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Operator: Welcome to the Third Quarter 2025 Sequans Earnings Conference Call. My name is Jonathan, and I will be your operator for today's call. [Operator Instructions] As a reminder, today's program is being recorded. I would now like to turn the program over to David Hanover, Investor Relations. David, you may begin. David Hanover: Thank you, Jonathan, and thank you to everyone participating in today's call. Joining me on the call from Sequans Communications are Georges Karam, CEO and Chairman; and Deborah Choate, CFO. Before turning the call over to Georges, I would like to remind our participants of the following important information on behalf of Sequans. First, Sequans issued an earnings press release this morning, and you'll find a copy of the release on the company's website at www.sequans.com under the Newsroom section. Second, this conference call contains projections and other forward-looking statements regarding future events or our future financial performance and potential financing sources. All statements other than present and historical facts and conditions contained in this release, including any statements regarding our business strategy, cost optimization, strategic plans, the ability to enter into new strategic agreements, expectations for sales, our ability to convert our pipeline to revenue and our objectives for future operations are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1999, Section 27A of the Securities Act of 1933 as amended and Section 21E of the Securities Exchange Act of 1934 as amended. These statements are only predictions and reflect our current beliefs and expectations with respect to future events and are based on assumptions and subject to risks and uncertainties and subject to change at any time. We operate in a very competitive and rapidly changing environment. New risks emerge from time to time. Given these risks and uncertainties, you should not rely on or place undue reliance on these forward-looking statements. Actual events or results may differ materially from those contained in the projections or forward-looking statements. More information on factors that could affect our business and financial results are included in our public filings made with the Securities and Exchange Commission. And now I'd like to hand the call over to Georges Karam. Please go ahead, Georges. Georges Karam: Thank you, David. Good morning to everyone. We announced this morning that Sequans has taken a proactive approach to reduce its debt by 50% through its strategic asset reallocation of its Bitcoin treasury. We remain fully committed to our Bitcoin treasury strategy, which we continue to believe will deliver meaningful long-term value for our shareholders. This is why we executed our major financing deal in July as the starting foundation of our Bitcoin strategy. As you know, the financing deal included both equity and convertible debt components that introduced approximately 50% leverage into our treasury structure. Initially, we thought the shares would appreciate following the deal announcement and the debt would convert due to share price appreciation. While there is no urgency for us as we are not paying interest on the debt for the first 12 months, we have chosen to act proactively given current digital asset treasury market conditions. With many of our peers currently trading significantly below an mNAV of 1. We find ourselves constrained by the lack of available options to meaningfully advance our treasury strategy at this time. Thus, we have opted to move forward and negotiate with our debt holder to reduce our debt exposure and provide us with greater flexibility moving forward. As a result, we announced today that we are reducing by half our convertible debt via a tactical sale of a portion of our Bitcoin holdings. We undertook this action for the following reasons: First, it has lowered our debt-to-NAV ratio closer to the 35% range, a more appropriate level while still maintaining decent leverage on the remaining portion of the convertible debt. This puts us in a better position for issuing preferred shares in the future. Second, we have reduced some of the debt covenant constraints, increasing our ability to use all of the treasury tools at our disposal, including buying back ADS and executing on the ATM based on market conditions. With respect to our ADS buyback program, factoring in the current valuation, selling Bitcoin on a tactical basis makes sense in this environment to fund the repurchase of our ADS, which are trading at a significant discount to our Bitcoin net value plus our net cash. Note that our current valuation does not reflect the value-creating opportunities we believe are available to us through our IoT business, which I will discuss shortly. And lastly, we have freed up some of the Bitcoin we hold, enabling us to generate some yield with minimum risk. Such yield can be deployed to buy Bitcoin. So to summarize this move -- to summarize, this move was undertaken to unlock shareholder value and put us in a better position to execute on our treasury strategy. We intend to continue to follow a disciplined and opportunistic approach to Bitcoin accumulation. We'll be patient with market conditions, but we remain proactive. Ongoing Bitcoin purchases could be funded by issuance of debt, equity or preferred as well as IoT business monetization and operating cash flow. We have the tools or option in place to execute the strategy. An ATM, which provides us with the option that when our share price is much higher than where it is today, we'll be able to execute opportunistically on our Bitcoin accumulation strategy in an accretive manner. We have also an ADS buyback program in place, which has been approved by the Board. And given the current share price, we'll execute on this as soon as we are able to. We have reduced our debt exposure, which affords us the option to consider other new instruments like preferred shares in the future. Returning to my earlier point about the large valuation discrepancy in our shares, I wanted to stress that our current net equivalent cash position that includes equivalent cash of Bitcoin net asset value minus debt is above $170 million. This is approximately $12 per outstanding ADS. You can see the deep discount our shares are trading at on this basis alone. This ignores any IoT business value we are creating and expect to create in the future. It also ignores the leverage we can create with our Bitcoin treasury strategy. While Bitcoin treasury companies as a whole may be in a transition phase that has affected current equity valuations, we continue to be fully committed to the Bitcoin treasury strategy we have initiated and are exploring all opportunities to unlock shareholder value through our Bitcoin treasury alongside our IoT operations. Our goal remains to create long-term value to our shareholders. As for our IoT business itself, it's moving in the right direction. Our pipeline remains healthy, representing about $550 million in a potential 3 years product revenue across our 4G and RF product lines. In Q3, we won 6 new projects, and I'm pleased to announce that around $300 million of this pipeline are design win projects, a 20% increase versus our last reported figure. Some of the design win projects are in mass production phase currently generating revenue and others are under development by our customers with revenue potential in 2026 and beyond. Our execution remains focused on increasing the design win pipeline, but more importantly, on helping our customers with projects not yet in production, finishing the development and certification of their products and turning them to revenue-generating design wins. In Q3, 3 design win projects transitioned to production. In Q4, we expect to add 5 more, positioning us to enter 2026 with over 45% of our design win projects in production and generating revenue. This aligns with the target we set at the beginning of 2025 and represents a more than 2x improvement of this key business metric. We anticipate this positive trend to continue into the first half of 2026, supporting our revenue growth in the second half of 2026. Our design win projects span multiple verticals. Tracking, fleet management and smart metering remain the strongest verticals for us with good presence in security and e-health and medical. Looking at smart metering, we are now shipping product for 3 projects of Honeywell and 2 of Itron and should have 2 new metering customers ramping early 2026. In fleet management, Geotab is ramping, and we will have another customer ramping in early 2026. We continue to have strong business with AsiaTEL, a channel partner addressing auto tracking and other vertical applications. Now I will briefly review the third quarter business and discuss our fourth quarter outlook. Let me start by highlighting that Q3 was the first quarter without any remaining revenue -- revenue recognition tailwind from the Qualcomm deal closed last year. While this has an optical impact on the licensing and services revenue component, it does not affect cash flow. Q3 product revenue was impacted by minor delays as some customer projects shifted their ramp-up scheduled to Q4. While this has postponed our expected Q3 revenue growth, we remain confident that the ramp will materialize in Q4 as planned. In addition, we faced some late production challenges with our OSAT partner and revenue fell short of our target due to substrate availability issue. The impact was around $1 million in Q3. Substrate lead times became extended last quarter due to industry demand from AI leaders. We mitigated this by working with suppliers and anticipating orders. However, our execution timing was right on the edge of the quarter end. This ended up delaying some of our shipments by a couple of weeks. However, this issue is now under control for our fourth quarter shipments. Given our Q4 visibility, our current Q4 view is that product revenue will exceed $6 million with around $1 million incremental revenue of services and IP licensing. We aim to finish the Q4 with revenue above $7 million by adding the 2 components. On the product development front, we launched our 4G Cat1 bis worldwide SKU module and have made very good progress on our 5G IoT. In this regard, I'm pleased to announce that we have just taped out our 5G eRedCap test chip as planned. This is a major milestone in our 5G IoT project. This program will enable us to sample our third generation of IoT chips supporting 5G eRedCap late 2026. This is an extremely advanced technology that we believe has significant value. In summary, our 4G IoT business will grow and generate positive cash flow in 2026, becoming a profitable business line for us with the potential to grow further in 2027 by around 50% year-over-year. This business is helping to fund our ongoing investment in 5G R&D, which can start generating product revenue in 2027 and licensing revenue in 2026. We expect the IP created with this 5G investment could result in strategic deals with significant near-term value creation as we have successfully demonstrated in the past with 4G. More generally, we have launched new IP initiatives and announced a portfolio of IP that we are willing to license. We have done a few licensing deals in the past, but here, we are shifting from an opportunistic approach to a proactive go-to-market strategy, maximizing our customer reach and accelerating the monetization of our IP portfolio, all without additional investment. Currently, we have several opportunities under discussion, and we hope to conclude a few of them in the coming quarters. We believe services and IP licensing should contribute high-margin revenue in 2026. We further expect longer-term product revenue strength based on current design wins and order backlog of 4G chips and module and radio transceivers. Considering the $300 million product design win pipeline, we currently have in hand and factoring that we will enter 2026 with 45% of the design win projects generating revenue, this could generate [ $45 million ] average annual product revenue over the coming 3 years. This doesn't include the growing number of projects that are expected to enter into production in 2026, the new projects we are working on to win or IP licensing and services contribution. On the operating expense front, our goal is to limit cash burn in 2026 in order to reach breakeven in Q4. To support this, we are implementing a 20% cost reduction program across functions while safeguarding core innovation. This approach provides downside protection and preserves flexibility to scale up if upside revenue opportunities materialize. I will now take a moment to discuss some of the IoT-related strategic alternatives we are currently evaluating. Since launching our Bitcoin treasury, we have been actively reassessing how best to position our IoT business to ensure shareholders benefit from its full value potential. Our Board is currently evaluating a range of strategic alternatives we have. While several options being explored, I can share that we are in serious discussions regarding a few strategic partnership opportunities for our IoT business. The objective is to accelerate the path to breakeven, enhance the business overall value and strengthen its cash flow generating capability. I will now turn the call over to Deborah to review the third quarter 2025 preliminary financial results in greater detail. Deborah? Deborah Choate: Thank you, Georges, and good morning, everyone. I'll cover our third quarter financial results and then speak more about our Bitcoin holdings. Total revenues in Q3 2025 were $4.3 million, a decrease of 47.3% compared to the second quarter of 2025 as the last license revenues from Qualcomm finished in Q2 2025. Gross margin was 40.9% compared to 64.4% in Q2, again, reflecting much lower high-margin license revenue in the mix in Q3. Operating expenses in Q3 2025, excluding the unrealized loss on the marked-to-market of the Bitcoin treasury asset were $14 million, stable compared with Q2 2025. Both quarters included a number of nonrecurring expenses related to various legal and advisory fees related to our strategic transactions. Operating expenses in Q3 included nearly $800,000 in noncash stock compensation expense and $1.6 million in amortization and depreciation expense. As Georges mentioned, we are putting in place cost reduction measures to reduce cash operating expenses, meaning excluding stock comp and depreciation expense to be below $10 million per quarter in 2026. Operating loss was $20.4 million in Q3 compared to an operating loss of $8.7 million in the second quarter of 2025. The operating loss in the third quarter of 2025 included an $8.2 million unrealized loss on impairment of the value of our Bitcoin asset, which was mark-to-market. For the third quarter of 2025, our net loss was $6.7 million or $0.48 per diluted ADS compared to a net loss of $9.1 million or a loss of $3.59 per diluted ADS in Q2 2025. Net loss in the third quarter of 2025 included a noncash $20.6 million gain on the change in value of the embedded derivative related to the convertible debt issued in July and included net interest expense of $6.9 million that was also primarily noncash and related to the IFRS accounting for the convertible debt issued in July. Our non-IFRS loss in Q3 2025 was $11 million compared to a non-IFRS net loss of $8.1 million in Q2 2025. Cash and cash equivalents at September 30, 2025, totaled $13.4 million compared to $41.6 million at June 30, 2025. The September 30 balance does not include the $10 million final payment from the 2024 Qualcomm transaction that was released from escrow in October 2025, giving us a pro forma ending cash of $23.4 million. At September 30, 2025, the company held 3,234 Bitcoin with a market value of $365.6 million, all of which was pledged as security for the $189 million of convertible debt issued in July. Following the recently announced amendment of the debt agreement, 1,617 Bitcoin are being released from the pledge and the company has sold 970 Bitcoin in order to reimburse half of the debt. The remaining 647 unpledged Bitcoin remain in our treasury but are -- that are available for the previously announced ADS repurchase program if needed. I'd also like to refer you to our Bitcoin dashboard on our website at sequans.com/bitcoin-treasury, where investors can find our Bitcoin-related statistics in one location. We now have many tools in place to pursue our Bitcoin treasury strategy and strategic options for our IoT business. We will use these to maximize shareholder value based on our own specific circumstances. And now I'll turn the call back to Georges before we begin Q&A. Georges Karam: Thank you, Deborah. So to conclude this call before the Q&A, I would like to stress like the 2 points. On the Bitcoin, we continue to be committed to the Bitcoin treasury strategy we've launched. Given the current digital asset treasury market condition, we decided to adjust our treasury structure and redeem half of the debt in order to be in a better shape to execute on our Bitcoin treasury strategy. With this move, we have now a more appropriate debt-to-NAV ratio while still maintaining decent leverage, also put ourselves in a stronger position to execute on the ADS buyback program as well as other financial instruments. On the IoT business, our design win pipeline is growing well, and we remain on track to have by end of this year, more than 45% of the projects -- of the customer projects moving to mass production and generating revenue. In parallel, we are taking all actions needed to control our OpEx and limit cash burn with the target to reach breakeven in Q4 2026. And finally, we are seriously considering a few strategic alternatives to ensure shareholders benefit from the full value potential of our IoT business. With that, let's now begin the Q&A session. Operator? Operator: [Operator Instructions] our first question comes from the line of Scott Searle from ROTH. Scott Searle: Deborah, maybe just to dive in quickly. In the third quarter, were there any licensing or service revenues a part of the $4.3 million, trying to understand if there was a sequential uptick in the product revenues. Also, I just want to clarify the timing on the OpEx going below $10 million. And Georges, from a high level, kind of looking at where the net asset value of the company is relative to the current stock price. How aggressive will you be on the buyback? If you got another 600 Bitcoin available to pursue that strategy, given the stock is trading at $7 versus net asset value around $12, would seem like it's a pretty good arbitration move to do that. So how quickly and how aggressively do you plan to tackle that? Georges Karam: Yes. I mean, Scott, first of all, and just to take your last point, as aggressive as needed and as the rational makes sense, right? I mean our Bitcoin value, the Bitcoin get acquired with the share at $14. So technically, if the share is at $7, you will be making 50% gain by selling a Bitcoin that you purchased at $14 and you recover the price you paid for it at $7, right? I mean, which is your share. So we have all in place. Board resolution is there. We were not able to execute on it in this period because, as you know, we were on the window. I mean, we were restricted and we could not act on this. But I don't know any 1 or 2 days, we will be free and we'll be moving on this. And obviously, consider depending where the stock is, but it makes full sense for shareholders today to buy back the shares of the company if it's trading low. And for the people staying with the company, we'll get the value of the NAV we have there. So we are completely committed to be aggressive on this if needed. Deborah Choate: Scott, on the revenue side, we are about 2/3 product, 1/3 licensing and services in Q3. And in terms of the OpEx reduction, this is being put in place now. We expect it will be mostly realized in Q1, and we're looking at it fully in place by Q2, but with an overall for the year being below $10 million a quarter. And that includes the new cost of managing the Bitcoin treasury. Scott Searle: Okay. Very helpful. And then, Georges, maybe to follow up in terms of the pipeline building for the IoT business. It's a lot of momentum in 1 quarter where you're growing about 20% in terms of your design wins. I guess, you'll kind of enter 2026 at almost double-digit revenues, right, somewhere in that $10 million to $11 million, I guess, is the run rate off of that 45% that go into production. I think in the past, you talked about what you might be exiting 2026. Is there a figure that you're thinking about right now because it sounds like that gets you to breakeven, particularly given the OpEx reductions that you have ongoing, so we should see that by the fourth quarter of '26. Georges Karam: I mean, Scott, and the business, the IoT business, as you know, is many, many projects, and each project is not huge. So that mix, if you want like at the beginning, when you're ramping, it's a little bit slow and frustrating to some extent. But once the products are in shipment, our customer is shipping, it's there for 7 years in average, like if you take meters, sometimes even more than this. So -- and give us very good visibility for the future. We are -- I'm very happy as we are exiting this year close to our range of 50%. But this will continue because, as you know, the design win project I don't qualify them like 100% secured, but we could have the risk on what we have a win in hand is very, very minimum. More than 90% based on the history of the project continue, I mean, except really some small projects or small company that you could have over the execution of projects, some surprises, but we are dealing with Tier 1 players that are there when you decide to launch a project they are in. It may take them longer than what we thought to be ready for production, but they get it there. So we -- I believe 2026 will continue ramping, and we should be -- because the pipeline will continue, I could not say what we have in hand today, maybe close to 90% plus will