higher occupancy costs and to a lesser extent, higher wholesale merchandise sales, these factors were offset by leverage in our distribution costs, allowing the margin stability of our commercial plan to shine through. Echoing Greg's earlier comments, achieving leverage in our distribution costs has been a long promised benefit of our supply chain transformation, and I want to pause to celebrate this moment and to congratulate our teams for their perseverance and dedication to getting us here. Q3 marks the start of what we expect to be many years of distribution cost leverage from our recent supply chain investments, which will provide opportunities for greater profitability and flexibility for reinvestment to fuel our growth and support financial resilience. Moving to operating expenses. SG&A in the third quarter was $54 million. Excluding share-based compensation and costs not indicative of business performance, our SG&A expenses were $51.5 million, similar to Q2 as our team did a fantastic job in diligently managing our expenses and finding efficiencies to offset expected inflation. Adjusted EBITDA was $64 million, representing 22% of revenue, an improvement from our margin in the first half of the year. Net income was $25 million compared to $23 million last year. Excluding share-based compensation and items not indicative of business performance, adjusted net income was $28 million or $0.40 per diluted share compared to $30 million or $0.41 per diluted share last year. Now turning to our balance sheet and cash flow. We ended the third quarter with ample liquidity, consisting of $15 million in cash and $140 million in unused borrowing capacity. Total debt net of deferred financing costs was $294 million, a decrease of $17 million from Q2 as we directed free cash flow towards repayments on our revolver. Factoring in net lease obligations, our leverage remains at 2.4x, consistent with last quarter and just slightly above our recent run rate over the last several years. Q3 inventories were $141 million, up 5% from Q3 last year, in line with revenue growth. Our supply chain and replenishment teams continue to do an excellent job managing turns across our DCs and delivering industry-leading store service rates, all while completing the final DC transition into our new facility in Calgary, Alberta. As we enter the busiest season of the year, we believe our DCs and stores are stocked with the right quality and quantity of product to meet the everyday and holiday needs of Canada's devoted pet lovers. Net capital expenditures were $8 million in the quarter, bringing us to $30 million year-to-date. With key investments into our supply chain transformation now behind us, our capital investments are now being directed towards the continued rollout of our enhanced culinary experience across our corporate stores, new store builds and ongoing store refreshes and other maintenance projects. And finally, we generated $25 million in free cash flow in Q3. Year-to-date, this brings us to $67 million, up 9% from last year, driven by improved earnings and lower CapEx. Importantly, free cash flow conversion on a trailing 4-quarter basis was 43%, consistent with our framework of roughly 40% or greater. While we continue to return a portion of our free cash flow to shareholders in the quarter through dividends, we directed the majority of it towards repayments on our revolver. We expect to complete these repayments by the end of the year, after which we will once again look to share repurchases on an opportunistic basis. Now to our outlook for 2025. As Greg indicated, the Canadian pet industry has displayed resilient yet tepid growth this year as pet parents seek out the best opportunities for quality and value to care for their pets. Devoted pet lovers are increasingly turning to pet value to fulfill this need, driven by our industry-leading omnichannel convenience, curated offerings of specialty pet products, in-isle expertise and recent investments in everyday value. Our strong financial performance and market share gains underscore the success of these strategies. At the same time, macro uncertainty continues to weigh on consumer spending, creating uneven discretionary demand, which has continued into Q4. Based on this, we have narrowed our full year outlook to reflect year-to-date performance and current market conditions. As a reminder, our 2025 outlook incorporates an extra week given the 53-week calendar this year. We now expect 2025 revenues between $1.175 billion and $1.185 billion, supported by approximately 40 new store openings, same-store sales growth of approximately 2% and increased wholesale penetration. Adjusted EBITDA is expected to land between $257 million and $260 million, representing growth between 4% and 5%. This continues to incorporate normalization of operating expenses and planned investments. Factoring in our narrowed revenue and adjusted EBITDA ranges, we now expect adjusted net income per diluted share between $1.63 and $1.66, representing growth between 4% and 6%. As a reminder, this includes absorption of approximately $0.12 of incremental depreciation and lease liability expense associated with our new distribution centers. And finally, capital allocation. We continue to expect approximately $45 million in net capital expenditures. We also continue to expect to convert roughly 40% of adjusted EBITDA into free cash flow this year, the vast majority of which is being returned to our shareholders. Before turning it back to Greg, I'd like to share our initial view on 2026 as we near year-end. With no real certainty on when today's macroeconomic conditions will improve, there is a strong likelihood that uneven discretionary demand we've seen through much of 2025 could extend into 2026, which may keep growth in the Canadian pet industry below its long-term average. As we say consistently each year, our aim is to grow alongside the industry and lean into initiatives to expand market share like continuing new store openings in 2026 at a pace similar to 2025 and further investing in our culinary renovations. With the completion of our supply chain transformation, we expect earnings growth to improve starting in Q4 and continuing into 2026 as we lap the major step-ups in fixed DC costs. And most importantly, we plan to grow our free cash flow, which we plan to deploy in accretive ways, including opportunistic share repurchases. We look forward to sharing more details around our financial and operational outlook for 2026 when we report our Q4 results in March. With that, I'll turn it back to Greg for some closing remarks. Greg Ramier: Thanks, Linda. As we complete our supply chain transformation and commence the next leg of our growth within the Canadian pet landscape, I'm excited about the opportunities ahead of us. With a great team, great assets and a clear strategy, we are well positioned to deliver on our mission to be Canada's preferred pet retailer, delivering the products, care, expertise and memorable moments that devoted pet lovers want. With that, we'll now be happy to take your questions. Operator: [Operator Instructions] Our first question will be from the line of Mark Petrie with CIBC. Mark Petrie: Just on same-store sales, traffic maintained positive, but you were lapping a pretty weak period last year. There was some modest deceleration sequentially. So could you just talk about sort of consumer behavior and specifically the traffic figure? Greg Ramier: Absolutely. Mark, maybe I'll talk about same-store sales first. We were very pleased with the pace in Q2, it was similar -- or in Q3, it was similar to Q2. Growth did come in a bit lighter than we initially expected in the quarter. And I'd say the main reason for that is tied to the shape of demand. If you recall in Q2, we've seen some early signs of stability in hardlines with trends improving sequentially from the beginning of the year. This progress paused in the third quarter, suggesting customers are more closely monitoring their spending given all the uncertainty around trade and other macro factors. I think the key takeaway for us, though, is that even in this constrained environment, we're winning share. This is a result of the actions that we've taken so far this year, including Q3, both the long-term actions around network