be in production. But obviously, in the meantime, we'll be adding new projects. So when we exit, the pipeline should be more than [ 300 ] exit '26. And obviously, the percentage will be less than 90%. But this is what will be funding the growth we'll have in 2027, which I predict to be at minimum 40% to 50% year-over-year, thanks to this. Deborah Choate: Just one point on Q1, we do tend to have a little bit of seasonality in. Georges Karam: I mean in that case, the average -- your number, you're right. I mean just to talk about the digital, I'm giving you the [ $45 million ] 3 years average, right? I mean all this is ramping. You imagine the shape because the new projects starting today is not going to yield that full revenue in the first quarter. It takes like 2 quarters or 3 quarters to go to the full revenue. So there is a ramp-up phase, obviously, with every project adding up. Scott Searle: And a couple of follow-ups, if I could then. Congrats on getting the tape-out on the RedCap front. I know that's a big milestone for the company. I think you've talked about licensing opportunities for RedCap. I wondered if you could elaborate on that in terms of what might be in the pipeline, kind of frame in terms of size and opportunities. And IRIS has been ramping up as well, I think, in terms of the potential opportunities. I'm wondering where that fits into the overall design win pipeline that you've talked about, the magnitude of those opportunities, particularly ramping into 2026. Georges Karam: Yes. I mean, obviously, in IPR licensing, we have some piece of this, which is established even in our revenue next year. We have already in the backlog revenue of royalty that we are collecting from a couple of customers to whom we did licensing with them, and we'll have other words of design win with licensing and now we're collecting a royalty in 2026. We collect even with one a little bit this year as well. But since we launched this IP strategy, we realized like at least we had more than a dozen of leads talking with us. It doesn't mean that they need the full RedCap -- the full eRedCap or RedCap solution from us. As you know, we have a very advanced radio transceiver technology. We have layer 2, layer 3 protocol that no one have it. And obviously, we have a lot of IP in the modem. And as well, we have the full solution. So you could have customers whether looking for a full solution of modem, mainly to adapt to move from a cellular to something else, if you want, like to satellite or defense application, other radio environment. And some other, they want just only a piece of the technology what we have. So we're talking about licensing deal that could be, I would say, $3 million to $5 million license. I'm not talking about royalty like upfront. Up to these, they could be equal to $15 million, $20 million and all those under discussion, and we have really nice number in discussion. And for sure, next year, we'll have something converging and helping to feed our IP licensing revenue next year. Scott Searle: Got you. And lastly, if I could, George, just to follow up on the strategic comments. Can you frame that a little bit more? Are you talking about more partnerships? Or are you talking about potential outright sale of the IoT business at the current time? Georges Karam: Yes. Scott, I don't want to comment much on this. Obviously, the question -- take the problem like this, like, okay, the company has a serious IoT business, which is extremely valuable, in my opinion. It has as well a nice Bitcoin holding, which is extremely valuable as well. And from there, we're moving as a company to hopefully succeed on both front, building more Bitcoin and building the treasury and buying more -- accumulating more Bitcoin. And on the other side, scale the revenue and the IP potential of the IoT. For the time being, they are not conflicting to each other. They are manageable. But if you project down the road, you could say maybe for shareholders, you can give more value by separating the tool, by doing something different, I would say that. And obviously, this take the factor as well discussing with other partners on the business front to do some strategic partnership and maybe more together. I cannot say more, Scott, I mean, allow me, but you have serious discussion there. And hopefully, when things will be close to sign or signed, we'll be able to announce it to market. Operator: And our next question comes from the line of Mike Grondahl from Northland. Mike Grondahl: George, talk a little bit about your confidence in $7 million of revenue in 4Q and this $45 million kind of annual run rate you're striving to? Georges Karam: Yes. Mike, obviously, for Q4, I mean, you never say I'm 100% sure, right? I mean we're giving a number that we believe it's in the backlog, if you want, and secure out of, I would say, extraordinary accident, we are very confident about it. If we talk about the annual revenue, I want just again to stress the math I did is I took 45% of the $300 million, which will be in production divided by 3, give you $45 million over 3 years. So this is the average. Obviously, this doesn't mean necessarily that it's flat first year, flat second year, flat third year. It's the reverse. It will start lower and it will go up over 3 years because you have the ramp of those products. And obviously, it's quite -- I'm quite comfortable with the number, even if the projection here, you're talking about longer program. You need to know that in our design win today, when I look, for example, to product shipping, I spoke, for example, about Honeywell. I can name even a smaller guy like Withings, like Coyote, like -- customer like this, that -- they are smaller, but very steady because they ship since more than 1 year. So we have history about their ramp. We know that they are -- how much they do, and we have extreme confidence in their future projection, forecast and so on. Obviously, we can -- we take our, I would say, optimization there. We -- maybe cut 10% for the risk things, but we are very confident. When you have a new project coming in, like even a Tier 1 customer saying, okay, now my product is shipping and I'm planning to ship like per year, let's say, to do 0.5 million units. Obviously, you are going to compute the ramp. First year, maybe 200, the second 350 and then we ramp up to 500. There is still some risk not factored in, which is related to the fact if this customer, we have, if you want, experience about his previous shipment, previous forecast and so on. So in other words, in this number, already more than half of those 4%, 5% are already in production. I'm extremely confident about them. The other half are ramping now like Q3 and Q4. There will be a little bit of risk, but measurable risk. That's why we're presenting this one. Mike Grondahl: Got it. And the cost reduction efforts, have you started those? Or do those start later this year? Georges Karam: We started many things. And again, cost reduction, we have a lot of stuff. We have -- even I can tell you, for example, our offices, we shave like -- we had the chance to renegotiate pieces of the OpEx, third party and so on. And obviously, some reduction here and there when it's needed. We started a little bit and some of it, not everything is implemented, but some is defined. As I'm speaking, I know what we are going to do if you want in Q4 and Q1. And all this is set without impacting, if you want our innovation and investment into the 5G R&D. A lot of this as well, like our 4G, if you want, product line is becoming fully, I would say, mature because we were still working on some development during the year, we finished it. So we have even some reduction of effort there. And more general, I would say, on the G&A and so on controlling the spend. Mike Grondahl: Got it. Got it. And then have you disclosed what you -- what price you got per Bitcoin for the 970 you sold? Georges Karam: We didn't. It will be on our -- it will be showing up on our website, but I can give it to you, it will be [ $108,600 ]. Unfortunately, we didn't have the best period to sell, started selling at [ $115,000 ] ended by selling at [ $106,000 ]. Operator: Our next question comes from the line of Fedor Shabalin from B. Riley Securities. Fedor Shabalin: Georges and Deborah, I completely understand the rationale behind the Bitcoin sale. You mentioned that this transaction enables our company to pursue a wider set of strategic initiatives to develop and grow the treasury. So could you provide more details on what additional initiatives you're considering beyond the ATM program and share buybacks? And any color on your strategic priorities here would be helpful. Georges Karam: Fedor, thanks for the question. I mean, essentially, and again, I want to stress one point. The company when -- one of the issues, if you want or the structure of the debt, there is -- it was not the risk even some people -- I don't know if people were -- because the collateral was fixed. We didn't have to readjust the price of the Bitcoin. It was just not the collateral is all the Bitcoin that we have and they are sitting there, we cannot do anything with them. If you cannot do anything with your Bitcoin, obviously, your -- the original plan was like the debt will convert at least over the first 6 months and so. And then by definition, some of those Bitcoin will be free and from there, we can use them. So we took this initiative really not under the pressure because we have interest rate to pay or because we are afraid about having the Bitcoin at $100 and have to face any issue. The company will not face any issue even if we stay on this Bitcoin longer. However, the company was stuck. In other words, I could not do anything. I cannot buy Bitcoin. I cannot generate yield on the Bitcoin. I cannot be aggressive on buyback because you can do a buyback, but at the end of the day, I have cash, but this cash needs as well to serve the operational business and the G&A even to manage the treasury. From this situation, we felt like even if it's not -- I will say, maybe we are the first treasury doing this, and we took the decision to act to be proactive. Maybe some people, they don't like it because no one sells Bitcoin in principle in the treasury. I mean, this is -- our aim was as well, but we felt it makes absolute sense now to change the ratio of debt, this often obviously preferred other structure of debt, which is today, I mean, it's not unusual topic for the company. But now they are possible because if your debt is around 30%, it's easy to have 10% preferred next to it. And if you reduce the debt further, you can do more. So this is one option. If we have free Bitcoin, those can be generating yield depending on the risk you want to take there. But if you want to take a very low risk, you can generate like 4% yield, and this will be nice cash that you can use to buy Bitcoin or to fund the G&A of serving the treasury. And obviously, the buyback that gives us -- that boosts the program because we don't need to sacrifice anything on the operation. If really the share stays low, the rational means sell Bitcoin and buy shares and support the shareholders staying with us. So that's the whole logic around it. This is really on the topic that we have. Now I know that there are other topic, if maybe you're raising for this, which is like consolidating and something with other treasury. I know that one happened in the market today and everybody saw this, I don't believe there is urgency on this. For me, honestly, there is not a clear idea currently what's the issue of the treasury strategy in general, why all this is trading below our NAV, which is not logical at the level where it is. And this is not for us, for all our peers. So we're trying to unlock it from where we are by taking -- put ourselves in a position where we are much stronger. And from there, we'll see how things will develop in the coming 6 months or so. Fedor Shabalin: That is helpful. And you already partially answered my follow-up question on debt-to-NAV ratio. But I just want to understand what will be different in the treasury approach going forward? I heard you plan to issue preferred, but if you can just throw some time line on this would be helpful. Georges Karam: Yes. I mean, Fedor, obviously, I mean, the first priority now is really the buyback program. This is what I have on my table, if you want to execute on this and see how things will develop there. And obviously, the second one will be the preferred and the yield on the Bitcoin. These are the 3 options. No time line. Honestly, the option is there, but I don't want to give more time line when we'll do something like this because it depends on negotiation and so on. Operator: This does conclude the question-and-answer session of today's program. I'd like to hand the program back to Georges Karam for any further remarks. Georges Karam: Thank you, Jonathan, for helping us with this. Thank you, everybody, staying on the call and for all your questions and looking forward to see you in the next opportunity. Thank you very much. Operator: Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.
Operator: Good morning, ladies and gentlemen, and welcome to the Driven Brands' Third Quarter 2025 Earnings Conference Call. [Operator Instructions] This call is being recorded on Tuesday, November 4, 2025. I would now like to turn the conference over to Steve Alexander. Please go ahead. Steve Alexander: Good morning. Welcome to Driven Brands' Third Quarter 2025 Earnings Conference Call. The earnings release and net leverage ratio reconciliation are available for download on our website at investors.drivenbrands.com. On the call with me today are Danny Rivera, President and Chief Executive Officer; and Mike Diamond, Executive Vice President and Chief Financial Officer. In a moment, Danny and Mike will walk you through our financial and operating performance for the quarter and full year. Before we begin our remarks, I would like to remind you that management will refer to certain non-GAAP financial measures. You can find the reconciliations to the most directly comparable GAAP financial measures on the company's Investor Relations website and in its filings with the Securities and Exchange Commission. During this call, we may also make forward-looking statements regarding our current plans, beliefs and expectations. These statements are not guarantees of future performance and are subject to a number of risks and uncertainties and other factors that could cause actual results and events to differ materially from results and events contemplated by these forward-looking statements. Please see our earnings release and our filings with the Securities and Exchange Commission for more information. Today's prepared remarks will be followed by a question-and-answer session. We ask you to limit yourself to 1 question and 1 follow-up. Now, I'll turn the call over to Danny. Daniel Rivera: Good morning, and thank you for joining us to discuss Driven Brands' Third Quarter 2025 financial results. We delivered a strong third quarter with top to bottom strength on all key financial metrics. Driven grew revenue by 7% and delivered adjusted EBITDA of $136 million. System-wide sales increased 5%, supported by 167 net new stores over the last 12 months, including 39 additions this quarter alone. Same-store sales rose 3%, marking our 19th consecutive quarter of positive same-store sales. We also continued to strengthen our balance sheet, reducing net leverage to 3.8x, as we progress toward our target of 3x by the end of 2026. We remain focused on our growth and cash strategy, driving strong consistent growth through Take 5 and generating reliable free cash flow from our franchise and car wash segments. Take 5, home of the stay-in-your-car 10-minute oil change, delivered its 21st consecutive quarter of same-store sales growth and continue to perform across every key metric. Through the third quarter, we opened 101 net new stores, including 38 in the third quarter. System-wide sales grew 18% year-over-year, and same-store sales grew 7%, driving adjusted EBITDA growth of 15%. Adjusted EBITDA margins expanded to 35%, up 40 basis points versus last year. These results reflect disciplined execution and a relentless focus on the customer, evidenced by our Net Promoter Score, which remained in the high 70s. We continue to see meaningful growth in non-oil change revenue, which accounted for more than 25% of Take 5 sales for the quarter. Over the past 24 months, we've added new services while simultaneously growing the attachment rates of non-oil change services from the mid-40s to the low-50s. We've now completed the rollout of our differential fluid service across the entire system. Early results have been positive. We've seen strong attachment rates, healthy margins, great customer feedback and no meaningful cannibalization of existing services. We expect to open approximately 170 new Take 5 locations in 2025, 90 company-owned and 80 franchised. We remain committed to opening 150 or more new units annually, supported by the strong performance of our 2023 and prior vintages, which ramped above $1 million in average unit volumes within 24 months. Our new unit pipeline remains robust with approximately 900 locations at the end of Q3, of which over 1/3 are sites secured or further along. Finally, we continue to innovate to drive traffic and efficiency across the system. We recently implemented a new media mix model to better allocate advertising dollars and maximize return on advertising spend. At the shop level, we're testing AI-driven camera technology that detects queuing issues in real-time, helping managers adjust staffing and workflow to move more cars more efficiently and ultimately serve more customers. Where Take 5 drives growth, our franchise and car wash segments anchor cash generation. Our franchise segment, built around some of the most trusted names in the industry, including Meineke, Maaco and CARSTAR, delivered same-store sales growth of 1% for the quarter versus prior year. That performance was driven by strength at Meineke and sequential improvements at Maaco and CARSTAR. The segment also delivered adjusted EBITDA margins of 66%, an improvement of 90 basis points versus the prior year. Turning to IMO, our international car wash business, growth remained solid but moderated as previously communicated, with worse weather conditions in Q3 versus the first half of the year. Same-store sales and revenue for the segment grew 4% versus the prior year, resulting in adjusted EBITDA margins of 28%. Now, turning to our expectations for the remainder of 2025. As we've discussed throughout the year, we continue to operate in a dynamic consumer environment. While the consumer faces ongoing pressure, our diversified portfolio has demonstrated resilience across varying market conditions. Q4 has been particularly choppy with several factors creating a higher degree of macroeconomic uncertainty, including the ongoing government shutdown and the potential disruption of funding for the military and social programs. Given this uncertainty, we believe it's prudent to take a more conservative stance as we close out the year. Accordingly, we're narrowing our full year guidance ranges to reflect both our strong third quarter performance and the evolving macro environment. Mike will provide more details on the outlook in a moment. I recently announced 2 important organizational changes that strengthen our foundation for the future. First, Mo Khalid has been named Chief Operating Officer of Driven Brands. In this role, Mo will lead the Take 5 and franchise segments. Mo is a seasoned executive, exceptional leader and a Driven Brands' veteran. He and I first worked together in 2015 when he led operations for me at Meineke. After several years with Driven, Mo went on to hold a series of senior roles at Great Wolf Lodge, culminating in his final role of Senior Vice President of Field Operations. He returned to Driven in 2023 as President of Take 5 Oil Change, where he and the team have grown the business to almost 1,300 locations with system-wide sales of $1.6 billion and adjusted EBITDA of over $400 million on a trailing 12-month basis. As COO, Mo will work across both segments to drive operational rigor, predictability and sustainable growth. Next, Tim Austin has been named President of Take 5 Oil Change. Tim most recently served as President of Take 5 Car Wash, where he did an outstanding job stabilizing the brand, culminating in our successful sale of the business in Q2 of this year. Tim is a fantastic leader and an exceptional operator. He began his career at Walmart, starting as an assistant store manager and rising to Vice President of Store Planning. Over the past 6 months, Tim has served as COO of Take 5 under Mo, experience that perfectly positions him for this role. These moves reflect the depth of talent we've built across the organization. Our meritocratic culture continues to identify, develop and promote talent from within, ensuring we have the right leaders in place to drive performance and deliver results. Let me close with a few key takeaways. First, we delivered a strong third quarter across same-store sales, revenue, adjusted EBITDA and adjusted EPS. Second, Take 5 continued to deliver industry-leading growth. Third, our franchise and car wash segments grew same-store sales in the quarter and remains reliable cash-generating engines. And finally, we've reduced our net leverage to 3.8x and remain on track to reach 3x by the end of 2026. I want to thank our more than 7,500 Driven Brands' team members and hundreds of franchise partners who rally every day around our mission and our customers. Your hard work, focus and execution are what drives our results and our continued success. With that, I'll turn it over to my partner and Driven's CFO, Mike? Michael Diamond: Thank you, Danny, and good morning, everyone. Q3 2025 demonstrated Driven's consistent execution, led by another quarter of strong growth in our Take 5 Oil Change business, improved performance in our Franchise Brands segment and the continued reduction of our net debt to adjusted