expansion and digital investments, but more recently, the investments we made in everyday value and having a sharpened promotional program. I think specifically on a 2-year basis, we don't think that the 2-year stack is a particularly helpful way to look at our performance given that 2024 was a fairly stable year in how our weekly sales progressed, which is something we're also seeing this year. And our comments all year have been around this -- our original 1% to 4% guidance range, which we continue to deliver within, and we now expect to reach roughly 2% for the full year. Mark Petrie: Okay. And if I could just follow up on culinary. Obviously, it's still relatively early days, but just wondering how that's performing. And curious if that category has more variation in its performance by sort of local demographics and neighborhoods than other parts of the assortment. Greg Ramier: As I shared in my prepared remarks, Mark, I'm very happy with the pace of the rollout. We've already completed almost 80 stores so far this year, including 70 in the quarter. Still very early in the deployment, but I can share the data that we're seeing, the first few weeks reaffirms how much the culinary customer spends in their pets. We've begun to expand the experience into a handful of franchise stores. So we're looking forward to what it's going to do in 2026. This category continues to be at the high end of growth for us in double digits. And we don't see a lot of variance to your question regionally or within different stores. Linda Drysdale: The one thing I'd add, Mark, is that we have rightsized the level of investment by store to best complement the existing layout in culinary presentation. So as a result, we expect the returns on these to be above our internal hurdle rates. Operator: The next question is from the line of Irene Nattel with RBC. Irene Nattel: Just continuing the discussion around same-store sales. Could you walk us through, please, sort of where you're seeing the highest level of unevenness? That's the first part of the question. And then the second part of the question is I'm wondering about sort of the degree to which the investments and the introduction of private label products at lower prices is kind of -- be acting in a deflationary way from a basket perspective. Greg Ramier: Thanks, Irene. I'll start on the consumers. So we continue to see devoted pet lovers seek out quality products, looking for better nutrition and better ways to feed and care for their pets. And we do see our highest growth still in premium kibble and in our culinary products as a result of that. At the same time, devoted pet lovers are looking for value. And this is where our proprietary brands really shine. And we've been very pleased with the progress on that front, both in volume and in sales. And really, the way that those themes have -- are manifested from a category perspective is we've seen and continue to see resilient growth in needs-based consumables and more uneven or opportunistic spending within discretionary hardlines. And as I noted, we saw early signs of stability on that discretionary demand in Q2. It held. We didn't see any further improvement in Q3, which I think really ties back to the macro environment. I do think that in this environment, what's really important is the things that we've done over the last several quarters to lean into our strengths, our points of difference to show how Pet Valu can deliver on both quality and value. Three things that I'd point out within this that we're doing to be successful in this environment. First is our focus on high-growth quality categories like culinary that we just talked about. The second is leaning into the role that our proprietary brands can play and -- both in innovation and in value, and they performed well. Third is the investment we've made to provide everyday better value, and you would have seen the -- us talking about our new Lower to Lock program across hundreds of key items that we launched at the end of Q3. These strategies in total are working. We're winning the monthly shop. We did that in Q3, and we're gaining share, growing same-store transactions. Irene Nattel: That's really helpful. And then just thinking ahead to 2026, what I heard you say is if we have all been thinking about, let's call it, mid-ish single-digit same-store sales growth in 2026, unless we see something change in the environment, which doesn't seem likely at this point, that will be difficult to achieve. So I guess, is that, in fact, what you wanted us to hear? Greg Ramier: Yes. With the macro environment playing such a critical role in how devoted pet lovers and frankly, all consumers are spending and given how fluid the trade environment remains, I think it's a bit premature to make a firm call. But our view and as per Linda's remarks, is we think industry growth will remain below its long-term mid-single-digit run rate through next year. I do think there's going to be a couple of big themes that are going to remain consistent, though, within that. First is the stability of demand for needs-based consumables, which account for about 80% of our sales. And this is the -- this has been a consistent growth driver for us through 2025, and I don't expect that to change next year. And second is the humanization trend and seeing that continue. So culinary products, as we talked about, continuing to gain traffic. And we're leaning into that category to make sure that we continue the growth curve that we've seen on it. Those are both big themes within what we view will be a fairly similar industry backdrop. Operator: The next question today is from the line of Martin Landry with Stifel. Martin Landry: I would like to just go again looking at the long-term outlook of the industry. I think the industry has been growing slower than its historical pace in '24 and '25, and you're calling for maybe a cautious outlook for '26. When do you expect the industry to get back to its historical growth rates? I think you quoted historically 4% to 6%, and it's even been higher than that over the last 20 years. At what point could we see the industry return to more healthier growth rates? Greg Ramier: Thanks, Martin. The -- as we pointed out in the past, the Canadian pet industry has an impressive track record of resilient growth over 30-plus years. When you take a look at what's driving that is really the humanization and premiumization of pet care that we've talked about. That tailwind hasn't stopped even in today's environment. We continue to see it every day in the conversations that we have with devoted pet lovers in store and the questions they're asking, and especially in the products they're buying. The best example of this continues to be the strong sales growth in our most premium peers of kibble and culinary. The slower pace of the industry growth that we've seen over the last few years has really been isolated to the more discretionary pockets of our industry, as we've said, particularly in hardlines like toys, apparel, collars, beds. These are categories where pet parents exhibit more compromise through either deferral or substitution when the environment is uncertain like it is today. But as history has shown time and time again, we believe this softness to be transitory. We expect it to stabilize as the macro environment stabilizes. In the meantime, what you've seen is we're leaning into our strengths of convenience, quality, value and expertise to win in today's environment, which has been driving our market share gains. Martin Landry: Okay. And how much of the industry you think is switching online? It feels like the online channel is growing maybe a little faster than the brick-and-mortar channel. And how are you positioned to capture that switch? Greg Ramier: Very well positioned. We've been very pleased with what we're seeing in our digital channel. Our online sales continue to outpace our company average. But what's even more important is the role this channel plays in our omnichannel offering. As we've shared in the past, our omnichannel customer visits the store and site 5x more than a non-omni customer and spends 4x more. They're not -- not only are they more engaged, but they're the most valuable, least price-sensitive customer segment that we have. We've seen -- so we've seen good growth in our omnichannel. It's outpaced our total business. Operator: The next question is from the line of Michael Van Aelst with TD Cowen. Michael Van Aelst: I wanted to talk to you more about the franchise and corporate mix that you've got this year. In the past, you've said you've reiterated the view that there's strong demand for franchises. But this year, you've opened 25 new stores and 21 of the net new stores are corporate versus 4 franchise. So can you talk about the health of the franchisee, that four-wall per EBITDA? And why specifically are you not seeing more franchisees stepping up this year? Greg Ramier: Mike, thanks. For most of our history, we've operated both franchise and corporate networks at scale. And they're both strategically important for us with unique benefits that complement each other. One of the strategic benefits of this dual structure is operating at a best site first strategy with the flexibility to lean into either a bit more corporate or a bit more franchise, depending on where we find the sites and where our franchisees -- our franchisee pipeline where they physically are. Right now, we've opened a bunch of really great locations, most of which we haven't identified the right franchisee yet. So we're opening them as corporate stores, which I'll remind you still provide fantastic returns for us. We may choose to resell some of those to existing or new franchisees, but we'll make that determination on what's in the best interest of both the community, the store and the franchisee given that they're making a 10-year commitment. Our health and pipeline of franchisee -- franchise inquiries is still strong. So that has remained consistent through this environment. And I think, Linda, from a four-wall EBITDA? Linda Drysdale: Yes. So I mean, we update that annually in the AIF. As we stated from last year, it was $230,000, and we'll update it again in the next year. Michael Van Aelst: Linda, are you willing to at least give us an indication of direction whether that -- whether it's higher or lower than what it was last year? Linda Drysdale: I can't at this time, Michael. Yes, I think there's compelling returns to the franchisee, and that's as far as I'll go on that. Greg Ramier: And Michael, we continue to see strong interest. Michael Van Aelst: Okay. So Greg, just to follow up on that, though. Historically, I think Richard had said, given the indication that you wanted at least 200 corporate stores and probably would be happy something. It sounded like it was something in the 200 to 230 level in that ballpark, let's call it. So with the corporate store count rising now up to 241, I think that's the highest level you've ever been at. Do you see that number coming down over time still? Or do you expect to start growing more? Is it changing a little bit where it's not as much of an asset-light growth strategy going forward? Greg Ramier: No, you shouldn't anticipate a change in that strategy. The strategy for real estate is best site first. And we will continue to be around that rate of franchise stores as a percentage. It will depend on where we find the best sites and how our franchise pipeline is looking for those trade areas. So you shouldn't expect a material change there. Operator: The next question will be from the line of Chris Li with Desjardins. Christopher Li: First question is -- first, thanks for all the discussions on the consumer so far. But Greg, I was wondering if you can talk a little bit more about the competitive environment as well. Have you seen an uptick in promotional intensity during the quarter? And how is it looking so far in Q4? Greg Ramier: Thanks, Chris. I'll start off by saying, generally speaking, and as a reminder, we operate in the least competitively intense end of the pet industry where devoted pet lovers -- with devoted pet lovers who value more than just price when shopping for pets. So as a result, we tend to have a very rational trading environment. In September, we did see promotional intensity increase from select specialty peers. That's perhaps in response to recent market share trends. But with that said, we continue to stick with our strategy of providing devoted pet lovers with quality and value that they can count on every day. It's a strategy that's anchored in what our customers appreciate. It's a strategy that works in driving the -- and winning the monthly shop. And we've got not only that, but a full agenda planned in Q4 from a commercial plan with some of our biggest weeks left to come in the quarter. Christopher Li: Okay. And I think just a follow-up maybe for Linda. If we take around just the midpoint of your full year guidance, I think the implied Q4 SSSG is going to be around 2% and EPS growth maybe around 9% if you exclude the extra week impact. If my math is right, I guess my question is looking out to next year, if let's say, same-store sales will remain a bit tepid like more in the low single-digit as opposed to mid-single-digit growth, is there still enough operating leverage within your business model to achieve at least that high single-digit EPS growth for next year? Linda Drysdale: Yes. Thanks, Chris. You're really choppy, but I think I caught your question. But for the 2026 growth, what I would say is we're still early days for plan 2026, and I'll provide more detail when we release our 2026 outlook. But from a high level, we do plan to continue to be successful winning customers and growing market share while delivering solid earnings growth in this environment. Operator: The next question will be from the line of Chris Murray with ATB Capital Markets. Chris Murray: Maybe talking a little bit about the wholesale business now that, I guess, the supply chain transformation is sort of behind us a little bit. Can you talk about where you're at in terms of that wholesale penetration number? And how we should maybe think about the next couple of years now that you've got the supply chain base really in place? Greg Ramier: Thanks, Chris. It's Greg. The -- so we continue to see good performance from a revenue perspective with outpacing system-wide sales. That's really driven by two primary factors. One is the clear opportunity we have had and still have in Chico as we grow that business and we -- from a store perspective and grow our wholesale penetration there, and with the capacity that we have in the supply chain. So we continue to add both innovation and new assortment into the distribution center that will -- that's going to continue to -- because we have lots of capacity that we're leveraging right now. That will continue to be a tailwind for us over the next several years. Chris Murray: Is it fair to think that your wholesale sales might actually kind of outstrip kind of like what you would think the same-store number will be over the next couple of years just as you capture additional share? Is that the right way to think about this going forward? Greg Ramier: Yes. The way you should think about our -- shape of our sales over the next few years is our system-wide sales should outpace our same-store sales because of our continued focus on new store growth and that our revenue should outpace our system-wide sales because of the wholesale penetration opportunity we have with Pet Valu franchisees and especially because of the opportunity in Quebec with Chico. Linda Drysdale: And the pace of that will ease from the current... Chris Murray: Okay. And then just maybe a quick one for me. Just sort of thinking kind of into '26 in capital spending. I know it's still early, but if you think about it semantically, no major investments in supply chain. Maybe some store level investments you talked a little bit about the ability to continue to roll out fresh product. But kind of on the whole, is there any reason to believe that there's anything that would be taking capital spending actually up materially from where it is going to end up this year? Or should we be thinking about kind of like just gradually tying it to sales growth over the next little while? Linda Drysdale: Yes. So we're still working through capital plans for 2026, Chris. But I'd say the expenditures will be in the ballpark of what we've targeted for this year would be a good starting point. We're continuing opening new stores, as you said, rolling