EBITDA ratio. These results demonstrate the power of our diversified platform with Take 5 driving continued growth, and our disciplined capital allocation moving us closer to our 3x net leverage target by the end of 2026. As a reminder, with the divestiture of our U.S. car wash business, the results for that business are included in discontinued operations and are not included in financial details provided today, unless otherwise noted. Driven recorded its 19th consecutive quarter of same-store sales growth, increasing 2.8% in Q3. We added 39 net units in the quarter, led by continued expansion in our Take 5 segment. System-wide sales for the company grew 4.7% in Q3 to $1.6 billion. Total revenue for Q3 was $535.7 million, an increase of 6.6% year-over-year. Q3 operating expenses increased $21 million year-over-year, including an increase in company and independently operated store expenses of $16.4 million, driven by higher sales volumes and additional stores in Q3 of 2025 versus Q3 of 2024. Operating income for Q3 was $61.9 million, an increase of $12.3 million. Adjusted EBITDA for Q3 was $136.3 million, roughly $4.3 million above Q3 last year. As a reminder, Q3 of this year comes without the benefit of PH Vitres, which we divested in August 2024, but 2 months of which are still included in Q3 2024 results. Adjusted EBITDA margin for Q3 was 25.4%, a decrease of roughly 85 basis points versus Q3 last year as sales growth was offset primarily by the aforementioned increase in store expenses and investments in growth initiatives. Net interest expense for Q3 was $23.6 million, down $20.1 million from Q3 last year, led by lower debt balances, including the payoff of our term loan balance and the benefit of the acceleration of our interest rate hedge on our 2022 notes. Income tax was a benefit for the quarter of $21.7 million, driven by a discrete change during Q3 in our tax valuation allowances related to the One Big Beautiful Bill Act, which increased the company's interest deduction. Of note, this positive valuation adjustment is excluded from adjusted EPS in the quarter. Net income from continuing operations for the quarter was $60.9 million, adjusted net income from continuing operations for the quarter was $56.2 million. Adjusted diluted EPS from continuing operations for Q3 was $0.34, an increase of $0.11 versus Q3 last year, driven by higher operating income on increased sales and lower interest expense. Q3 performance for each of our segments include Take 5 Oil Change, which represents more than 75% of Driven's overall adjusted EBITDA, had another strong quarter with same-store sales increasing 6.8% and revenue growth of 13.5%. Danny mentioned earlier the ongoing advancements we're making to the Take 5 business model, including better marketing efficiency, technology-led operational improvements and additional service offerings. Take 5 continues to build on its strong operational foundation by driving attachment of non-oil change services, now over 25% of Take 5's total system-wide sales and continued growth in the penetration of our most premium synthetic offerings. Adjusted EBITDA for the quarter was $107.3 million, reflecting growth of 15% compared to Q3 2024. Adjusted EBITDA margin was 35%. We opened 38 net new units in the quarter, of which 21 were company-operated stores and 17 were franchise-operated. Franchise Brands reported a 0.7% increase in same-store sales despite ongoing headwinds in Maaco, our most discretionary business. Segment revenue declined $1.8 million or 2.3% in the quarter due to a decline in weighted average royalty rate in the quarter. The segment continued its strategic role as a cash generator in our growth in cash portfolio, delivering an adjusted EBITDA margin of 66% in the quarter. Adjusted EBITDA was $49.7 million, down $0.5 million from the prior year due to the decline in revenue. During the quarter, we added 3 net new units. Our car wash segment, representing our international car wash business, grew again in Q3 with a 3.9% increase in same-store sales. The segment continued to benefit from improved operations and expanded service offerings, while experiencing more normalized weather that resulted in moderated growth as compared to the previous 2 quarters. Adjusted EBITDA decreased $1 million to $15 million or 27.8% of sales, driven by higher independent operator commissions due to higher sales and higher utility and rent costs. We closed 1 store in the quarter. Turning to our liquidity, leverage and cash flow performance for Q3. Our cash flow statement shows a consolidated view of cash flows for Q3, inclusive of discontinued operations. Net capital expenditures for the quarter were $27.3 million, consisting of $39.8 million in gross CapEx, offset by $12.5 million in sale-leaseback proceeds. Free cash flow for the quarter, defined as operating cash flow less net capital expenditures, was $51.9 million, driven by strong operating performance. As we discussed last quarter, on July 25, we monetized the seller note received from our divestiture of our U.S. car wash business for $113 million. We used the net proceeds to fully retire our term loan and pay down our revolving credit facility. Strong free cash flow, combined with the proceeds from the sale of the seller note, helped us reduce debt by approximately $171 million during the quarter. At the end of the quarter, our net leverage stood at 3.8x net debt to adjusted EBITDA as compared to 4.1x at the end of Q2 2025. On October 20, after the third quarter closed, we issued $500 million of new 5-year securitized notes combined with the draw on our revolver of approximately $130 million to prepay and retire in full our Class 2019-1 and Class 2022-1 securitized notes. This leverage-neutral transaction simplifies and extends our maturity wall, while reducing our annualized interest expense. We used our revolver as part of the transaction to permit us to deploy future free cash flow to continue delevering our balance sheet in a capital-efficient manner. As of the close of the transaction, our revolving credit facility had a balance of $187 million and represents the only nonsecuritized debt we have outstanding. Following the refinancing, our debt is now 92% fixed rate with a weighted average rate of 4.4%. Year-to-date through the end of Q3, we have repaid approximately $486 million of debt. As a reminder, you will see on our balance sheet an increase in current portion of long-term debt related to our Class 2019-1 securitized notes that were addressed as part of this recent refinancing. We continue to make progress on our goal of achieving net leverage of 3x net debt to adjusted EBITDA by the end of 2026. We are actively assessing how our capital allocation priorities will change once we achieve this important milestone, but for now, our focus remains on executing on our deleverage commitment, while investing in the Take 5 business, which generates a predictable high return on capital spend. I'd now like to provide an update on our full-year outlook. As we enter the fourth quarter, we are narrowing our fiscal 2025 outlook ranges to reflect our year-to-date performance and current expectations for the remainder of the year. As Danny mentioned earlier, we have seen additional choppiness across our portfolio, beginning in Q4 as recent macroeconomic factors weigh on the consumer. Our revised ranges reflect an appropriate caution for the current economic climate despite the strong third quarter for Take 5 and despite the sequential Q3 improvement in Franchise Brands. For the full year, we now expect revenue of $2.1 billion to $2.12 billion, driven by new unit growth and Take 5 strong performance through Q3, combined with a more measured Q4 outlook. Adjusted EBITDA of $525 million to $535 million, balancing Take 5's strong execution throughout the year with a more conservative view for the portfolio in Q4. Adjusted diluted EPS from continuing operations of $1.23 to $1.28, supported by our operational efficiencies and lower interest and income tax expense. Same-store sales at the low end of our original 1% to 3% range, reflecting the current consumer environment and ongoing dynamics in Maaco and collision. As for other important operating metrics, we reiterate net store growth between 175 and 200 units. Net capital expenditures near the high end of our original range of 6.5% to 7.5% of revenue, driven by opportunistic builds in our Take 5 segment. For interest, we now expect full year interest expense of approximately $120 million. In closing, Q3 was another strong quarter for Driven's diversified, growth-focused business model. We combined same-store sales growth across each of our segments with strong cash flow generation that enabled us to continue our progress toward achieving 3x net leverage by the end of 2026. With that, I will turn it over to the operator for Q&A, and we are happy to take your questions. Operator: [Operator Instructions] Your first question comes from Justin Kleber of Baird. Justin Kleber: Just was hoping you could share a bit more color on maybe on how the comps progressed across the quarter, what the exit rate looked like? And then Mike, you alluded to the choppy start here in the fourth quarter. Is that fairly broad-based across your business -- your various segments? And then just the math would seem to suggest you could see a negative comp in 4Q. I just want to ask if that's within a reasonable range of outcomes as you sit here today. Michael Diamond: Yes. So I'll unpack those questions. Justin, good to hear from you. So starting from the top, I would say Q3, in general, performance was consistent within the quarter. Obviously, we're happy with those results that we saw in Q3 and think that it demonstrated broad-based consistency and strength across most of the brands that we have. I think turning to Q4, as Danny and I both mentioned, we did see some choppiness as it relates to really the broader consumer environment, which did impact all of our brands. It's inconsistent, hence the word choppy, right? There are some good days, there are some bad days. And we felt it appropriate to demonstrate an appropriate amount of caution, as we sit here only 1 month into Q4. In terms of your question on negative comp for Q4, I'd answer it a couple of different ways. I think, one, it's important to start with our Take 5 brand, overall continues to be healthy. And so we expect that brand to grow in Q4 kind of -- regardless of where we ultimately end up for the quarter and the full year within that lower end of the range. Mathematically, yes, it is possible if we hit the very low end of that 1%. Given the strength we've seen in Q1 through Q3, it could be a negative Q4 from the consolidated. That will likely largely be driven by Franchise Brands, given the overweighting Collision can play in our same-store sales growth calculation. But I think, in general, the takeaway for Q4 is we're seeing some uncertainty. There is a little bit of choppiness across the entire consumer, as it relates to our brands. But overall, we think Take 5 is healthy. And that despite an incredibly strong Q4 '24, we'll be lapping. We expect that business to grow this quarter. Justin Kleber: Okay. Perfect. And then a question for you, Mike, just on kind of free cash flow conversion. It looks like you've converted about 70% of your adjusted EBITDA year-to-date in the free cash flow. Is that a good benchmark in terms of how we should think about this business on a go-forward basis? Could it actually get better to the extent CapEx maybe declines in '26? Just would love to hear your perspective on that topic. Daniel Rivera: Yes. I'm not sure I'm going to get into specifics of 2026 yet, as that's something Danny and I are still working through. I think we've demonstrated in all of 2025, our focus on delevering the balance sheet and achieving our commitment of 3x net leverage by the end of 2026. I mean, I think we pair that with the fact that our Take 5 business, because it is so strong, because we have such a good pipeline of both franchise and cost units, those corporate stores give us such an ability for a predictable high rate of return that we want to be opportunistic. Yes, Danny mentioned in his remarks, the 170-ish total units, a little bit more corporate owned this year. That's largely driven by the opportunism we see. When a good location comes about, we want to take advantage of that. So I think at a high level, yes, we will continue to be focused on driving EBITDA to free cash flow, making sure we return that cash to our stakeholders, which right now is focused on debt. But we want to leave ourselves a little bit of flexibility so that as we see good opportunities to build Take 5 corporate stores, we have the ability to do that. Justin Kleber: Okay. Makes sense. Operator: Your next question comes from Simeon Gutman of Morgan Stanley. Unknown Analyst: This is [ Zach ] on for Simeon. Take 5 has been among the fastest unit growers in the industry since 2019. At the same time, it looks like units for this year 2025 will end a tad below original expectations. So what are your unit growth expectations over the next few years given competition is increasing and new units are slowing more broadly across the industry? Michael Diamond: Yes. I'd have to go back and check expectations specifically related to Take 5 in 2025, because I would tell you that we feel very good with the numbers we're going to put up around 170, I think. Obviously, as we've discussed over previous calls, there's always going to be a little bit of fluctuation on the mix between franchise and corporate, not because the franchisees don't want to build, but because they deliver such high returns for us, we lean in when we find good opportunities that give us such strong returns. We mentioned on the call, we see a pipeline across the entire Driven portfolio, of which a large part is Take 5 of over -- almost 900 locations, of which about 1/3 are sites secured or better, which means we actually have the lease and moving forward. To the extent what you're talking about is the fact that Q1 through Q3 is a little bit light relative to the full year, that's just a natural nature of a franchise business. Danny and I have been experienced with many of them, and you'll always see additional growth in Q4. I wish there was a way to make that not the case, but that's just the nature of the game. And so we feel really good with the pipeline. And I think longer term, as we've talked about, we see 150 or more Take 5 for the next several years given the strong franchise relationships we have and the additional pipeline of company-owned stores we can build to deliver a consistent, predictable high return. Daniel Rivera: Yes. [ Zach ], this is Danny. I'd just underscore what Michael has said. I mean, I think everything was spot on. But we've committed for a while now to be 150-plus locations a year. Nothing's changed with that. The pipeline is quite strong. And just to give you 1 data point, the franchise side of the business is incredibly healthy. We've got about 40% of our franchisees on that side of the business that are either on their second area development agreement or their third, so that is probably the best data point I can put out there in terms of the health of the franchise side of that business. Unknown Analyst: That's helpful. And then just as a quick follow-up, in what ways does the Take 5's value proposition make it more likely to succeed as it continues to scale those units because it does seem like there will continue to be industry growth in units over the next few years. So what differentiates the Take 5 model? Michael Diamond: Yes. I mean, I think it's a great question. I mean, at the end of the day, Take 5 is the home of the stay-in-your-car 10-minute oil change. And we're the only national provider that provides a 10-minute oil change experience stay-in-your-car with NPS scores in the high 70s. So at the end of the day, it comes back to the consumer and what is it that the consumer values, but what we've seen and where we've won historically is there's a consumer out there that wants a high-quality oil change and 10 minutes stay-in-your-car. That's an amazing experience. And the consumer that wants that that's where we win. Operator: Next question comes from Chris O'Cull of Stifel. Christopher O'Cull: Danny, you mentioned a new media mix model being used at Take 5. Could you just elaborate on the changes that were made and why you expect them to kind of benefit brand awareness? Daniel Rivera: Sure. Yes, happy to. I mean, at the end of the day, just to be clear, so we've had media mix models for time -- for some time now in Take 5. We just introduced a new partner, and we have, let's say, big aspirations for what the tool can do for us. At the end of the day, the media mix model kind of does 2 things for you, and we're in our first iteration of it with the new media mix model that we're using right now. But number one, it helps you just optimize spend across channels and geographies, so it really lets you get pinpoint accuracy in terms of what channels are working in specific parts of the country and how should you optimize that spend. And then the second thing it does for you is it helps you understand should you be investing more or less at the macro level, right? So is there room on the curve -- kind of your return curve to actually invest more money into marketing? And what's the incremental return you're going to get on that investment? So we are leveraging both sides of that tool. Again, it's kind of early going. We just deployed it now, the new tool, anyway for the first quarter here. But we think that over time, it's going to improve our return on advertising spend, and we think that it's going to inform just the level of investment that we're making. Christopher O'Cull: Okay. Are there any specific spending milestones that could open up access to maybe new marketing channels as the ad fund grows and the system just has more units and better concentration? Daniel Rivera: Yes. I mean, look, we're a national company today talking about Take 5, but there are obviously pockets where we have more concentration, let's say, in some areas that we're a little bit more sparse. As we fill out the map, we talked about getting to 2,500 locations. We still think that that's the North Star, and that's very doable. As we fill in the map and we get more concentration across the country, it does open up some upper funnel mass media where you can do, let's say, national TV or national radio buys that you're hitting a lot of eyeballs and per eyeball you're getting a good return, and it's a good -- very efficient buy, so to speak. So I think the short answer, Chris, is yes. As we continue to put dots on the map, it does open up more channels for us. Christopher O'Cull: Okay. And just one last one, and I apologize if I missed this, but how have sales trends among lower-income consumers at Take 5 shifted in the current quarter, maybe compared to the first half of the year? Daniel Rivera: Yes. I mean, I'll answer maybe at the higher level. Just in terms of Driven, I mean, we've been saying all year long, and there's been pressure, right, on that lower income consumer. That's been true the entire year. That hasn't really changed in Q4. What we've seen in Q4, as we talked about in our prepared remarks and as Mike highlighted, a bit of choppiness. Some days are up, some days are down. It's been choppier than it's been the rest of the year. There's some new variables here in Q4 that haven't existed. We mentioned them also in the prepared remarks. You've got government shutdown, you've got furloughed employees. You have at least the potential for millions of Americans to have their income disrupted as military or government programs may go unfunded. So there's some uncertainty out there. I think the thing that makes us feel good is, number one, we're coming from a position of strength. Third quarter is quite strong for us. 7% comps for Take 5, 1% comps for the franchise segment. It was strong quarter. I'd say secondarily, we're nondiscretionary. So at the end of the day, if there's any disruption -- maybe you delay that oil change for a period of time, but at the end of the day, you're still going to need to change that oil, you're still going to need to get those brakes, you need to get your car back on the road. And so if there's any temporary dislocation, we tend to see a bounce back. And look, at the end of the day, all of the uncertainty when Mike and I reissued our outlook for the quarter and we narrowed our ranges, all of that uncertainty is baked into that. So we feel good about hitting our ranges here in the back half of the year. Operator: Your next question comes from Brian McNamara of Canaccord Genuity. Madison Callinan: This is Madison Callinan on for Brian. Going off with the low-income consumer question, are you seeing any evidence of oil change referrals? And how would you measure that by location? Daniel Rivera: Yes. I'd say, look, in general, we've just seen the low-income consumer pressured. As we look at the entire year, we've had a strong year quarters 1 through 3. We've reiterated our outlook for the fourth quarter. All we're seeing is just a bit of choppiness here in the fourth quarter. So we continue to see strength at Take 5 non-oil-change revenue, we talked about is 25% right now. We've continued to grow our attachment rates from the mid-40s. If we're going back about a year to 1.5 years now, we're sitting here today in the low 50s. We've rolled out a new service. That new rollout of the service differentials in this case has gone quite well. So the business has shown a lot of strength. All we're seeing is just a bit of choppiness. And again, there's some new variables in play here in Q4. So a bit of uncertainty in Q4. But again, we feel good about the ranges that we put out there from an outlook perspective. Madison Callinan: And then what do you think it will take for the collision industry to inflect as insurance premiums and deductibles don't appear to be going down anytime soon? Daniel Rivera: I'm sorry, you kind of broke up there at the beginning. Can you reask the