out our enhanced culinary experience across both corporate and franchise stores. So you can also expect us to start to return to share repurchase in the next year. I'll add that in with respect to our capital. Chris Murray: Okay. But there's no major capital expenditures planned or anything like that, that we should be aware of? Linda Drysdale: No. Operator: The next question is from the line of Vishal Shreedhar with National Bank of Canada. Vishal Shreedhar: With respect to industry square footage growth, do you have -- or industry capacity growth, do you have an estimate of that? Is it growing at an accelerated pace? Or has it moderated in line with these more challenging conditions you've seen over the last couple of years? Greg Ramier: Vishal, what we saw in Q3 was quite similar to what we've seen so far this year. We are the lion's share of industry footage growth. We are fully on track to be at our 40 stores again this year. We've seen slow or muted growth from other competitors. So that is an area, as Linda said, that we are leaning into right now to make sure that we get growth now and growth in the future and find the best sites to be in over the long term. Vishal Shreedhar: Greg, as you continue to expand and right now, you operate at a premium end of the market. But as you continue to expand, you start bumping up against a customer who's more value conscious or who values other attributes that maybe Pet Valu doesn't focus on as much. Wondering your perspective on this, the expansion and your premium tier, I mean, there's only so many customers that value those attributes. Greg Ramier: Our store decision-making isn't just about the here and now. When we open a store, whether it's corporate or franchise, we're making a 10-year commitment. And that 10-year commitment includes or encompasses all the phases of an economic cycle. So that's how we look at it when we are making the decision about opening a store. As you've heard us share in the past, we believe that there's a clear opportunity for us to operate over 1,200 stores across Canada. We do lots of modeling around that, both on the location and the customer base. We see a large portion of devoted pet lovers within those locations that will allow us to be successful with our model. We're only roughly 2/3 of the way along that path of 1,200 stores. I'd love the pace of us with 40 stores a year. It's a nice manageable size, but still provides really good growth trajectory for us. And we continue to see strong returns, both corporate and franchise returns with the new stores that we're opening. Vishal Shreedhar: Okay. And with respect to the environment which you anticipate and granted, I know there's substantial uncertainty regarding the outlook, but you anticipate it to be more challenging, at least relative to historical trends. Do you feel -- and you've come in and you've implemented the pricing initiatives and more analytical promo decisions. Do you feel that pricing at Pet Valu is sufficient? Or do you think the gap versus peers could still use some adjustment? Greg Ramier: It's a good question, Vishal. I'll come back to our strengths, which are convenience, value, quality and expertise. We've made some changes in our value program this year, starting about this time last year to have a sharper promotional plan and to have better everyday value across especially our brands, but now some key value items in national brands. That has allowed us to gain share consistently. We are -- as we talked about, we're winning the monthly shop. We're growing same-store transactions. We have stable margins at the same time because we've done a lot of good work under the -- under all of that. So I like where we are right now. I think it sets us up to be very successful next year during what we expect to be a similar environment to this year. Operator: [Operator Instructions] And our next question will be from the line of Adrienne Yih with Barclays. Adrienne Yih-Tennant: Great to see the progress. Craig, I wanted to ask a couple of things on pricing. So the brands have obviously raised prices sort of year-to-date this year. How much pricing have they taken? And has the spread between the brands and your private label expanded? And what do you expect in terms of future pricing as we go into 2026? And then for Linda, you talked about the EPS growth kind of accelerating in the fourth quarter and then into next year. Is that largely because you're starting to anniversary the fixed costs and the incremental depreciation from the investments? Greg Ramier: Adrienne, so I'll -- there's a couple of questions within that. I'll maybe start with the inflation question and then go to brands and then get Linda to ask or to answer the last part. There wasn't -- we had inflation in Q3. It was a bit less than what we've seen in previous quarters, but it's still positive. And this is really a result of the intentional actions that we've taken to make sure that we have the right everyday value. That would be earlier or this time last year that we're still lapping the Fresh 4 Life and the litter reductions that we did, the value that we did in Prime at the end of Q2, and then just now at the end of Q3 with the recent changes that we've done with the Lower to Lock program. So we've been focused on making sure that we have the right value and that we're competing to win that monthly shop. Within that, we've made sure that our proprietary brands are positioned to give the savings for devoted pet lovers. I'll remind everybody that they're 1/4 of our sales. They're an important part of our business. They give savings to customers, great quality and better margins for us. So it's a very helpful environment. So that's what we've really seen. We've done the work with making sure that we are focused on and building our brand sales and basket penetration has been a key focus for us this year. Linda Drysdale: Yes. And on your question about the growth on the EPS, you nailed it, Adrienne. It's the returning -- as we annualize the investments in our supply chain, that's unlocked that, and we're really looking forward to that. Adrienne Yih-Tennant: Okay. And then can you just -- as a follow-up, can you just remind us where you are in the journey of sort of increased productivity gains and capacity utilization? I remember earlier on, you had talked about and we are seeing it that it would start to really manifest in the back half of this year, but it was a multiyear journey. And so if we're just starting to see that, I can only imagine that there's more to come, so it's going to help us where we are here. Greg Ramier: Adrienne, we're very early in this journey. So we've built capacity for 10-plus years. We will leverage that capacity through those 10 years. And we were pleased with starting to see some -- both leverage and productivity gains in Q3. That Q3 was a little stronger and a little better than what we had anticipated. We foresee a strong tailwind from both the leverage and the productivity opportunities that we've created with the supply chain investment. Adrienne Yih-Tennant: Fantastic. Controlling what you can in an uncertain macro is the name of the game. So good luck. Greg Ramier: Thank you. Operator: The next question will be from the line of Mark Petrie with CIBC. Mark Petrie: I think I heard a comment earlier about adding a bunch of national -- I think it was 150 SKUs of national brands in hard goods. And can you just confirm that? And could you just talk about that decision in the context of what you're highlighting with regards to the consumer and sort of the importance of value around private labels? And so what's the background there? Greg Ramier: Mark, that is true. Our strategy in hardlines, and this is an area where we want to compete stronger next year is to make sure that we have the right innovation, both from our brands and from national brands. We've added some great specialty brands into the portfolio to close out the year that will help us in Q4 and to make sure that we have the right value in both led with our proprietary brands. We want a great balance between the innovation and value of both national brands -- the right national brands and our proprietary brand. Mark Petrie: Okay. So is this more a substitution of what your national brand portfolio was before or -- and just sort of a refresh there? Or are you sort of shifting like -- maybe you went too far on the proprietary brands and now you're shifting some of the SKUs from own brands to back to national brands? Greg Ramier: No, Mark. This is an effort to make sure that we have the right national brands with the right newness and the right innovation as we go into the holidays. Operator: With no further questions on the line at this time, I will now hand the call back to Greg Ramier for some closing remarks. Greg Ramier: Thank you, everybody, for joining us. Looking forward to speaking with you in March. I hope everybody has a great Q4 and a great holiday season. Thank you very much. Operator: This concludes the Pet Valu Third Quarter 2025 Earnings Conference Call. Thank you to everyone who joined us today. You may now disconnect your lines.
Operator: Good morning, ladies and gentlemen, and welcome to the Sterling Infrastructure Third Quarter Webcast and Conference Call. [Operator Instructions] As a reminder, this call is being recorded on Tuesday, November 4, 2025. And I would now like to turn the conference over to Noelle Dilts, Vice President of Investor Relations and Corporate Strategy. Please go ahead. Noelle Dilts: Good morning to everyone joining us, and welcome to Sterling Infrastructure's 2025 Third Quarter Earnings Conference Call and Webcast. I'm pleased to be here today to discuss our results with Joe Cutillo, Sterling's Chief Executive Officer; and Nick Grindstaff, Sterling's Chief Financial Officer. Joe will open the call with an overview of the company and its performance in the quarter. Nick will then discuss our financial results and guidance, after which Joe will provide a market and full year outlook. We will then open the call up for questions. As a reminder, there are accompanying slides on the Investor Relations section of our website. These slides include details on our full year 2025 financial guidance. Before turning the call over to Joe, I will read the safe harbor statement. The discussion today may include forward-looking statements. Actual results could differ materially from the statements made today. Please refer to Sterling's most recent 10-K and 10-Q filings for a more complete description of risk factors that could affect these projections and assumptions. The company assumes no obligations to update forward-looking statements as a result of new information, future events or otherwise. Please also note that management may reference EBITDA, adjusted EBITDA, adjusted net income or adjusted earnings per share on this call, which are all financial measures not recognized under U.S. GAAP. As required by SEC rules and regulations, these non-GAAP financial measures are reconciled to their most comparable GAAP financial measures in our earnings release issued yesterday afternoon. Our discussion of all results today, including revenue and backlog, refer to figures that adjust prior period results to conform to the current accounting for RHB JV, unless otherwise noted. Additionally, all comparisons are to the prior year quarter unless otherwise noted. I'll now turn the call over to our CEO, Joe Cutillo. Joseph Cutillo: Thanks, Noelle. Good morning, everyone, and thank you for joining today's call. Sterling delivered another outstanding quarter as we achieved strong revenue growth, expanded margins, grew backlog and generated excellent cash flow. We are pleased to discuss these results today with you, but even more excited about the opportunities ahead of us. Beginning with the third quarter results, revenue grew 32%, fueled by 58% growth in our E-Infrastructure Solutions segment, including 42% organic growth. In addition, our Transportation segment grew 10% in the quarter. We grew adjusted earnings per share by 58% to $3.48 and delivered adjusted EBITDA of $156 million, an increase of 47%. Our gross profit margins expanded 280 basis points from the prior year to reach 24.7%. Additionally, operating cash flow generation in the quarter was again very strong at $84 million. Our backlog position and strong visibility drive our confidence in the future. Backlog at the end of the quarter totaled $2.6 billion, a 64% year-over-year increase. Excluding the contribution from the recent acquisition of CEC, backlog increased a strong 34% year-over-year. E-Infrastructure Solutions backlog of $1.8 billion was up 97% in total and 45%, excluding the contributions from CEC. When you layer in our unsigned awards and pipeline of future phase opportunities, we have visibility into a pool of work in excess of $4 billion for Sterling. The Sterling Way, which is our commitment to take care of our people, our environment, our investors and our communities while we work to build America's infrastructure, remains our guiding principle as we execute our strategy and grow the company. Now I'd like to discuss our segment results in more detail. In E-Infrastructure, third quarter revenue grew 58% over prior year and over 34% sequentially. Excluding CEC, revenue grew more than 42% over prior year and 21% sequentially. The data center market, again, was a primary growth driver in the quarter, as revenue from this market grew more than 125% year-over-year. Adjusted segment operating income grew 57%, or 48% excluding CEC. Adjusted operating margins for the legacy E-Infrastructure Site Development business were 28.4% and increased over 140 basis points from prior year levels and 10 basis points sequentially. This was driven by our continued shift towards large mission-critical projects, including data centers, where our superior project management and ability to finish jobs on or as scheduled are extremely valuable to our customers. We are pleased to have closed the CEC acquisition during the quarter. We see tremendous opportunities ahead to leverage our expanded service portfolio and are seeing early positive reception from our customers. CEC contributed $41.4 million of revenue in September and adjusted operating margins that were in line with our expectations. We continue to have very good visibility in the E-Infrastructure business. With the recent CEC acquisition, the aggregate of our E-Infrastructure signed backlog, unsigned electrical awards and future phase site development opportunities total approximately $3 billion. Moving to Transportation Solutions. Third quarter revenue grew 10% and adjusted operating profit grew 40%, driven by strong market demand and the benefits of the mix shift towards higher-margin services. We ended the quarter with Transportation Solutions backlog of $733 million, a 23% year-over-year increase. Sequentially, segment backlog was roughly flat, with awards keeping pace with burn. As a reminder, the wind down of our Texas low-bid heavy highway operation is impacting backlog to some extent this year, but will ultimately benefit segment margins. Shifting to Building Solutions. In the third quarter, segment revenue declined 1% and adjusted operating income declined 10%. Adjusted operating margins in the quarter were 12%. Overall demand for homes has been impacted as potential buyers struggle with affordability challenges. Revenue from our legacy residential business declined 17%, driven by softness in the overall housing market. Even with these headwinds in Building Solutions, the strength of Sterling's diversified portfolio and strategy to focus on growth in high-margin end markets enabled us to deliver another record quarter. With that, I'd like to turn it over to Nick to give you more details on some of our financial metrics and full year guidance. Nick? Nicholas Grindstaff: Thanks, Joe, and good morning. I'll begin with our consolidated backlog metrics, all of which are adjusted to exclude RHB for the prior year. Our third quarter backlog totaled $2.58 billion, a 64% increase from the prior year second quarter. CEC contributed $475 million to backlog. Excluding CEC, backlog increased 33.8% year-over-year. We closed the quarter with combined backlog of $3.44 billion, which was up 88%. Excluding CEC, combined backlog increased 43.5% year-over-year. Third quarter 2025 book-to-burn ratios excluding CEC were 1.23x for backlog and 1.76x for combined backlog. Year-to-date book-to-burn ratios excluding CEC were 1.31x for backlog and 1.58x for combined backlog. Moving to our cash flow