question? Madison Callinan: Yes. What do you think it will take for the collision industry to inflect as insurance premiums and deductibles don't appear to be going down anytime soon? Daniel Rivera: Yes. Look, I think actually, as you've seen the year play out, right? So if we look at the insurance industry in general, Q1, Q2, we talked about estimates being down high single digits, call it, around 10%. There's 2 big drivers to that. Number one is claim avoidance. We've just seen as inflation has ticked up here in the last 24 months, it hit that part of the industry particularly hard. And so you've seen deductibles and premiums go up. The second reason is you've seen total loss rates historically high. And the combination of the 2 things has driven estimates to be down, call it, 10% or so percent first quarter, second quarter. The industry did rebound in Q3. It did improve sequentially from Q2 to Q3. If we look into the future, we think Q4 may look a little bit more like Q2. The positive thing for us is when we look at Driven collision, our specific businesses, we continue to take share. So in a world where the industry maybe had some headwinds, we've consistently outperformed the industry. That continued in Q3. We mentioned a really strong third quarter with 1% comps for the segment at large, our best quarter from a comp perspective for the year. And I'd say most importantly, and I keep kind of going back to this for our businesses, in particular, when you look at the franchise segment, ultimately, the role that, that plays in the portfolio is cash generation. So what I'm most interested in and what I'm most excited about is when I look at third quarter, and I see 66% EBITDA margins, that's exactly what we need from that part of the business, and that's what that part of the business has delivered for us. Operator: Next question comes from Mark Jordan of Goldman Sachs. Mark Jordan: On Take 5, same-store sales growth came in much better than expected for the quarter. And I know you don't break out traffic versus ticket, but just wondering if there's any commentary you can provide there about how the contribution was compared to maybe your initial expectations? Because I think looking back on the 2Q call, there was some discussion about trends potentially moderating in Take 5 for the second half of this year. So I guess on that note, how did the quarter trend relative to your initial expectations? Michael Diamond: Yes. So I'd say a couple of things, Mark. Good to talk to you. I think first of all, we've always said we believe the Take 5 business is a mid-single-digit grower over the long term in this quarter, no exception, obviously, a little bit higher. I think mathematically, there still is this issue that as the new stores ramp, that's a helpful tailwind for us both in terms of traffic and ticket. But as we grow over a larger base, the impact of that will continue to be less and less. And so over time, we expect that to contribute less to the overall story, although it's still a positive tailwind. I would say the other thing to your point, we don't break out the sales tree, but we feel good in terms of where we are from both a traffic perspective and an ARO perspective. We've obviously mentioned some of the various drivers we have in ARO around the ability to do more premiumization as well as the additional attach. And then, as you think about some of our commentary on Q4, in addition to the state of the consumer, which we've obviously covered, I'd also just remind you that Q4 of last year was an impressive comp at 9.2%, and so, there is a little bit of moderation we expect just given how we're going to be lapping that comp this year. But in general, the Take 5 system is healthy, we continue to grow. We feel good about the numbers we put up in Q3. And kind of regardless of where we land in the range for consolidated Driven in Q4, feel good about Take 5's growth prospects. Mark Jordan: Perfect. And then just one follow-on, if I could. Thinking about the differential service offering you rolled out. I know you might not go into detail about product-specific attachment rates. But it sounds like attachment is trending maybe above your initial expectations. Is that the right way to think about it? Daniel Rivera: I'd say, Mark, look, the way to think about it is we're really happy with the results we're seeing. So we're fully rolled out nationwide at this point, both company and franchise. The team is doing an amazing job executing. So we just building the muscle rolling out the new service has been quite good. We haven't seen NPS scores budge at all. So we're able to introduce a new service while continuing to deliver NPS scores in the high 70s, which is obviously fantastic. Margin profile is good. We're not seeing cannibalization. So I'd say check marks across the board. For me, the most exciting thing is it proves out another growth vector for Take 5, right? So we've shown historically that we can grow organically and we can take our attachment rates and grow the existing kind of basket of services, so to speak. But now, we're showing that we can add a new service to the mix that fits within the fast, friendly and simple model that we have and successfully execute that other growth vector. So for me, that's very exciting. Mark Jordan: Congrats on a great quarter. Michael Diamond: Thanks, Mark. Daniel Rivera: Thank you, Mark. Operator: Your next question comes from Robby Ohmes of Driven Brands (sic) [ BofA ]. Robert Ohmes: Mike, just a quick follow-up on choppiness. You guys have kind of been answering it, but maybe going to ask for a little more clarification. So on the Take 5 side, choppiness is a deferral traffic situation? Or -- and you would -- you're seeing no change kind of in attachment rates or premiumization trends? Or maybe some color on that. Daniel Rivera: Yes. So welcome to Driven Brands, Robby, by the way. Nice to have you on the team. So yes, choppiness -- look, choppiness at Take 5 is what we've kind of alluded to. It's just we're seeing up and down days. I'd say on the non-oil-change revenue side of the equation and attachment rates, we're not really seeing any changes there. So attachment rates continue to be strong. We talked about we've grown them now into the low 50s. We talked about differential and how that's a positive behind the business. As we come into Q4 though, we're just seeing a little bit of choppiness in terms of traffic here and there. And again, it's across the portfolio. And to Mike's point, I mean, he emphasized this earlier, it's choppiness, right? It's -- there's some really good days and then there are some days where it's not so good. So I'd say no changes to non-oil-change revenue, no changes to premiumization. We continue to see both of those be quite strong. But as we look across the portfolio, just a bit of uncertainty here in the fourth quarter and a bit of just up and down given any given day. Robert Ohmes: That's really helpful. And then just sort of taking choppiness over to Maaco and CARSTAR, et cetera, the -- there's -- is it similar choppiness in direct repair program trends? Or is that more stable? What are you seeing on the direct repair program trends? Daniel Rivera: Yes. I'd say it's choppiness across the portfolio right now as it relates to DRPs, right? So that's specifically in the collision business. I mentioned this a second ago, but if you look at what's been happening with that industry, call it, estimates down high single digits, Q1 and Q2, the overall industry had a bit of a recovery in the third quarter and improved sequentially Q2 to Q3. We think that Q4 is going to probably soften a little bit, and it's going to look more like Q2. So that's just the industry trends that we're seeing. And that it's obviously related to the DRP, that's all kind of related. But again, as I think about our collision business, we've been steadily taking share the entire year. That didn't change Q1 to Q3. We don't expect it's going to change in Q4. So even if the industry softens a little bit in Q4, we expect to continue to take share. Operator: Your next call comes from Peter Keith of Piper Sandler. Sarah Morin: This is Sarah on for Peter. Can you just break down the comp improvement within franchise a bit more, specifically in maintenance? And then, are you seeing underlying improvement in collision demand? Or are you seeing that improvement from Maaco's continuous improvement framework? And then just, when did you start to see these sequential improvements throughout the quarter? Michael Diamond: Sarah, yes, happy to take that. So I will start by saying, in general, we don't break out the full brand performance across our franchise brands. I would call it a couple of things, though, that we mentioned in the prepared remarks, Meineke continues to operate well. Maaco, which is our most discretionary brand, has been under pressure really for the entire year. And while that improved some in Q3, that continues to probably be our most pressured franchise brand. As Danny mentioned, we have -- we did see some improvement in Q3 in collision. That has an outsized impact on our same-store sales, if not our revenue, given the amount of system sales that run through our collision boxes. So I think, in general, we feel good about the Q3 performance. But as you probably heard on the call, cautious heading into Q4 for that section. The good news is it continues to do what it needs to in the portfolio, 66% margin for Q3, strong cash flow generator. So feel good about its role within the Driven portfolio to generate cash and help us pay down debt as we need it to. Operator: Your next question comes from Christian Carlino of JPMorgan. Christian Carlino: Could you maybe quantify your exposure to First Brands or lack thereof? And whether that's more Take 5 versus the Franchise Brands? I think within Take 5, it doesn't look like you source filters from them, but maybe source wiper blades from one of their brands. So could you quantify your exposure there? And then, any color you can provide around that. Michael Diamond: Yes. I mean, very limited impact. And to the extent there is, we've got various other suppliers, so not -- I don't believe it's a read-through on anything in the auto category and not really worried about the impact to us. Christian Carlino: Got it. That's helpful. And could you talk about trends by region? Any notable outperformers or underperformers? And then similarly, on the quarter-to-date, is the choppiness more apparent in any particular regions, maybe the D.C., Mid-Atlantic region, given the government shutdown or maybe some of your lower income markets? Any comments there? Daniel Rivera: Yes. Look, I'd say the general choppiness that we're seeing coming into Q4 is, I'd say, generally speaking, across the board. Yes, I could pick a data point here or there. If there happens to be a location that's in a particularly distressed neighborhood, maybe it's a little bit. But just -- I'd generalize it to choppiness across the portfolio coming into the fourth quarter. And as I think about just overall regional, Take 5, in particular, is a growing brand. So you're going to see differences more than anything else based on the maturity of the stores, right? So if we've got a market where the vast majority of the stores are less than 2 years old, well, that market is still ramping. If you talk about a market like New Orleans, where the brand originated and we've been in that market for 30 years, that's a completely different profile. So Take 5 is still a dynamic, growing new business. And if you're looking for regional trends, it's going to be more proportionate to just the maturity of the stores in that market than anything else. Operator: Your next question comes from Mike Albanese of Benchmark. Michael Albanese: Can you just comment on the labor market, and I guess, overall strength of the labor pool in terms of hiring and retention? Daniel Rivera: Yes. I mean -- specifically for Take 5, yes. Look, I'd say from our perspective at least, the team is having a fine job or doing a fine job hiring. It's not -- I'd say it's not any better or any worse than it's been trending kind of the entire year. We have a really strong and robust pipeline for bringing in employees at all levels of the organization, and it's something that we stay on top of. But I wouldn't say from a trend's perspective, it's any more or less worrisome than it's been the whole year. Operator: [Operator Instructions] Your next question comes from Marvin Fong of BTIG. Marvin Fong: Nice quarter here. Most of my questions have been asked here, but just thought I'd ask on like Take 5 specifically, are you seeing any changes to the unit economic story? Is there some opportunity given sort of the macro to kind of take advantage of or maybe from lower lease expenses? Or conversely, are you seeing any increase in equipment costs or anything like that? Just any insight there would be great. Daniel Rivera: Maybe I'll take kind of the first part of your question, and maybe Mike wants to take the second part. Generally speaking, we're really happy with the ramps that we're seeing across all of our vintages, right? I think some of the things that we've put out there, if you look at the vintages, 2023 and prior, they're all ramping -- well, on average, they're ramping to $1 million AUVs within 24 months. So that continues to be true. We're quite happy with that. We see nice returns on our new stores and consistent ramps. And I'll put the same data point out there that I mentioned a second ago, if you're looking for one of the best testaments to the growth of the system and to the steadiness of the ramps, I'd look to 40% of our franchisees are on their -- either their second or their third ADA. So the reality is that if the units weren't ramping consistently and predictably, you just wouldn't see that level of investment. So we continue to be quite happy with the ramps that we're seeing. Michael Diamond: To the other point, I'll answer it in a couple of different ways, which is, I mean, absolutely, always look forward to opportunity to take cost out of the box and make sure we're getting the best rates possible. I think given the relative youth of our footprint, we still have a lot of lease term left in a lot of these as well as the fact that a small box size means that the lease expense doesn't necessarily carry the same weight as it does in some other instances. That said, we never missed an opportunity to have a discussion around what a good partner we are. And so making sure that we have those conversations with our landlord. On the build cost, again, one of the advantages of the Take 5 model is a relatively low build cost to begin with, lower than some of our competitors in the industry, but that doesn't change our focus on making sure we continue to keep that advantage and find ways to make sure we are deploying money correctly to deliver the right experience, but not more than we need to. So it is absolutely an opportunity. We continue to take a look at it. But I would say it's probably more of an opportunistic opportunity than a big thing we need to focus on. Most importantly, like Danny said before, the unit level economics continue to be strong. We have a strong pipeline of both franchise builds and corporate stores going forward and feel really good about where Take 5 is positioned for future growth. Marvin Fong: Great. And maybe as a follow-up -- my follow-up, on the commentary that the insurance side of the collision business could be more like the second quarter, I'm acknowledging that there was a positive like trend here in the third quarter, but could you just kind of double click a little bit more on what you're seeing there? Is it the claims avoidance aspect of it? Or are you actually seeing something in the loss rates and the behavior of the insurance company that's also kind of driving kind of backpedaling in the trends there? Daniel Rivera: Yes. I think it's nothing new per se, right? So you're talking it's claim avoidance, it's total loss rates. And then, I think it's also just the uncertainty that we're talking about heading into the fourth quarter, right? So I think when you put those 3 things in the blender, it leads us to believe that the fourth quarter will look more like the second quarter. Operator: Ladies and gentlemen, there are no further questions at this time. That concludes today's conference call. Thank you for your participation. You may now disconnect.
Operator: Welcome to the Third Quarter 2025 Stanley Black & Decker Earnings Conference Call. My name is Shannon, and I will be your operator for today's call. [Operator Instructions] Please note that this conference is being recorded. I will now turn the call over to Vice President of Investor Relations, Michael Wherley. Mr. Wherley, you may begin. Michael Wherley: Thank you, Shannon. Good morning, everyone, and thanks for joining us for our third quarter call. With us today are Chris Nelson, President and CEO; and Pat Hallinan, EVP and CFO. Our earnings release, which was issued earlier this morning and a supplemental presentation, which we will refer to, are available on the IR section of our website. A replay of today's webcast will also be available beginning around 11 a.m. Eastern time. This morning, Chris and Pat will review our third quarter results and various other matters, followed by a Q&A session. During today's call, we will be making some forward-looking statements based on our current views. Such statements are based on assumptions of future events that may not prove to be accurate, and as such, they involve risk and uncertainty. It's therefore possible that actual results may materially differ from any forward-looking statements that we might make today. We direct you to the cautionary statements in the 8-K that we filed with our press release and in our most recent '34 Act filing. Additionally, we may also reference non-GAAP financial measures during the call. For applicable reconciliations to the related GAAP financial measure and additional information, please refer to the appendix of the supplemental presentation and the corresponding press release, which are available on our website under the IR section. I'll now turn the call over to our President and CEO, Chris Nelson. Christopher Nelson: Thank you, Michael, and good morning, everyone. I am honored and energized to be leading Stanley Black & Decker as we embark on our next chapter of growth. Since joining the team over 2 years ago, we have focused our businesses on where we want to compete, the end users we want to serve and the markets where we can be a leader. This work has been about being more selective so that we invest our resources in the places where we see the most significant opportunities and greatest ROI for our businesses. We show up every day for our customers and end users to deliver what they need when they need it. Through everything we do, this will continue to be our North Star. Over the last few years of transformation, Stanley Black & Decker has solidified our foundation and sharpened our focus. I am proud of the dedication and collective effort that our team of approximately 48,000 employees strong has contributed to get us here. Our ambition is to build a world-class branded industrial company by solving our end users' most pressing and complex challenges. We go to market with a portfolio of iconic brands and innovation is in our DNA. We have strong connections with customers and end users, and our brands open doors and afford access to opportunities in geographies around the world. These foundational attributes, combined with the renewed focus achieved through our transformation, have positioned us to win across industries poised for long-term growth. Stanley Black & Decker has made tremendous progress towards the objectives we established at the outset of our strategic transformation. We achieved these results despite a rapidly shifting operating environment, evolving consumer demand dynamics and trade policy fluctuations. With the operational proficiency and agility we have developed through our strategic transformation, we can now serve our customers and end users more effectively and efficiently. With a strong foundation firmly in place and with a significantly simplified and focused business, we believe our future success will now be determined by how effectively we execute our strategy. This presents us with the compelling opportunity to deliver attractive returns for our investors while benefiting all stakeholders. As we look forward, we are on track to successfully deliver the $2 billion cost reduction targeted when we began our transformation over 3 years ago by year-end 2025. Our next priority is to achieve 35% adjusted gross margin while further strengthening our balance sheet. We will build on our capabilities and strong financial foundation as we execute our 3 strategic imperatives: activating our brands with purpose, driving operational excellence and accelerating innovation. I want to spend a few minutes going into each of these focus areas to give you a better sense of what will drive our profitable organic growth going forward. The first imperative is activating our brands with purpose. We have pivoted from a product-led marketing approach to a brand-led market-backed approach to reinvigorate our organic growth. This included creating a closer feedback loop between our brands and end users and prioritizing innovations that will address end users' most pressing needs. Our core brands, DEWALT, STANLEY and CRAFTSMAN, each have a distinct identity, and we maintain this differentiation along with clearly defined target end users. This strategic segmentation informs how we prioritize resources and investment in key brands and focused trades. In addition, it enables broad coverage of the total addressable market with specific and productive solutions that uniquely address the needs of end users ranging from commercial and industrial professionals to residential construction contractors and ambitious DIY enthusiasts. Our organic growth strategy is anchored on accelerating DEWALT's performance while maintaining a strong focus on delivering consistent above-market results in STANLEY and CRAFTSMAN. DEWALT's mission is to serve the world's most demanding professionals. Supported by a more data-driven targeted approach, our commercial teams are executing locally and focusing on the most attractive growth opportunities with trade-specific initiatives. To amplify our presence with professional end users on and off the job site, we have added nearly 600 trade specialists and field resources to our team over the last 2 years. And these investments typically show a payback within 12 months of each hire. Our trade specialists visit job sites with DEWALT solutions, demonstrating and promoting our newest innovations. They also gather valuable end user insights to drive future product development priorities. In addition, as part of our Grow the Trades program, we are investing to support the training of new tradespeople and upskilling of established professionals. These initiatives are driving continued organic growth for DEWALT. Our results are informing and guiding future investments in real time and ensure our resources are deployed to the best prospects for accelerated growth. In addition, these initiatives are building DEWALT brand ambassadorship along the way. We rigorously track metrics from commercial activation to operational execution with all efforts laddering up to our strategic vision. As a result of these efforts, positive momentum is also beginning to emerge from the international STANLEY brand vitalization effort. In parallel, the CRAFTSMAN brand campaign and portfolio expansion is progressing with an improved margin profile and strategy to drive success with the ambitious DIY enthusiasts. Our next imperative is driving operational excellence. While it all starts with activating our brands with purpose, equally vital to our success is our commitment to operational excellence and continuous improvement. As we move beyond the transformation, we are executing with a lean-based operating system to deliver annual productivity gains, which we expect will contribute to both margin expansion and firepower for accelerated growth investments. Operational excellence also extends to our distribution network. Business process improvements, along with our redesigned distribution network, have helped our team to deliver the best global customer service levels in our company's recent history. As we build strategic partnerships and multiyear growth plans with our channel partners, this will continue to be a top priority. And finally is innovation, the lifeblood of Stanley Black & Decker's value proposition to our end users. We are accelerating innovation to advance and expand our end-to-end workflow solutions across DEWALT, STANLEY and CRAFTSMAN. By innovating faster, we will strengthen our position to provide preferred solutions for our end users and drive growth for our channel partners and for our brands. We know that our end users, particularly the professional trades, are seeking holistic solutions that make them more productive and safer in every task that they perform on the job site. Providing this comprehensive set of solutions tailored for the specific needs of each trade, all powered by our robust and well-established battery platforms is our opportunity. To enable this, we've centralized our engineering organization under one leader to unify our global strategy with investments in core capabilities, design processes and systems. Within this operating model, we are accelerating how we deploy the product platforming method, which is a comprehensive approach to modular design and governance. It empowers our engineers to dedicate more of their time and expertise towards addressing our end users most pressing and complex challenges. It also enables us to deliver highly specialized solutions to the market at greater speed. Year-to-date, our team has achieved 20% faster product development, and we believe there is runway for an additional 20% improvement by 2027. In addition, this approach is streamlining product development and production processes. This allows us to take full advantage of our scale to achieve cost leadership and drive further working capital efficiencies. Our aim is to implement platforming across roughly 2/3 of our product portfolio by 2027, enabling our 35% plus margin objective. Our entire organization is contributing to an organic growth-oriented culture, underpinned by operational excellence. We believe that by executing this strategy, we can deliver a compelling value creation opportunity. A year ago, we outlined long-term financial targets. And those levels of market-beating growth, earnings power, profitability and cash generation remain the appropriate long-term financial targets for our business. We expect our capital deployment priorities to focus on funding investment in the business, improving our balance sheet and supporting our long-standing dividend. Once these priorities have been satisfied and our leverage is sustained below 2.5x, our preference for excess capital will be opportunistic share repurchases. We are executing with purpose, leveraging our core strengths and deploying capital with discipline. While we continue to navigate a dynamic macro today, we believe we are taking the actions required to serve our end users and customers, protect the profitability of the business and make progress toward our long-term financial goals. By fully executing against the strategic imperatives that I outlined, we are confident in achieving strong long-term shareholder returns. Now turning to our third quarter 2025 performance. Our operational agility helped us deliver sales and adjusted EBITDA in line with our expectations. Furthermore, gross margin increased year-over-year, restoring progress towards our expansion trajectory and overcoming the tariff-driven interruption experienced during the second quarter. We accomplished these results despite the persistently challenging macroeconomic environment. Total revenue was $3.8 billion, flat with the prior year period and down 1 point organically, driven by pricing up 5% and volume down 6%. We continue to generate growth in our DEWALT brand in the third quarter, supported by relatively resilient professional demand. Consistent with prior quarters, the overall consumer backdrop remains soft. Our third quarter adjusted gross margin rate was 31.6%, up 110 basis points versus last year, predominantly driven by the benefits of our pricing strategies and the supply chain transformation efficiencies. This result is a testament to the dedication and collective focus of our teams around the company. It is even more noteworthy given it was achieved in a dynamic macroeconomic environment and with the ongoing production transitions. We expect to continue our trajectory of year-over-year adjusted gross margin improvement with expansion projected on a full year basis for 2025 and 2026. Third quarter adjusted EBITDA margin was 12.3%, reflecting a 150 basis point improvement year-over-year, mainly attributed to the gross margin expansion. Adjusted earnings per share was $1.43, which includes a $0.25 tax benefit that we had previously expected to land in the fourth quarter. Third quarter free cash flow was $155 million, a solid result as we effectively manage working capital while shifting an increasing percentage of our U.S. supply chain to North America. Turning to our operating performance by segment. I'll start with Tools & Outdoor. Third quarter revenue was approximately $3.3 billion, which was flat year-over-year. As with the total company revenue drivers, the drivers for Tools & Outdoor were in line with our expectations. Organic revenue declined by 2% as a 5% benefit from targeted pricing actions was more than offset by a 7% decrease in volume. Currency tailwinds and a small product line transfer from Engineered Fastening each contributed a 1% benefit in the quarter. The volume decrease was partially due to expected price elasticities and partially impacted by tariff-related promotional reductions within the retail channel. As we had indicated during our second quarter earnings call, price realization in the third quarter was consistent with our expectations based on the April price increase. Consistent with prior disclosure, we are implementing a second price increase during the fourth quarter to maintain our innovation and brand investments given the pressures resulting from tariff-related cost increases. DEWALT, our powerhouse professional brand, maintained strong momentum and continued to demonstrate top line growth. The brand delivered revenue expansion across all product lines and regions. This result reflects the positive impact of our ongoing targeted investments in innovation and market activation. Tools & Outdoor adjusted segment margin was 12%, up 90 basis points year-over-year. Margin expansion was driven by price realization and supply chain transformation efficiencies, partially offset by the impact of tariffs, lower volume and inflation. Shifting to performance by product line. Power tools organic revenue declined 2%, largely resulting from tariff-related promotional cancellations in North America and continued softness in consumer demand. Hand tools organic revenue was flat. Strength within the commercial and industrial channels was offset by softer retail channel performance. Outdoor organic revenue decreased 3% as we ended a subdued outdoor season, where the independent dealer channel partners focused on selling through their remaining inventory. We anticipate inventory will be rightsized heading into preseason ordering for 2026. Now Tools & Outdoor performance by region. In North America, organic revenue declined 2%, reflecting trends consistent with the overall segment performance. End user demand as measured by U.S. retail Tools & Outdoor POS, started the quarter strong, but moderated later in the quarter, with aggregate third quarter performance at a level that was relatively flat on a dollar basis. In Europe, organic revenue was flat. Growth in the U.K. and key investment markets, including Central and Eastern Europe, was offset by softer market conditions in France and Germany. The Rest of World organic revenue declined 1%, primarily due to pockets of market softness in Asia. Turning to Engineered Fastening. Third quarter revenue grew 3% on a reported basis and 5% organically as compared to the prior year. Revenue growth was comprised of a 4% volume increase, a 1% price benefit and a 1% contribution from currency. This was partially offset by a 3% headwind from the previously disclosed product line transfer to the Tools & Outdoor segment. The aerospace business continued its strong trajectory, achieving over 25% organic growth, propelled by robust demand for fasteners and fittings. This business maintained its exceptional year-over-year and sequential top line growth supported by a solid backlog. The automotive business delivered low single-digit organic growth, reflecting a stronger-than-anticipated automotive market during the quarter. General industrial fasteners organic revenue declined by mid-single digits. Adjusted segment margin for Engineered Fastening was 12.8%, which reflects elevated production costs in relation to a tough prior year comparable. On a sequential basis, adjusted segment margin expanded by 200 basis points versus the second quarter, reflecting improvements in the automotive market. Overall, our teams delivered results in line with expectations through disciplined execution, targeted pricing strategies and a continued optimization of our supply chain, a solid quarter in a trying environment with significant credit to the global Stanley Black & Decker team. Together, we all continue to make meaningful progress on what is within our control. Thank you to our team around the world for all your hard work and the dedication you display every day to our customers and end users. I will now pass the call to Pat to discuss progress we achieved on key performance metrics and to outline our latest 2025 planning assumptions. Patrick Hallinan: Thank you, Chris, and good morning to everyone joining us today. I'm going to start by diving deeper into our gross margin performance. In the third quarter, the company achieved adjusted gross margin of 31.6%, representing a 110 basis point increase over the same period last year. Our entire organization has prioritized margin expansion. And through the implementation of targeted initiatives, we have achieved tangible year-over-year margin improvement. The improvements have been primarily driven by our disciplined pricing strategies and enhanced supply chain efficiencies. Our targeted initiatives contributed meaningfully to our performance this quarter, though the benefits were partially offset by tariffs, reduced volume and inflation. Our gross margin trajectory remains firmly positive, reflecting the organization's steadfast dedication to operational excellence. The team's commitment and capability to deliver is exemplified by the fact that even with the significant tariff expenses hitting our P&L starting in April, we only had a single quarter of gross margin setback. Despite broader market volatility, our teams have demonstrated remarkable agility and focus, ensuring we sustain profitable growth even in uncertain environments. And looking forward to 2026, we foresee a strong opportunity for significant year-over-year adjusted gross margin expansion versus 2025, even if the macro conditions do not improve materially. We continue to target 35-plus percent adjusted gross margin. As a team, we continue to strive to achieve or be very close to this target by the fourth quarter of 2026. Turning now to our global cost reduction transformation program. In the third quarter, we continued to make substantial progress, delivering approximately $120 million in incremental pretax run rate cost savings. These actions are instrumental in supporting our ongoing margin improvement trajectory, which ultimately enables sustained investment in growth. Since its inception in mid-2022, the program has generated about $1.9 billion in pretax run rate cost savings, underscoring the scale and effectiveness of our transformation agenda. We are on track to meet our targets with consistent progress across all workstreams. We expect the transformation program to yield cost savings of $500 million in 2025 and $2 billion overall by the end of this year, marking the successful achievement of this initiative's original cost reduction goals. A key element of our tariff mitigation and gross margin improvement strategy centers on minimizing the amount of U.S. supply that comes from China. We are making substantial advancements in this area and systematically progressing along a clearly defined path. We have been rapidly moving cordless production from China to Mexico, while also rapidly increasing the levels of USMCA-compliant production in Mexico. We expect to continue to meet targeted reductions in U.S. goods from China. We plan to reduce from 2024 levels when approximately 15% of our U.S. supply was sourced from China to less than 10% by the middle of 2026 and to less than 5% by the end of 2026. These milestones are essential for achieving targeted gross margin objectives and for improving supply chain resiliency. By diversifying our supply chain, we are better positioning our business to navigate evolving trade dynamics, respond to regulatory changes and deliver operational excellence. Operational excellence via platforming, lean manufacturing and further fixed cost reductions will remain a top priority beyond 2025. We remain confident in our ability to sustain positive momentum as we move into 2026 and that our focus on disciplined execution will deliver sustainable productivity gains and cost leadership. Annual productivity improvements will serve as the engine to fund investments that drive top line growth and further our competitive position. The actions we are taking today are foundational to supporting ongoing margin improvement and achieving our long-term adjusted gross margin target of 35-plus percent. Now let's take a look at our planning assumption for 2025. Adjusted earnings per share is expected to be approximately $4.55, a reduction of $0.10 compared to the estimate from last quarter. This revision reflects higher-than-anticipated production costs resulting from tariff-related volume softness and supply chain changes. We will correct for these items during the fourth quarter to facilitate achievement of targeted 2026 gross margin improvement, making these headwinds temporary elements of our tariff mitigation response plan. Our earnings outlook for the year reflects an updated GAAP earnings per share range of $2.55 to $2.70. This revision from the previous planning assumption is primarily attributable to $169 million pretax noncash asset impairment charge recorded in the third quarter. Let me provide clarity on these impairment charges. First, updates to our brand prioritization strategy to focus more company resources and investment on DEWALT, CRAFTSMAN and STANLEY, which we have discussed many times over the past year, impacted 3 trade names, specifically LENOX, Troy-Bilt and IRWIN. This was the vast majority of the impairment charges. Going forward, we intend to focus on marketing of these specialty brands to specific product categories and regions where they hold their most meaningful market positions and value to end users. Second, we've made a strategic decision to exit most of our noncore legacy corporate venture investments, which resulted in the write-down of certain minority investments in the quarter. Total pretax non-GAAP adjustments for the year are estimated to range between $370 million to $400 million, primarily related to the supply chain transformation, noncash asset impairment charges and other cost actions that will benefit SG&A. We expect approximately 45% of these adjustments to be noncash as they pertain to the aforementioned trade name impairment charges and write-down of certain minority investments associated with legacy corporate ventures. Now in regards to the revenue outlook. For the full year, we anticipate total company sales to be flat to down 1% as compared to 2024, most likely at the lower end of this range. Organic revenue is projected to decline in the same zone as a total company, and price realization is expected to be offset by anticipated volume declines. Currency is expected to contribute a positive 1 percentage point, which will be offset by the first quarter comparable impact from the infrastructure divestiture. We expect adjusted gross margins to remain resilient. And based on our current trajectory, we expect to be approaching 31% adjusted gross margin for the full year 2025. To deliver profit and cash in a dynamic environment, we will continue to advance our tariff mitigation and gross margin expansion journeys, and we will manage SG&A thoughtfully relative to expected volumes while preserving growth investments. Looking forward to the fourth quarter, we expect continued year-over-year expansion of adjusted gross margin to around 33%, plus or minus 50 basis points. This outlook is supported by our second round of price increases, ongoing benefits from our supply chain transformation and additional tariff mitigation measures, partially pressured by tariff-related production costs. SG&A as a percentage of sales for both the year and the fourth quarter is planned to be 21% in a fraction, characterized by judicious cost management while protecting strategic growth investments. We remain committed to investing in high-growth, high-return opportunities with over $100 million being reinvested in 2025 to drive market activation, strengthen our brands and support commercial expansion, while managing SG&A costs down elsewhere in the business. For the full year and fourth quarter, adjusted EBITDA margins are also expected to expand year-over-year, supported by gross margin improvements and the cost actions we are implementing. Shifting to our segments. For the Tools & Outdoor segment, the full year organic revenue outlook is projected to decline approximately 1 percentage point. The Engineered Fastening segment is expected to achieve low single-digit organic revenue growth led by aerospace. Now turning to cash generation. We generated $155 million in free cash flow during the third quarter, making progress toward our full year 2025 free cash flow objective of $600 million, which remains unchanged from a quarter ago. As we advance through the last quarter of 2025 and into 2026, we remain committed to diligent inventory management, ensuring customer order fulfillment remains a top priority, even as we proactively navigate evolving supply chain dynamics and potential shifts in the external market environment. Our capital expenditure outlook for 2025 remains approximately $300 million, in line with previous planning assumptions. On capital allocation, we intend to allocate free cash flow in excess of our dividend toward debt reduction in the near term. Maintaining a strong and resilient balance sheet is a top priority, and we are committed to achieving a net debt to adjusted EBITDA ratio of less than or equal to 2.5x. Our strategy to reach this leverage objective is to be supported by the proceeds from an asset sale we are targeting within the next 12 months. We continue to anticipate our adjusted tax rate will be approximately 15% for the year. Other modeling assumptions for 2025, as shown here, are generally consistent with the assumption shared with you in July. For the fourth quarter, we anticipate organic revenue to be flat as price increases are offset by volume pressures stemming from a subdued consumer DIY market. In the fourth quarter, we expect continued pretax earnings growth and working capital efficiencies driven by the seasonal drawdown of receivables and a modest decrease in inventory to deliver our free cash flow target. Adjusted earnings per share for the fourth quarter is expected to be approximately $1.29. We remain optimistic about the long-term growth prospects for our industry and our business. The targets we laid out for you a year ago at our Capital Markets Day