metrics. Cash flow from operating activities for the first 9 months of 2025 was a strong $253.9 million compared to $322.8 million in prior year period. Cash flow used in investing activities for the first 9 months of 2025 included $46.9 million of net CapEx and $484.2 million for acquisitions, including CEC. Year-to-date cash flow from financing activities was a $80.7 million outflow, primarily driven by share repurchases of $48.5 million at an average price of $135.96 per share. Remaining availability under the existing repurchase authorization is $80.9 million. We are in great shape from a balance sheet perspective. We ended the quarter with a very strong liquidity position consisting of $306.4 million of cash and debt of $294.6 million for a cash net of debt balance of $11.8 million. Our $150 million revolving credit facility remained undrawn during the period. Now I'd like to discuss our guidance. The strong tailwinds behind our business position us for another record year at Sterling in 2025. We are increasing our guidance ranges to: revenue of $2.375 billion to $2.390 billion, which is a more than 5% increase at the midpoint relative to our previous guidance range; diluted EPS of $8.73 to $8.87; adjusted diluted EPS of $10.35 to $10.52 -- this represents a 9% increase at the midpoint over our previous guidance range -- EBITDA of $448 million to $453 million; adjusted EBITDA of $486 million to $491 million, a 6% increase at the midpoint over our previous guidance range. From a financial standpoint, we are in an excellent position to continue to take advantage of both organic and inorganic growth opportunities in the years ahead. Now I will turn the call back to Joe. Joseph Cutillo: Thanks, Nick. As we look to the future, we remain very bullish on the multiyear opportunity in each of our markets. Our strong backlog, future phase opportunities and discussions with our customers contribute to our confidence. First, in E-Infrastructure site development, we anticipate that the current strength in data center demand will continue for the foreseeable future. Our customers are discussing multiyear capital deployment plans and our focus on how to align with the right partners to support these plans. We are getting pulled into new geographies by our customers, including Texas, where we are now performing site development work. In the manufacturing market, we are seeing a fairly steady pace of activity in 2025. As we look out to 2026 and 2027, there remains a very big pool of megaprojects on the horizon. This would include planned semiconductor fabrication facilities. The e-commerce market has strengthened significantly in 2025. We have built a sizable level of backlog and believe we should continue to see momentum in 2026. Together, these dynamics support strong growth opportunities over a multiyear period. Moving to CEC. We have very good momentum heading into 2026. Customer demand is very strong, particularly in the data center market, and the organization has booked several large projects in recent months. We continue to see opportunities for margin expansion over the next couple of years. We have a high degree of confidence in our ability to leverage the combination of site development and electrical services as we head into the new year. For 2025, we expect to deliver E-Infrastructure revenue growth of 30% or higher on an organic basis and approaching 50%, including CEC. Adjusted operating profit margins for E-Infrastructure should approximate 25% for the full year including CEC, as compared to 23.7% in 2024. In Transportation Solutions, we are approaching the final year of the current federal funding cycle, which concludes September 2026. We have built over 2 years of backlog and continue to see good levels of bid activity. For 2025, we anticipate continued growth in our core Rocky Mountain and Arizona markets. The downsizing of our low-bid heavy highway business in Texas is progressing according to plan, resulting in some moderation of Transportation Solutions top line and backlog, but should drive meaningful margin improvements as we move through the year. We expect Transportation Solutions revenue growth in the low teens on an adjusted basis in 2025. We forecast adjusted operating profit margins in the 13.5% to 14% range compared to 9.6% in 2024. In Building Solutions, we continue to believe the business is well positioned for growth over a multiyear period. Our key geographies of Dallas-Fort Worth, Houston and Phoenix are expected to see continued population growth, driving new home demand. Additionally, there is a significant opportunity for share gain in Houston and Phoenix. In the near term, we are anticipating a continuation of soft market conditions driven by affordability challenges. For full year Building Solutions revenue, we forecast a mid- to high single-digit decline. We anticipate adjusted operating margins in the low double digits as compared to 14.8% in 2024. As a reminder, from a seasonality perspective, our fourth quarter and first quarter tend to be slower than our second and third quarter, with the first quarter typically our lowest of the year. On the acquisition front, we are continuing to look for small to midsized acquisitions that are the right strategic fit to enhance our service offerings and geographic footprint. Moving to our full year guidance. The midpoint of our increased 2025 guidance range would represent 27% revenue growth year-over-year as adjusted for RHB, 47% adjusted EPS growth and 42% adjusted EBITDA growth. With that, I'd like to turn it over for questions. Operator: [Operator Instructions] The first question comes from Brent Thielman at D.A. Davidson. Brent Thielman: Joe, yes, maybe just a first question. It looks -- I mean, it looks like CEC signed and unsigned work has substantially grown since the June deal announcement. So again, I would just be sort of interested on kind of what's behind the momentum and award activity there. And how do we think about -- sounds like some large data center projects. But how do we think about them converting that over the next sort of 12-plus months? Joseph Cutillo: Yes. So they had very good and strong bookings and wins in the quarter. It's mostly around the data center front as that continues to move forward, along with a couple of other big projects that are a little outside of the data center front. We are -- here's what I'll tell you, they had a great bookings quarter. We're excited about that. But we're really excited about the reception that we're getting from our end customers in our end markets from this combination and are in the early stages of talking about several 2026 projects and how do we do those as a joint package instead of an individual package. So we're very excited about that. As we said in the call, we have started doing site development in Texas. We think that is going to grow very aggressively as we go into 2026. And I will tell you, the teams are working diligently together to pull each other into that market into these next big future phase jobs. So we're -- man, I'm tickled to death with where we are. The team spent 2 weeks together right out of the chute, working on stuff, and I was excited about the deal before. I came away even more excited after that 2 weeks together on the opportunities they saw between the site development and the electrical teams. Brent Thielman: And Joe, it sounded as though you're optimistic around some margin expansion opportunities there or some specific things that you're seeing in the award activity that gives you some confidence there. What drives that margin expansion [indiscernible]? Joseph Cutillo: Yes. So a combination of things. Certainly, on just the pure site development, the size of these projects continue to get bigger and bigger. And what our customers are talking to us about the next level of projects that are coming out, again, they just -- they're getting bigger, which is fantastic for us. On the combination of the electrical and site development side, we've proven significant productivity gains with the small dry conduit business tuck-in we did at the beginning of January. We've seen their margins improve 40% just by combining that with the site development. We think there's certainly some opportunities to lever that larger with CEC. But also as CEC