remain appropriate for the business and our focus, albeit delayed by roughly a year due to the impact of increased tariffs. Near term, we expect market conditions to remain dynamic and challenging. We will continue to respond decisively through targeted supply chain and SG&A adjustments, underscoring our commitment to meet the needs of our end users and customers while delivering financial result improvement. We continue to focus on enhancing the company's long-term earnings power and strengthening the balance sheet. Thank you. And I will now turn the call back to Chris. Christopher Nelson: Thank you, Pat. We are strengthening our operational resilience on a daily basis. Our disciplined data-driven approach empowers us to navigate evolving market conditions, seize emerging opportunities and consistently deliver value to our stakeholders. As Pat outlined, we are continuing to proactively manage factors within our control to facilitate the achievement and advancement of our goals. We believe our outlook for 2025 is balanced given the elevated levels of global uncertainty. We recognize the operating environment is challenging. And we are focused on creating significant value from our powerful brands and businesses to generate long-term revenue growth, margin expansion, cash generation and shareholder return. We remain committed to driving towards the goals outlined during our November 2024 Capital Markets Day. I am confident that with the collective dedication of our talented team and an unwavering commitment to supporting our customers and end users, Stanley Black & Decker will continue to set new standards for excellence in the years to come. We are now ready for Q&A, Michael. Michael Wherley: Thank you, Chris. Shannon, you can begin the Q&A now. Operator: [Operator Instructions] Our first question comes from Tim Wojs with Baird. Timothy Wojs: Just maybe on the volumes, I'm just curious how those performed relative to your expectations? And I guess if you could break down the volume between kind of what was impacted by tariffs and kind of what the, I guess, elasticity you saw in the quarter. And as you think about the next few quarters with price and volume, do you expect that kind of one-for-one trade-off to kind of continue with price and volume? Or do you think there could be some underlying improvement in that dynamic? Christopher Nelson: Tim, this is Chris. Thanks for joining us. Yes, I would say that our volumes were relatively in line with expectations. We started the quarter fairly strong, and there was a little bit of tapering towards the end of 3Q. But that really was more due, we believe, to, as we had referenced in earlier conversations, a nonstandard promotional window. And we're -- as we go into Q4, we actually will get back on a more normal promotional calendar. And we're actually very excited about the promotions we have for the holiday season, which, as you know, is important to our business. I'd say that we expect the environment to remain similar into Q4, and then we will continue to monitor and adjust as we go into the new year in 2026. But I'd say that while we see the environment, as Pat certainly mentioned, as challenging, it is relatively stable, and we're excited about the promotional calendar we have to close out the year, and it's going to be important for us to monitor. Operator: Our next question comes from the line of Julian Mitchell with Barclays. Julian Mitchell: Maybe just my question would be around dialing into some of the profit levers in a bit more detail. So I think for the fourth quarter, you're assuming operating profit up a few tens of millions of dollars sequentially with flattish sales. And is that all really coming from this extra price increase? And then as you're thinking about 2026 as it's only 8 weeks away now, it seems like you won't get much help from volumes based off the exit rate from this year. So maybe help us understand what are some of the main gross margin drivers you're most enthused about for 2026? Patrick Hallinan: Thanks, Julian. Yes. So operating profit for the fourth quarter is going to expand really 2 levers. We certainly expect to continue making progress on the gross margin front. We expect a fourth quarter gross margin around 33%, could bounce around plus or minus 50 basis points, but that's certainly what we're targeting and tracking towards. And then one of the things we've been talking about all year is judiciously managing SG&A expense relative to the volume environment while still protecting growth investments. So while we're still targeting around $100 million of growth investments, kind of elsewhere in the business, we're really reducing SG&A expense quite considerably, almost to an equal amount this year in our '25 full year income statement. And we'll probably, on a year-over-year basis, be down in SG&A, $40-or-so million versus the same quarter last year. So the profit expansion in the fourth quarter is a mix of gross margin expansion and SG&A reduction. Those are the primary drivers in a quarter where, overall, our net sales line is roughly flat. So that's where you're getting this year. I'd say as we work into next year on gross margin, we're still, as an organization, very focused on our long-term objective of 35-plus percent. And every day, we get up trying to solve the riddle of how to get there by the fourth quarter of next year, and that's still our objective. We'll be there or thereabouts working on that, assuming the macro environment is kind of in line with where we are or better. Obviously, if there was a big recession, we might need to revisit that. And the levers we're going to be pulling for next year, we're still going to be working strategic sourcing, in-plant continuous improvement, platforming is going to be starting to play a bigger role, and we still have some facility decisions ahead of us. So all of those levers are still in play for '26 and beyond. And they'll all be playing very significant roles. And as we mentioned, as we adjusted the outlook for the fourth quarter of this year, we went into the back half of this year with a bias to having some excess capacity in our plants to deal with the circumstances if elasticity ended up being more favorable and to accommodate some of the global transitions of supply, and we'll be having to kind of adjust for those types of costs, too, as we go into the early parts of '26. Operator: Our next question comes from the line of Nigel Coe with Wolfe Research. Nigel Coe: And Chris, congratulations on -- I'm actually [ sitting ] on the phone right now, I guess, but congratulations. Maybe -- I think you mentioned going out with another price increase in the quarter. So can you just maybe mark-to-market somewhere you expect price to maybe come into the fourth quarter? And maybe just give us a quick mark-to-market on -- I know it changes a lot, but on the tariff inflation, how you see it right now? And are you down in this 10% [ sentinel tariff ] reduction? And does that have an impact on 4Q? Christopher Nelson: Thanks a lot, Nigel. Nice hearing from you. I'll start, and I'll let Pat wrap up. But I would say that the price increase, the second price increase, as I mentioned in my remarks, we're in process right now, and it's going to be in that low single-digit realm that we talked about in previous conversations, and we're on track to that. And we're working with all our channel partners constructively to get that in place because our goal collectively is to make sure that we do everything and anything we can to minimize what the stress would be on our end users. And therefore, where our real emphasis is, is driving our production moves and mitigation to reduce our reliance on China imports for U.S. consumption. And we've been making significant progress there. We remain on pace to be below 10% by the end of the year and below -- at or below 5% by the end of 2026. We're making great progress there. And that's really the emphasis. So as it relates to the second part of your question, which would be the tariff exposure based on latest information, it really has no material impact. It's still right about the same area based on the changes that have come in 232s, combined with the reduction in China, it's kind of netted out. So we're right in that same ballpark. And as it relates to what that means for our mitigation efforts, we were -- basically, as I mentioned earlier, we were planning in the not-too-distant future to be largely absent from China as a source of supply for the U.S. So it really has minimal impact on our medium- to long-term strategies there. So I don't know, Pat, if you had anything else to add there? Patrick Hallinan: Yes. No, I think you covered most of it, Chris. I'd say just to reiterate a few things Chris said is our end game plan kind of end of '26 forward is to be below 5% U.S. COGS from China. That's what drove our total mitigation strategy, both supply chain changes and pricing. And so given that, this reduction in 10% of -- 10 percentage points of the China tariffs doesn't meaningfully change that outcome. You asked a little bit of is there a fourth quarter benefit? It's probably in the ballpark of very low single-digit millions, given that it affects one quarter and then you pretty much only get the LIFO portion of that. So for the fourth quarter, it's a very small amount. It's a slight help, probably in the 5% to 10% range of each of the first 2 quarters of next year or thereabouts, but it's not a game changer long term. Certainly, any relief is welcome, but it's not a big magnitude item. Operator: Our next question comes from the line of Christopher Snyder with Morgan Stanley. Christopher Snyder: I wanted to ask about Tools & Outdoor top line. So price this quarter, I think you guys said 5%, but I thought the conversation on the Q2 conference call was for high single-digit price. Maybe that was more of a back half comment than a Q3 comment. So any color there would be appreciated. And then also, Tools & Outdoor is calling for a better Q4 mark. It seems like maybe flat organic. Q3 was negative 2%. And now we have a more difficult comp into Q4. So can you just maybe talk about why that 2-year stack will get better? I know price comes through, but we would think with the one-for-one offset that, that would be accounted for on lower volumes. Patrick Hallinan: Yes. So Chris, pricing can get confusing because obviously, it's a portion of all the work we're doing to mitigate tariffs. Obviously, there's a lot of supply changes in addition to that. But it's largely a United States Tools & Outdoor phenomena. So you're talking about taking considerable price on 60% of our business, not on 100% of our business. So you're accurate in understanding that our pricing, ultimately, when we get through the second round of price increases, but even the pricing we've already taken is in the high single-digit range. It's probably going to across our U.S. product lines be in that high single to maybe even in the low double digit depending on the SKU you're looking at. But again, when you take basically 60% of that, you're getting into a mid-single-digit global viewpoint on pricing, both global for T&O and global for total Stanley Black & Decker. So we -- if you look at our outlook and planning assumption information, we've been referencing on an enterprise-wide basis, expecting mid-single digits, U.S. T&O high single digits or above. And that's exactly what we're seeing. So it's a lot of hard work by our team and a lot of hard work with our channel partners to do it thoughtfully, but we're getting the price we expected. And you saw in the pricing reconciliation for the third quarter, it was 5 percentage points, and that's right in the ZIP code we expected. Obviously, we're taking a second round of pricing in the fourth quarter, but we're also going to be running back to kind of a more normal promotional cadence. So I would expect the reconciliation for the fourth quarter to be in a similar ZIP code. It can kind of move up or down from that 5% based on promotional mix to relative sales. In terms of the growth cadence for the quarter and the year, for the full year enterprise-wide, we're expecting net sales for the full year enterprise-wide on an organic basis to be flat to down 1%, probably more likely towards the lower end of that range. And for T&O for the quarter, we're also kind of expecting flat to down at 1-ish percent and again, probably towards the lower end of that range. So that's going to have an enterprise where T&O for the quarter and the year is down somewhere between 0 -- flat to down 1%, closer to that down 1% and you're going to have SEF up about 2 percentage points on the year, and that's what's going to drive the overall enterprise to the enterprise expectation. Operator: Our next question comes from the line of Michael Rehaut with JPMorgan. Michael Rehaut: I wanted to focus on -- without really getting into guidance for next year, focus on some of the actions you've taken this past year and how they might impact '26? And in particular, just thinking of, number one, the carryover impact kind of like from an annualized perspective on what the cost reduction that you're on track to do the $2 billion by the end of this year, what impact on a fully annualized basis would that have to benefit 2026 as well as the movement of supply chain with the China footprint reduction that would ostensibly -- as that comes down throughout the year, I would figure have some type of -- also some type of benefit to cost. Patrick Hallinan: Yes, Mike, it's a fair question. We certainly are going to be looking at how this quarter plays out from consumer confidence, consumer engagement and volume perspective before we're going to feel like talking about '26 guidance is appropriate. But anchor stones to '26, kind of no matter the macro are going to be making gross margin progression and managing SG&A thoughtfully. So we're working game plans for '26 that have us around 35-ish percent in the fourth quarter. We're going to be finishing this full year on like a 31-ish percent basis. So the full year '26, we're going to obviously be targeting something very much in between those 2 points of 31% and 35%. And as I mentioned to the questions Julian was asking, all the levers are still in play. We're going to need to be generating in terms of gross productivity next year, somewhere in the $350 million, $400 million range. That's going to be our rough focus point, again, irrespective of the macro to continue marching on that gross margin path. And then we're going to be working on a mitigation path of getting $200 million to $300 million of tariff expense out of the system via -- whether that's shifting product out of China and/or increasing USMCA compliance. So those are our focus areas. Those are levers that we're pulling, and we'll continue to kind of manage SG&A in that 21-ish in a fraction range, again, working to generate growth investments while tightening up the cost structure elsewhere. Operator: Our next question comes from the line of Adam Baumgarten with Vertical Research Partners. Adam Baumgarten: Just curious how you think your North America power and hand tools volumes compared to the market in the third quarter? Christopher Nelson: Adam, so I think we're relatively in line with market. I'd say a couple of things. We know DEWALT continues to grow year-over-year in the absolute terms, and I think that, that would be pacing the market. We've been seeing more signs of progress staying in line with market levels with our other 2 core brands. And I think the important thing to understand is that in the short term, with the amount of change that has happened with various responses to tariff policy, pricing as well as promotional calendars, there's just -- there's been a lot of volatility in the market. We're going to keep on monitoring and see how things progress, not only as we wrap this year, but going to the next year into 2026. But I'd say we have been relatively in line with what we think the market would be and I'd say, exceeding what we think the market is with our DEWALT brand. Operator: Our next question comes from the line of Jonathan Matuszewski with Jefferies. Jonathan Matuszewski: There's a lot of moving pieces with housing policy for the current administration. I was hoping you could talk to how you see Stanley Black & Decker as a potential beneficiary of some of these proposals to catalyze and unlock dormant housing supply in the future. Christopher Nelson: Thanks a lot, Jonathan. Nice hearing from you. Let me start by just saying that we understand that -- and we would say that we don't see any real near-term catalyst right now for that market. So we're focused on making sure we control [ what ] we control. We're excited about what we're doing. We're excited the progress we're making in our margin expansion and our product line expansions. And we'll continue driving towards that. And for lack of a better term, we're going to continue to improve based on the actions that we take on the things that we control. And that's what we're concentrating on. And I think that I'm excited about the progress we've been making, and we expect to continue to make along those lines as we go into 2026. As it relates to any release of momentum in the housing market, whether it be new construction or repair and remodel, we certainly believe that we are very well positioned to be a beneficiary of that. We certainly serve those markets and serve those trades with very high share positions, and we have been using this time of what I would say is a little bit more of a retrenchment of that market to invest heavily to make sure that we are there with those end users, with those contractors and with that industry to be building the relationships and building the innovation so that as that does unlock, that we will be there to certainly be a beneficiary of it and probably more than our fair share. Operator: Our next question comes from the line of Joe O'Dea with Wells Fargo. Joseph O'Dea: You gave some helpful color on China and U.S. supply exposure there and what you expect on that trajectory. Any perspective on USMCA compliance and the path that you're on there? And then along with that, just on the 4Q pricing that you talked about being kind of in process, for how much of the quarter would you expect that price to be flowing through the P&L, the incremental price that you're in process on now? Christopher Nelson: I'll start with USMCA, and then I'll turn it over to Pat for the pricing question. So USMCA, and I think I stated this on our last call that we are making significant progress. It's a big part of our mitigation efforts. And as we've talked about our strategy from the very outset on managing the tariffs, we're going to support our customers, we are going to mitigate our operations, we're going to price where necessary and we're going to maintain our communications with the administration. We certainly priced for what we believe our end state mitigation was going to look like as we went out of 2026. So it's all hands on deck to get us towards that end because that's a big part of what our mitigation and margin journey is all a part of. As it relates specifically to USMCA, we're making progress, and we see no structural roadblocks to us being at or around what I would say is the average for industrials that look like us, and we'll be there over the medium term. So we're making great progress, and we see a good opportunity there to make sure that we can continue to have the products that our end users need at the prices that they can afford. Patrick Hallinan: Yes. And Joe, relative to fourth quarter pricing, a fair number of those discussions with channel partners have been completed, and those pricing actions are starting to go underway. We would expect the balance of them to be completed here in the early part of November. And so I kind of think of it as, for the most part, 2 of the 3 months of the quarter, and we feel like we're tracking on that. And with all the variables we're managing in this quarter within our planning assumption, we're comfortable with where we are on that front. Operator: Our last question comes from the line of Joe Ritchie with Goldman Sachs. Joseph Ritchie: Just my -- the only question I have right now is really around inventory levels. It looks like you've reduced your inventories over the past year and also sequentially. How far above do you still think you are from an inventory perspective? And what's your expectation for reduction in 2026? Patrick Hallinan: Yes. Good questions, Joe. I mean I think I'd raise it to the topic of cash and then come back to inventory because we still are in a delevering mode and very focused on generating cash. And obviously, we have work to do this quarter. And so we expect the gross margin improvement and the SG&A management I referenced earlier in the Q&A to drive profit expansion in the fourth quarter. And then we'll be pushing for over $500 million of working capital reduction in the quarter. That's both receivables and inventory. I'd say this whole year, at least to this point in the year, we're a little bit heavier on inventory than we'd like to be, but that is understandable relative to all the supply chain moves we're doing. I mean, obviously, we're taking 15 percentage points of our U.S. COGS and moving them out of China that ends up requiring some inventory slack in the system, and that's part of our challenge. I'd say for next year, we're probably targeting at least $200 million. We'd like to be better than that because I think our longer-term opportunity in a level at this revenue stage probably approaches $1 billion of working capital reduction. That's not just kind of on the margin thing. That's leveraging platforming and improving the way we do planning and a whole host of other things that drive inventory. But I still think that that's the opportunity that's out in front of us. But with some of the tariff mitigation that's going to consume the first half to 2/3 of next year, I think a target in the $200 million to $300 million range, closer to [ $200 million ] for next year is probably more appropriate. Operator: I would now like to turn the call back over to Michael Wherley for closing remarks. Michael Wherley: Thank you, Shannon. We'd like to thank everyone again for their time and participation on today's call. If you have any further questions, please reach out to me directly. Have a good day. Operator: This concludes today's conference call. Thank you for your participation. You may now disconnect.
Operator: Thank you for standing by. My name is Van and I will be your conference operator today. At this time, I would like to welcome everyone to Black Stone Minerals Third Quarter 2025 Earnings Conference Call. [Operator Instructions] I will now turn the call over to Mark Meaux, Director of Finance. You may now begin, sir. Mark Meaux: Thank you. Good morning to everyone. Thank you for joining us either by phone or online for Black Stone Minerals Third Quarter 2025 Earnings Conference Call. Today's call is being recorded and will be available on our website along with the earnings release, which was issued last night. Before we start, I'd like to advise you that we will be making forward-looking statements during this call about our plans, expectations and assumptions regarding our future performance. These statements involve risks that may cause our actual results to differ materially from the results expressed or implied in our forward-looking statements. For a discussion of these risks, you should refer to the cautionary information about forward-looking statements in our press release from yesterday and the Risk Factors section of our 2024 10-K. We may refer to certain non-GAAP financial measures that we believe are useful in evaluating our performance. Reconciliation of those measures to the most directly comparable GAAP measure and other information about these non-GAAP metrics are described in our earnings press release from yesterday, which can be found on our website at www.blackstoneminerals.com. Joining me on the call from the company are Tom Carter, Chairman, CEO and President; Taylor DeWalch, Senior Vice President, Chief Financial Officer and Treasurer; Steve Putman, Senior Vice President and General Counsel; Fowler Carter, Senior Vice President, Corporate Development; and Chris Bonner, Vice President and Chief Accounting Officer. I'll now turn the call over to Tom. Tom Carter: Thank you very much, Mark. Good morning, and thank you all for joining us on the third quarter earnings call. Before we discuss our financial and operating results, I'd like to congratulate Fowler Carter, Taylor DeWalch; and Chris Bonner on their announced upcoming promotions. I'm excited for and confident in their leadership as we look to the continued growth and success of Black Stone for many years to come. Looking forward to my new role as Executive Chair as well and will continue to provide strategic guidance to the management and lead the board. Thank you to all of our employees who continue to work very hard day in and day out to drive Black Stone's success and position us for an exciting future. We continue to pursue acquisitions through the Haynesville expansion around Shelby Trough, and we're looking forward to Revenant's development getting underway in early 2026. We also continue to work towards solidifying another development agreement covering 220,000 gross acres in between Aethon's development in the Shelby Trough and expand's development in the Western Haynesville. Unscripted, I also add, we are working on yet another package that we hope to assemble and market in the not-too-distant future. The recently announced expand energy horizontal well and successful pilot well in addition to the ongoing development throughout the Western Haynesville provide even further confidence in the Haynesville expansion play and long runway of inventory. As mentioned previously, we expect these development agreements to ultimately drive over 50 wells drilled in the expanded Shelby trial per year providing significant gas growth for the partnership and a constructive outlook for demand in the region. And this is in conjunction with ongoing great opportunities coming up in other areas in our properties. We remain focused on the significant growth opportunity that result in the increasing production and distribution outlook for years ahead. With that, I'll hand it over to Fowler to walk through the operational updates. Fowler Carter: Thank you, Tom, [indiscernible], and good morning to everyone. During the quarter, we progressed our commercial initiatives across the expanded Shelby Trough, including working with Revenant Energy on their inaugural development program beginning early next year. Our marketing efforts on an additional 220,000 gross acres is progressing well with a framework agreement that would add the equivalent of 12 additional wells annually to our acreage by 2030. We expect these new developments, coupled with our existing agreements to more than double the current annual drilling rate in the expanded Shelby Trough in the next 5 years. There is also the opportunity for our operating partners to exceed their annual well commitments, and we are excited about the multiple decades of development inventory in this play. Our grass-roots acquisition program also continues to progress well. We added $20 million in mineral and royalty acquisitions during the quarter bringing our total acquisitions since September 2023 to roughly $193 million. We have line of sight to an additional accretive acquisition opportunities in the near term which we expect to enhance our existing asset position in the Shelby Trough and to add long-term value for our unitholders. While 2025 development activity has slowed across the U.S., we are optimistic looking ahead to 2026 given our existing and pending development agreements across our high-interest acreage in the Shelby Trough. Turning to the Permian. The large project we were monitoring remains on track to add meaningful oil volumes to our production base. We are also tracking several new projects on our high-interest acreage there that are expected to add additional liquids volumes in the next 12 to 18 months. We believe that these projects, in addition to our agreements in the Shelby Trough, provide Black Stone a path to increase production and, in turn, higher distributions. With all of that, I'll turn it over to Taylor to walk through the financial details of the quarter. Taylor DeWalch: Thanks, Fowler, and good morning, everyone. We had a successful third quarter with mineral and royalty production of 34,700 BOE per, an increase of 5% over the prior quarter. The increase in production quarter-over-quarter was driven by strong volumes in the Permian Basin. Total production volumes were 36, 300 BOE per day. While we currently sit here at the high end of the range, production guidance for 2025 is unchanged at 33,000 to 35,000 BOE per day. We continue to monitor activity levels and commodity price dynamics as we look towards the fourth quarter of 2025 and full year 2026 production and distributions. Net income was $91.7 million for the third quarter with adjusted EBITDA at $86.3 million. 57% oil and gas revenue in the quarter came from oil and condensate production. As previously announced, we declared a distribution of $0.30 per unit for the quarter, or $1.20 on an annualized basis. Distributable cash flow for the quarter was $76.8 million, which represents 1.21x coverage for the period. The excess coverage was used to partially fund acquisitions and maintain a solid financial and leverage position. As Tom mentioned earlier, the partnership's outlook remains strong, anchored by long-term contract development in our high-interest Shelby Trough acreage as well as our core legacy assets across the U.S. In addition, with increasing demand from LNG and power, the outlook for natural gas is increasingly constructive over the next decade. With significant assets in close proximity to LNG facilities, Black Stone is in a prime position to benefit from the looming call on gas supply. In conclusion, we had a solid quarter, bolstered by strong oil volumes from our Permian assets which ultimately produced robust coverage of the announced distribution. Going forward, we remain confident that our existing acreage positions, coupled with our commercial strategy and the expanded Shelby Trough will provide a strong foundation to deliver sustainable long-term value for unitholders. With that, we'd like to open the call for questions. Operator: [Operator Instructions] Our first question comes from the line of John Annis from Texas Capital. John Annis: Congratulations to everyone on their new roles. For my first question, on the acreage currently being marketed in the KLX area, I think on the September update call, you mentioned that you were on the 1 yard line with getting a deal across. I was hoping if you could provide a quick update on where those discussions currently sit? And secondly, if you've seen any increased interest in potential commitment to the development following expand's entry into the Western Haynesville. And then maybe just building off of Tom's remarks that you're also working on assembling another package. Is there any additional color that you could share at this time? Fowler Carter: Well, I'll start with the 1 yard line comment. We were at the 1 yard line and now we're at the half yard line. So it's progressed, and we expect to hopefully have that wrapped up here in the next couple of weeks. But we'll let you all know how that goes, and we'll announce that information accordingly. Remind me your second part of your question before we go on to the expanded area that [indiscernible] mentioned. John Annis: Yes. Just if you've been seeing any increased interest in potential commitments just following expands announcement and their entry into the Western Haynesville? Fowler Carter: We say interest remains robust across this whole area and increased commitments. What I'm comfortable saying about that is that our operating partners have the ability to flex up above and beyond their minimum annual commitments. And so you can certainly see some relative outperformance there. John Annis: Terrific. Is there any color that you could offer on the package that you're working on assembling that you mentioned in the prepared remarks? Fowler Carter: I'm going to let [indiscernible] take that one because he's really excited about it. Tom Carter: If you look at the Shelby Trough in the Western Haynesville and now the expand well, the Yancey well, which is about 20% to 30% further to the east than any of the wells that have been drilled so far moving back into almost North Central Houston County. And then you go into Trinity County, Cherokee County, Angelina County, Polk County, Tyler County, San Augustine County, Sabine County. There is so much inventory potential out there that really hasn't even been scratched yet, and folks keep putting blocks together. And we've done a lot of homework on the subsurface all the way across to the Western Haynesville and everything that keeps happening thus far has been positive to more positive than what one could expect. We see some very, very interesting geologic things happening as you move further west from the traditional Shelby Trough, where there is significant expansion between the base of the Knowles Lime and the top of the Cotton Valley if I'm saying that -- Smackover -- excuse me, Cotton Valley also. Smackover and that phenomenon is what's been driving moving Eastward into the Western Haynesville. So I think I said this last time, these packages of shale that are commercial are thicker in that expanded area. And we have existing acreage that we think is deeper than the traditional work that's been done in the Shelby Trough, but that is not inconsistent with what's been going on in the Western Haynesville. And it's in our inventory, and we're working it hard and looking forward to taking it out to capital development in the future. John Annis: I appreciate all the color. For my follow-up, with the strong volume growth this quarter, how should we think about volumes trending in the fourth quarter and into 2026 with the wells that are expected to be turned in line from Aethon and the Permian development project? And then maybe more broadly, just how would you compare what you're seeing in terms of gas-directed activity across your acreage relative to earlier in the year. Taylor DeWalch: Yes. Thanks, John. So like I said in my prepared remarks, I mean, we didn't update full year guidance at this point. So we're still being pretty thoughtful about the activity that's going on across our assets, whether it's Aethon or larger developments out in the Permian, I'd say where we start to get excited is to see Aethon volumes coming online and then kind of throughout the fourth quarter into the beginning of next year, along with the large development in the Permian, which is Coterra and seeing their wells start to come online recently, but more completely as we think about kind of the beginning of next year. So overall, I think it's going to be an interesting several months kind of winter season to watch activity levels, especially in the natural gas-focused basins and to see how that plays into full year '26 volumes. Tom Carter: I would add also, recently, we put out a multiyear forecast, which is somewhat unusual for a publicly-traded company. And I would just encourage the marketplace to not focus so much on the next 6 to 12 months, but to focus on the next 5 years because as I said earlier, this is a massive reservoir, and it takes time to spool it up -- and evaluate it and spool it up. And we really are excited about the slow, methodic, thoughtful, early stages of some of these new transactions that we've done. But every one of those with success will grow in well counts by two to threefold as well as layering new projects in there. I just -- when you talk about share value and share activity, that's a real good question because I don't know how much the average person wants to get out in front of the market. But if what we're seeing is valid and as I said before, if the natural gas markets are as everybody seems to think they're going to be, i.e., less volatile and more secure in the future. The time to buy our shares is now not 2 years from now. Operator: Our next question comes from the line of Tim Rezvan from KeyBanc Capital Markets. Timothy Rezvan: Congrats everybody on the new roles and Tom, on your transition. Some of my questions were addressed by the prior analysts. But I wanted to ask, you mentioned more Permian production coming. As a 2-stream reporter, we've noticed that your natural gas differentials have weakened. I'm guessing that's due to exposure to Waha. And as you think about -- I know the Haynesville is sort of the longer-term story, but a lot of producers are getting beaten up by the challenges at Waha that may not resolve until 2027. So can you talk about anything you're doing? I know you've been plain vanilla hedges in the past. Do you intend to just sort of ride this out? Or is there anything you can do because gas is still over 70% of your production. Just curious on that. Taylor DeWalch: Yes. Thanks, Tim. This is Taylor. I'd say, like you said, I mean, our hedging strategy remains consistent the way that we've been thinking about it. And I think when you think about our natural gas volumes so much of that is coming from the Haynesville and from the Shelby Trough, where we've got good exposure to Henry Hub, I think relative to -- as you mentioned, kind of some of the dynamics that are going on with Waha and the Permian. I think when we think about Waha and we think about just general Permian production, really what gets us excited is to see the ongoing development on high-interest acreage and then ongoing development across the full suite of assets. I guess we touched on in the investor presentation in September, we're really well aligned with the top operators in the Permian. And so we continue to see robust activity from those folks. And then also just going back to some of these a little bit more bespoke high interest development that we have in the Permian. So excited to see those volumes come online. So overall, continuing to maintain our consistent strategy as we're thinking about pricing and activity levels. Timothy Rezvan: Okay. So from a modeling perspective, do you think that on a 2-stream basis being at a discount to the benchmark Henry Hub is that going to be the reality over the next year if Waha sort of stays where it is? That's what I'm trying to get at. Tom Carter: Yes. I mean that's -- like I said, that's what we're thinking about it, and that's what we've got a robust hedge strategy. Operator: [Operator Instructions] Tom Carter: All right. If there are no more questions, we sure thank you all for joining us today, and we look forward to speaking with you soon. Operator: Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.
Operator: Hello, everyone, and welcome to the Centerspace Q3 2025 Earnings Call. My name is Ezra, and I will be your coordinator today. [Operator Instructions] I will now hand over the call to Josh Klaetsch from Centerspace to begin. Please go ahead. Joshua Klaetsch: Good morning, everyone. Centerspace's Form 10-Q for the quarter ended September 30, 2025, was filed with the SEC yesterday after the market closed. Additionally, our earnings release and supplemental disclosure package have been posted to our website at centerspacehomes.com and filed on Form 8-K. It's important to note that today's remarks will include statements about our business outlook and other forward-looking statements that are based on management's current views and assumptions. These statements are subject to risks and uncertainties discussed in our filings under the section titled Risk Factors and in our other filings with the SEC. We cannot guarantee that any forward-looking statements will materialize, and you are cautioned not to place undue reliance on these forward-looking statements. Please refer to our earnings release for reconciliations of any non-GAAP information, which may be discussed on today's call. I'll now turn it over to Centerspace's President and CEO, Anne Olson for the company's prepared remarks. Anne Olson: Thank you for joining us today. I'm here with our SVP of Investments and Capital Markets, Grant Campbell, who will provide some comments on the transaction market; and our CFO, Bhairav Patel, who will discuss our guidance and balance sheet. Centerspace's third quarter and year-to-date results are a testament to the health of our smaller regional markets, our operating platform, which helped us drive exceptional expense control and the strength of our team, which has remained focused even in light of the significant sale and acquisition activity that we have undertaken. For the third quarter, we reported 4.5% year-over-year growth in NOI within our same-store portfolio. This is being driven by solid increases in revenue, coupled with excellent execution on expenses. That said, due to timing adjustments related to our planned strategic transactions and associated G&A costs, we are lowering the midpoint of our Core FFO guidance by $0.02 to $4.92. Bhairav will further discuss the impact of our capital recycling activities when he speaks to our outlook. In June, we announced strategic initiatives that included acquisitions in both Colorado and Utah and dispositions that reduced our portfolio concentration in Minnesota. We expect to close on the sale of 7 communities in the Minneapolis area yet this month, at which time we will have recycled approximately $212 million of capital and increase the quality and efficiency of our portfolio. While our current cost of capital has impeded our ability to execute on external growth opportunities, we are committed to enhancing our market position and value for our shareholders. We have many levers we can use to do that, and we will remain disciplined and flexible. Operationally, our portfolio continues to benefit from the stability of our Midwest markets. Like in 2024, lease rates peaked in mid-Q2 and remain positive for us, up 1.3% on a blended basis in the quarter and 1.6% year-to-date. Retention has exceeded our initial expectations, hitting 60% in both of our peak leasing quarters. In our largest market of Minneapolis, results benefited from the dual tailwinds of improved occupancy and increasing rental rates, where we saw improvement in both new and renewal leases in the quarter, leading to blended increases of 2.1%. In our other markets, North Dakota continues to be a standout with portfolio-leading blended increases of 5.2% in the quarter. Our Denver portfolio has been challenged by supply pressures, and Q3 blended lease rates were down 3.5%. Digging more into Denver, we believe our experience there is truly the result of supply. Based on absorption data, 2025 has been Denver's second best year ever. In our portfolio, we're seeing higher closing of lease with our Q3 lead to lease up 275 basis points year-over-year and higher tenant incomes, which are up 7% versus last year as well as a 70 basis point improvement in our occupancy over Q2. Some of that occupancy was driven by our decision to offer concessions in this market. We anticipate Denver will return to a more normal environment as we move through 2026, and we remain optimistic. I'll ask Grant to comment on the state of the transaction market. Grant Campbell: Thanks, Anne, and good morning, everyone. On a macro level, while we do not expect transaction volumes to return to 2021 and 2022 levels in the near term, this year has produced more transaction activity compared to the last 2 years. We are seeing investors display conviction in placing capital, and this dynamic should drive value for our shareholders. Our recent transaction initiatives position the portfolio well for continued long-term growth. In May, we closed the acquisition of Sugarmont in Salt Lake City. And in July, we expanded our Fort Collins presence with the acquisition of Railway Flats in Loveland, Colorado, both of which were discussed in detail on last quarter's call. In the case of Railway Flats, Fort Collins has been a target geography