continues to move further and further into data center space, those margins are accretive to their average margin. So if we can build their portfolio and backlog stronger in that area, their margins will continue to increase as well. So we feel very good on continued margin enhancement across the segment. Brent Thielman: Okay. Just last one, I think, along those lines on the E-Infrastructure business and that the current backlog, I guess, for the legacy Site Development side. Joe, could you talk about maybe how the size of projects even within mission-critical has evolved over the last 12-plus months? I know mission-critical is bigger for you now, but how is that sort of being redefined with the projects you're putting in backlog now? Joseph Cutillo: I don't know that we're really redefining it. The only incremental add to E-Infrastructure is obviously the CEC acquisition piece. But the base business was up, was it 34%, I think in backlog. And so for us, mission-critical, again, is data centers, manufacturing, e-commerce distribution is kind of what I'll call the 3 core elements of it. Did I miss anything? Nicholas Grindstaff: 45%. Joseph Cutillo: 45? Yes. So we're up 45% in that area. So we haven't redefined anything, just the project size of these data centers. And when the chip plants come out, those are pretty sizable as well will continue to help us on the margin front. One of the things we really don't talk about in the script that I think is important that everybody understands is -- we said we're in Texas. I will tell you that there's some other geographic footprints that we are aggressively looking at expanding into. Not because there's large projects there today, but we believe there's going to be large projects there based on our customers telling us that over the next 2 to 3 years. So we're trying to get in early, get our footprint established and be ready for those to come up. Noelle Dilts: Yes, Brent, this is Noelle. I would just say we're now over 80% of our work is mission-critical in backlog, looking at kind of data centers, manufacturing, et cetera. So that continues to move higher. And then to Joe's point, even within that bucket of mission-critical, the projects are getting larger and more complex in that there's underground infrastructure, which is great for us. And so that intensity of the work we're doing continues to expand. Joseph Cutillo: Yes. And just to add to that, I think it's part -- kind of a thought. If you think -- not only -- we talk about data centers getting bigger. But I will tell you that every piece of mission-critical jobs are getting bigger in size as we talk about e-commerce distribution coming back, and I think we're up 150% in backlog growth in e-commerce distribution. Those jobs are about 2x to 2.5x the size of historical ones. Not only are the footprints getting bigger, but Noelle mentioned, the infrastructure associated with these -- an e-commerce distribution center is starting to look a little bit more like a data center. And what I mean by that is with all the EVs that are being used by an Amazon, all the underground utilities that now have to be run to these charging stations and everything else look like a mini duct bank. So it just continues to add to the complexity, the size and the scope, which is perfect for us. And now adding the electrical piece, you can quickly, in your head, see how we can integrate those two together and make that part of the package. Operator: The next question comes from Julio Romero of Sidoti & Company. Julio Romero: I wanted to hone in on the combined backlog plus the forward pipeline of future phase work of $4 billion plus that you mentioned. Help us think about the mix of end markets or customers that are driving the growth of that forward pipeline? And then secondly, what's your estimation of when that forward pipeline begins to convert into orders? Joseph Cutillo: Well, I think you got to break it down into the pieces. The backlog, we're either converting or we'll be converting shortly into work. The low unsigned, those are projects that we either have letters of intent or we have won the physical job or negotiating terms of contracts or there's a final design work that's taking place. Those are likely to start in '26. Depending on the actual project, when in '26 could vary. And some may start first quarter, second quarter, third quarter. A lot of the big design-build highway projects, I will tell you, are going to start second and third quarter of next year, kind of in the process there. And then that future phase work, the way to look at it is as we burn off current backlog, the work we're working on today, that then flows into current backlog. So that spreads out over what I'll call a '26, '27 and into '28 time frame in which that will hit. Julio Romero: Got it. Very helpful there. And then just -- go ahead, sorry. Joseph Cutillo: I'm sorry. I just want to make sure I answered everything you're looking for there, really. Noelle Dilts: I would say in terms of the composition... Joseph Cutillo: Well, if you take a look at it, $3 billion of the $4 billion is in E-Infrastructure. And the highest percentage of that is going to be data center, which would probably be 75% or 80% of that piece there. Julio Romero: Got it. Extremely helpful there. And then maybe just turning to Transportation Solutions, really notable margin strength there, here in the third quarter. If you could help us unpack the drivers there? I don't think the impact of low-bid phase is starting to come through, unless I'm mistaken. And then just talk about the margin profile of what you have in Transportation backlog and unsigned awards. Joseph Cutillo: Yes. I think people grossly underestimate the progress that Transportation group has really made. We have best-in-class margins, and they continue to get better. It's really -- again, it's really around what I'll call project selection and focus as we continue to do more design-build or alternative delivery-type projects, along with aviation and rail, continue to diversify that portfolio, the margins will continue to increase. We haven't seen a significant part of that, though we've seen a little from the wind down of our Texas low-bid business. We'll see that impact more in 2026 as we weed out or wean down, I should say, that backlog. But that will continue. So probably the first -- most of that will be burned off in the first half of 2026. Operator: The next question comes from Adam Thalhimer at Thompson Davis. Adam Thalhimer: Joe, I wanted to ask you about -- so you said '26 and '27, big pool of megaprojects. Obviously, your ability to bid on megaprojects isn't -- your capacity to bid isn't infinite. So how do you think about how you prioritize what you're bidding on? And how do you price that work? Joseph Cutillo: Yes. I think that's a good question, Adam. We do have a fair more capacity. We've been planning for this. We've been in conversations on some of these projects for a couple of years now with our customers. So we have been doing stuff internally to plan for this. As we've said, generally, our biggest limitation to capacity is around project management and the program we put in place to develop future project managers. We've been doing it for, I think, 4 or 5 years now, is really starting to pay off to add some increased capacity. But at the end of the day, I don't want anybody to be surprised if we pass on one of these megaprojects because if the pricing is not right, the margins are not right or the complexity of the contracts don't make sense for us, we're okay to pass on that with the visibility we have in data centers and the rest of mission-critical stuff coming out. But I will tell you, we're looking at those and we will continue to build capacity as needed to do those. Just keep in mind, if we have a year runway to build capacity, we can build a lot. If somebody comes in tomorrow and says, "I've got three $500 million jobs," it may be tough for us -- and they need to start in 60 days, that would be a challenge for us. But we've got -- our customers have been very good, the hyperscalers, and even these big chip plants have been very good, kind of forward looking and anticipating what's coming out. The other good thing on the chip plants is they've taken much longer than I think the builders have anticipated for them to hit the ground running with all the upfront work that's had to be done. So we've seen these coming now for 2 years. So we'll be ready. Adam Thalhimer: And then I was curious, you talked about entering Texas for site prep. I guess you're doing that organically. And I was curious if -- or kind of what you're doing with the assets from the Texas highway work that's winding down? Joseph Cutillo: Yes. Another good question. Well, you may see those on a site development job or two. The smaller assets that we have there are very capable of doing some of the utility and underground work. With CEC and those assets combined, now we can start doing duct banks in Texas. So I think over the next 6 to 12 months, if you go to one of our sites, you may see some stuff that has a TSC logo on. Adam Thalhimer: Cool. And then lastly, you said you were -- you continue to look at small and midsized deals. Was that just a comment in the residential segment? Or is that for the whole company? Joseph Cutillo: No, no. We're -- yes, we're looking -- the vast majority of deals we're looking at are in and around E-Infrastructure. It's not that we won't look at stuff and be opportunistic in Building Solutions. But I would tell you right now, about 95% of everything we're looking at or folks we're talking to is and around added either capabilities, geographic expansion or just pure assets in and around E-Infrastructure. Operator: The next question comes from Noah Levitz at William Blair. Noah Levitz: To start off on the transportation side, has there been any impact from the government shutdown on transportation funding? And you've also mentioned in the past about a potential successor bill to the IIJA. Can you give any update as to -- do you still think that's moving along? Should it be bigger? Anything you can add there? Joseph Cutillo: Yes. So first, no impacts from government shutdown. The funding that's on these jobs has already been allocated. It's out there, so no impact at all on that. That's not to say there may be some grant projects or grant programs that somebody has out there, they could be delayed. Good news is, I'm not aware that we have anything tied to that. I haven't heard a single word from our business units in a few or so, not an issue there. On the next bill, the existing bill ends at the end of September of 2026. I will say that -- I was with the DC team, it's probably been 4 weeks ago now or 5. Things have been progressing very well. I always use the caveat, it is DC, and it is the government, and we can see the functions or dysfunctions of things. But they're probably 6 months ahead of where they have been historically. And I'm optimistic that something will happen in a timely manner. However, keep in mind that why we are not losing any sleep over this is we will go into September with roughly 2 years of backlog. Second, if there is not a resolution or a new bill passed is probably how I should phrase it, they will put an extension in place, generally. Or historically, the extensions have been the current kind of spend rates plus an inflation adjustment. So we don't stop. We continue at that. The thing that does generally happen in that year where there's a gap or that 6 months or whatever time frame it takes to bridge to the new bill is the states tend to do more smaller projects than the big multiyear projects because they're unsure of how much funding they'll have over a multiyear period. But the reality is the world doesn't shut down. Our projects don't stop. The bid activity projects change a little bit. But what we're seeing -- the thing that people don't understand is that there is spending that will continue to take place on this current bill. There's still 2 years of spending left approximately on the current bill that they have to get out before the end. So today, we're anticipating going in with 2 years of backlog. We can go in with more backlog than that, depending on what projects get squeezed into this last, call it, 18 months or less now. I guess it's almost a year until the next one. Noah Levitz: Great. That's helpful. And then just my last question. You said that data center growth was greater than 125%, which is exceptional, and it comes after last quarter, which was more than doubled. Can you break that down a bit more? Just -- is that growth in existing projects? Is that new projects coming online? Is it the current phases that the work was being done during the quarter being bigger phases? Like can you -- yes. Joseph Cutillo: Yes, it's a combination. I think if you talk to our teams out in the field, one of the things we're most proud about in the quarter isn't the great quarter they had and the results they were able to deliver. But it was really impressive for them to grow total backlog with the burn rates that they have. But some of that is new projects. And the way to look at it is if we didn't get new projects and we just shifted from future phase to backlog, our total would have decreased, right? So we not only shifted future phase to backlog, but we won enough new projects to offset that burn rate and grow that total backlog. Operator: The next question comes from Alex Rygiel at Texas Capital. Alexander Rygiel: Very nice quarter. A lot of good answers here so far on the call, but I've got a few here, questions for you. Do you generally experience any permitting issues that possibly delay project starts historically? Joseph Cutillo: Well, what I will tell you is the permitting process certainly is longer today than it was pre-COVID. And I would have told you, pre-COVID, that it sucked and was really long, okay? It definitely takes longer for permits to happen. But we -- generally, on the site development side, where we see the delay isn't from the time we get the contracts to start, it's more waiting to get the contracts. So we know the projects are coming. We know that it's going to -- we're going to win them. But we may not win them in this month, and maybe a month later, it may not be this quarter, maybe the next quarter. We haven't seen historically where we've got equipment ready to go, we're ready -- or on the site and we have delays. So we're fortunate in that where it takes place in our process tends to be before we start. However, I will tell you that from historical numbers, it certainly is -- what used to take 6 weeks for a permit now takes 3 months. Maybe 5 in certain markets. So that upfront piece is delaying stuff. It's also why some of these megaprojects are taking so long to hit the ground. These chip plants, we know they're there. We know they're coming, but they're still going through a lot of the permitting, getting utilities. And utilities require permits and everything else, right? So it kind of cascades. So it's definitely a long pole in the tent. I will tell you -- and I have told everybody this. If the U.S. wants to accelerate onshoring, reshoring chip plants, whatever it is out of build, if they can get through the regulatory and permitting issues, it would speed up these projects and spending and funding exponentially. Alexander Rygiel: And then within Building Solutions, are you seeing any signs of green shoots? Joseph Cutillo: I'm sorry. Say that again? Alexander Rygiel: Within Building Solutions, are you seeing any signs that 2026 could start to improve again? Joseph Cutillo: No. I think we don't believe, honestly, that anything would happen until the second half of '26 at the earliest. Certainly, interest rates continue to creep down, builders have a lot of programs in place. We have not seen -- we've flattened, okay? It's not getting worse. That's the good news. But we have not seen anything that would tell us we're going to see an uptick here anytime soon. Operator: Thank you. We have no further questions. I will turn the call back over to Joe Cutillo for closing comments. Joseph Cutillo: Thank you. Thanks again, everybody, for joining today's call. If you have any further follow-up questions or would like to set up a call, please contact Noelle Dilts. Or if -- contact information is in our earnings release. I hope everybody has a great day, and I appreciate you taking the time. Thanks. Operator: Ladies and gentlemen, this concludes your conference call for today. 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