for us as evidenced by 2 of our recent investments occurring there. This market has displayed outperformance in annual rent growth, absorption and vacancy when compared to Metro Denver. Within our portfolio, Fort Collins retention is 800 basis points ahead of Denver in the quarter, and Fort Collins occupancy is our strongest year-over-year increase across our portfolio markets. To fund these acquisitions, we completed the sale of our St. Cloud, Minnesota portfolio in September for $124 million, exiting us from that market. Investor reception was strong with buyer interest ranging from individual community offers to portfolio offers. This portfolio transaction of lower growth prospect communities priced at a mid-6% cap rate well inside of the mid-7% implied portfolio cap rate our stock trades at today. In addition, this week, we anticipate closing the sale of 7 communities in Minneapolis for $88.1 million. These 7 assets are smaller communities, totaling 679 homes. This transaction will price at a high 5% cap rate, again, well inside the implied portfolio cap rate we trade at today. Upon completion of the sale, our remaining Minneapolis portfolio will be higher quality, increasingly suburban with 87% of NOI located in suburban submarkets and operationally more efficient with NOI margin for the Minneapolis portfolio increasing approximately 90 basis points as a result of the impending 7 community sale. Recent comparable trades support low 5% to 5.75% cap rates for our remaining Minneapolis portfolio. Lastly, on the capital allocation front, we repurchased 63,000 shares in the quarter at an average price of $54.86 per share, driven by the current disconnect between public and private market valuation. I'll now turn it over to Bhairav to discuss our financial results and guidance. Bhairav Patel: Thanks, Grant, and hello, everyone. Last night, we reported third quarter Core FFO of $1.19 per diluted share, driven by a 4.5% year-over-year increase in same-store NOI. This NOI growth was driven by a 2.4% increase in same-store revenues with revenue growth composed of a 20 basis point increase in occupancy and a 2.2% increase in average monthly revenue per occupied home. On the same-store expense side, Q3 numbers were down 80 basis points year-over-year with controllable expenses up 3.4% and noncontrollables down 7.6% due to favorability in both property taxes and insurance. Specifically on property taxes, we trued up our accrual based on recently received assessments of value for Colorado, which were much lower than initially anticipated. Turning to guidance. We now anticipate full year core FFO per diluted share of $4.88 to $4.96 per share with expectations for 2025 same-store NOI growth of 3% to 3.5%. Within NOI, we expect same-store revenues to grow by 2% to 2.5% for the year. This reduction is driven mainly by the impact of concessionary activity in Denver. As a reminder, concessions are amortized over the lease term, and as such, a portion of the noncash amortization will be realized in the fourth quarter and in 2026. Positive results and expenses are more than offsetting this with same-store expenses now expected to only increase by 75 basis points. Core FFO guidance is lower at the midpoint by $0.02 per share due to higher expectations for G&A and interest expense, offset by higher NOI with the timing of our dispositions playing a significant role in those differences. On our balance sheet, our recent acquisition of Railway Flats, which included the assumption of $76 million of long-dated low rate debt at 3.26% as well as the completed St. Cloud and planned Minneapolis dispositions has improved our debt profile. As these transactions conclude, we expect our net debt to EBITDA to move into a low 7x level by year-end with a pro forma debt profile with an average rate of 3.6% and average time to maturity of 7.2 years. To conclude, this was a good quarter for Centerspace with our results demonstrating our commitments to both operational excellence and financial discipline and setting us up for the fourth quarter and into 2026. Operator, please open the line for questions. Operator: [Operator Instructions] Our first question comes from Brad Heffern with RBC Capital Markets. Brad Heffern: On the repurchase, obviously, very attractive use of capital right now, just given where the stock is trading, but it does compete against your goals of reducing leverage and increasing the float. So I'm just wondering how you think about the balance. Anne Olson: Yes. Brad, thanks for the question. That's something we think about every day when we have the opportunity to buy back. And I think as you'll see in this quarter, it was a very small use of proceeds, just a few million dollars. Really, we outperformed on the St. Cloud sale from where we thought that, that would trade, having gross purchase price of $124 million. And so when we looked at the allocation of capital there, we took some of those excess proceeds. We agree that this is a good use of capital and really sends another signal about where we think the value of the company is and our conviction about what we think it's worth. Brad Heffern: Okay. Got it. And then for Minneapolis, you gave some numbers in the prepared comments. It seems like the market is showing some pretty strong signs of recovery. Can you just talk about your expectations going forward? Is that sort of a return to normalcy over the next couple of years? Or would you expect to see a period of above-average performance as sort of a catch-up? Anne Olson: I think we're seeing right now a return to normalcy in Minneapolis. And as we look towards next year, we are expecting that it's going to outperform its historical. It hit its peak deliveries. We've had excellent absorption. And if we look at third-party data, CoStar, RealPage, other, Minneapolis is really slated to be in that kind of top 5 of U.S. markets for rent growth headed into 2026. So we are expecting a little bit of outperformance there next year. We're optimistic that we're going to be able to capture that strong rent growth and hold our expenses in line to drive good NOI out of Minneapolis. Operator: Our next question comes from John Kim with BMO Capital Markets. Robin Haneland: This is Robin Haneland sitting in for John. It sounds like same-store revenue was mostly flat driven by Denver weakness. Could you maybe update us on what you're expecting for the earn-in for '26? Bhairav Patel: Yes, sure. From an earn-in perspective, we're sitting just a shade above 1% at the moment. And as you said, Robin, it captures some of the weakness in Denver, where we're seeing some heavy concessions. So at the moment, about 1%, maybe slightly above. Robin Haneland: Got it. And then specifically on Denver, could you just elaborate on the concession levels and how long you expect them to persist? Anne Olson: Yes, certainly. So I'd say concession levels in Denver within our portfolio range from no concessions at a couple of our properties where we have still seen strong occupancy and good absorption demand there to 6 weeks free, maybe some waiving of application fees. On the market as a whole, it varies pretty widely. We're seeing up to 2 months free, 8 weeks free, 10 in some pretty isolated instances. But I'd say with respect to our portfolio's concession relative to the market, we're either at or a little bit under what market concessions are. Robin Haneland: So the portfolio is taking a little bit of a -- doing quite a little bit of recycling for Collins, Loveland seems to be targeted markets today. Could you just maybe give us how new lease performed in those 2 markets and how they differ from Denver fundamentals? Anne Olson: Yes. So we are looking at Fort Collins, as you said, that is a target market for us. And what we're thinking about there is really just trying to get a little bit of scale in that market. We now have 2 assets in the Fort Collins area. And I'd say when we look at outperformance there relative to the Denver submarket, Grant commented a little on that, and I'm going to have him just take that and give you some stats on what the difference is there between Fort Collins and Denver. Grant Campbell: Yes. I think that outperformance is a result of the supply dynamic, deliveries peaked there in 2024, really concentrated in the second and third quarter. In terms of the total number of units delivered at the peak, it was measured at about 7% to 8% of total inventory. So a more overall more muted supply profile. And then when you look at really any time period kind of over the last 3 years, you'll see rent growth that has outpaced Denver to the tune of about 450 basis points. And then also absorption or demand as a percent of inventory has been pretty robust as well, outperforming to the tune of 600 to 700 basis points compared to Denver over that same time period. Robin Haneland: And lastly for me, how are you thinking about recycling the $88 million of sales expected across repurchases, acquisitions and debt? Anne Olson: Yes. Sorry, Robin, was that question about recycling with respect to the sales that are pending here in Minneapolis? Robin Haneland: Yes. Anne Olson: Yes. So we have already acquired that has already -- those proceeds have already been spoken for. And so that is part of the acquisitions that we did in Salt Lake City and Fort Collins. So these proceeds will be used solely to pay down the debt that we incurred when we undertook those transactions. Operator: Our next question comes from Jamie Feldman with Wells Fargo. James Feldman: So can you talk about your blended lease growth expectations for the fourth quarter? Where are you sending out new and renewal leases? And then also just as we think about -- we're in the slowest time of the year, what do you think January, February could look like before we get back to spring leasing season? Bhairav Patel: Yes. So for the fourth quarter, renewals are out for the rest of the year. October renewals still in the high 2% to low 3% range. So that's pretty strong. But the new lease trade-outs remain negative. So there's no real material change in trend relative to Q3 that we've seen so far. But from an occupancy standpoint, it remains stable and the exposure is trending in the right direction. So overall, for the portfolio, we are showing exposure in the low 5% range, which is a good place to be. As we think about Jan and Feb, it's hard to say. We still need to make it through the next couple of months from a concession standpoint in Denver. And if we see some reversal in concessions and stabilization in occupancy, which we are seeing, that will give us a better indication of where next year may start. James Feldman: Okay. And then can you talk on the expense side, can you talk about the drivers of the higher G&A expense for the year? And then also, just as we think about modeling '26, any specific line items that you think could be materially savings year-over-year or growth year-over-year? I know you mentioned the Colorado taxes. Just any onetime items we should be thinking about that could help or hurt? Bhairav Patel: Yes. So I'll take the G&A question first. There were some additional fees and legal expenses that we incurred in the quarter plus some true-ups, which had an impact on the Q3 numbers. More importantly, none of these are run rate items. So from a run rate perspective, our run rate remains in the $28 million range, in line with what we had previously disclosed. With respect to Q3, there was a true-up in taxes, specifically in Colorado, which drove the reduction in expense there. We still expect some true-ups in Q4 in other jurisdictions. But overall, that should just bring taxes in about the 2% range growth year-over-year, which is pretty normalized. When we think about 2026, there aren't really particularly onetime items that come to mind. One of the expense items that in recent years has driven some volatility is insurance. We should be renewing it in the next couple of weeks. And at this point, we don't really anticipate a big increase, which is a good outcome just given the 12% reduction we experienced last year. That has typically driven some volatility in year-over-year expense growth over the past couple of years, but that is expected to be a nonfactor when it comes to 2026. So there's no real particular items that come to mind with these updates to taxes. It just seems like taxes would be in a normalized year-over-year pattern. James Feldman: Okay. And since you mentioned insurance, are you able to ballpark or just give us a range on how they may look across the industry next year? I know you probably don't want to talk about years specifically yet. Bhairav Patel: Yes. No, I mean, I think a lot of it depends on when your renewal cycle falls. I mean we are in the process of having those discussions. And over the past couple of months, we've had several discussions with the hope that it remains in the low single digits, and that's where it's trending. It might be a little bit favorable, but too early to tell, even though it's just a couple of weeks away. But I think overall, it's a huge factor, the renewal cycle with us being at the fag end of the year, there might be some activity that drives losses, which we haven't really seen this year. So we're expecting a favorable outcome this year, which, as I said, is a good follow-up to last year's 12% reduction. Operator: Our next question comes from Connor Mitchell with Piper Sandler. Connor Mitchell: Anne, you mentioned you had some open commentary on Denver and the supply drag and then Grant on some of your kind of focus on the Boulder and Fort Collins and how that's kind of comparing in better rent growth to Denver. I guess just kind of drilling down on both of those. Could you guys maybe just give us an idea of when you really see Denver like turning the corner for supply, whether it's earlier in the year or later in the year, it seems like there's kind of more of a drag than we had expected earlier this year into '26. And then the demand around that as well, it sounds like the income is still growing for Denver and the Colorado markets. But maybe any other influences or factors that are really giving you guys some good conviction on Denver and then also the comparison to how you guys want to keep scaling up in Boulder and Fort Collins, how you kind of compare those 2 markets within the same state? Grant Campbell: Connor, on the supply front in Denver, obviously, it experienced its peak delivery levels later in the cycle relative to many institutional markets. When we look ahead, we really think demand will start to outpace supply in the back half of 2026 and that will certainly carry forward into 2027. So late '26 into '27 is when we expect demand to start to exceed supply. From a scaling perspective, obviously, Boulder and Fort Collins, that is a smaller geographic market relative to the size of Denver. We really like our position in that market with 3 assets now totaling about 980 homes. We do think there could be additional opportunity there, but we're going to be selective, and we're going to be targeted in our approach as it relates to that market. We do have desires to scale other regions within the portfolio, including Salt Lake City, which is a new market for us. So Fort Collins, certainly happy with the performance. We'll continue to look at opportunities there but we'll be targeted in that approach. And then supply in Fort Collins, as I touched on earlier, certainly a more muted supply profile peaked in second and third quarter of 2024. That continued demand and absorption that I alluded to earlier is really creating a strong backdrop for fundamentals right now. Connor Mitchell: Okay. And then maybe just following that line of thinking as well, you guys entered Salt Lake and you're scaling up in Fort Collins and Boulder in Loveland. And then I know that you guys have mentioned just thinking of other markets for new entries as well. Maybe if you could just stack rank that as those 3 options for the capital recycling program and then thinking of expanding presence in the current markets, the ones that you're expanding in Fort Collins, Boulder and then Salt Lake or even entering a new market that's been discussed. Grant Campbell: Our priority in that ranking, if you will, would be Salt Lake City. We do desire to scale that market. That is important to us, and we're highly focused on that. So that would be at the top of the list with the caveat that it has to be the right opportunity. We're not going to buy product there just to fill out the pie chart, if you will, it has to make sense, be the right opportunity, and we're going to continue to seek those. In terms of new markets, we're always thinking about markets internally. We're always having those discussions. We'll continue to do that and more to come from our perspective there. Connor Mitchell: Okay. I appreciate that. And then maybe just turning to the expense side. I think you guys are pretty well set up on RUBS. You've gone through that the past couple of years. And then just kind of following the line of questioning earlier, is there anything else that needs to be done in setting up RUBS or any other expenses as we kind of head into winter? Or should be thinking about with the winter months coming up? Anne Olson: Yes. I think we are really well set up. As you said, we had deployed RUBS across the portfolio. That's fully deployed. All of our assets are on RUBS to the extent they can. One thing to be thinking about, which isn't unique to us, but as an industry is that there has been some legislation in Colorado that will limit our ability to pass on RUBS. That will take effect January 1. And so that will have some negative impact, and we are working right now on what the steps we're going to take so that we can make sure that those are billed directly to tenants rather than through RUBS. So there may be some disruption there. I think that will be market-wide in Denver as we look towards 2026. Operator: Our next question comes from Rob Stevenson with Janney. Robert Stevenson: You guys lowered the value-add expenditure guidance by $2 million at the midpoint. Was that due to the Minnesota sales? Or did you pull back on redevelopment within the core portfolio? Bhairav Patel: Rob, no, I think that was more timing driven than anything else. It wasn't really truly driven by the Minneapolis portfolio because we hadn't really earmarked much capital to be deployed at those assets, knowing that we were going to dispose them. So it was -- it's more timing driven than anything else that's thematic. Robert Stevenson: Okay. How aggressive are you in starting new projects today given the status of your various markets operationally? Anne Olson: I'd say right now, we're very focused on things that can enhance the portfolio overall. So broad-based ways to save water, electricity, value-add enhancements that can drive operating expense reductions, such as our SmartRent implementation where we install leak detectors and keyless entries. But we're really trying to be mindful of our cost of capital that is driving up the return that we need to see on investments. And then also with the softer market, we really want to have conviction around getting the premiums that we need in order to get to the hurdles that we want to see given our cost of capital and the return expected. So we pulled back a little bit on things like unit renovations and common area renovations, but we are still looking at broader portfolio-wide initiatives that can drive, in particular, operating expense reduction. Robert Stevenson: Okay. And then last one for me. Bhairav, when does the $93 million of secured debt mature in 2026? Is that early in the year, late in the year? Bhairav Patel: I think it's in the first half, some in the first quarter and some in the second quarter. So it's all done in the first half or by June. Robert Stevenson: Okay. And what is your best option for debt today to refinance? And where is that pricing? Bhairav Patel: Yes. I mean what's maturing is secured debt. That's available in the low 5% range, can be driven a little bit lower based on leverage. So that's an option. The other option we have is following the paydown in the line of credit, once we close the dispositions, we'll have a lot of capacity on the line of credit. One of the reasons we extended the line of credit was to give us flexibility just given the disconnect between short-term rates and long-term rates. So that's another source of potential funding that allows us to keep the spread low and also pick up maybe a few basis points on the spread between short-term rates and long-term rates. Overall, the availability of debt capital, it's a pretty favorable environment from a debt capital standpoint for the sector. So there's multiple sources of debt, including bank debt if needed. So we have a range of options that we can utilize to refinance the upcoming maturities. Operator: Our next question comes from Ami Probandt with UBS. Ami Probandt: The revenue growth leaders have been Omaha and North Dakota. And while those remained strong in the quarter, the same-store revenue growth is decelerating. So I'm wondering if there's anything to point to there that's leading to a bit lower growth. Anne Olson: Yes. Ami, it's really Denver. It's really the offset from Denver having -- still decelerating a little bit and having negative new lease growth. So as strong as North Dakota and Omaha, they're smaller portions of our portfolio and really that deceleration overall in projected revenue growth for the year is because of Denver. Ami Probandt: Okay. And is there anything to call out for Omaha or North Dakota specifically that they're also decelerating? Anne Olson: No, I think just seasonality. We're getting into the winter months. We have fewer expirations. There is less demand as we move through the quarter. And we did see with that peak leasing has really moved from what was the end of June, July historically into May. So that seasonality comes down a little bit faster during the year. We see really strong renewals in both of those regions. So that is great to see and will help keep that revenue boosted. Ami Probandt: Got it. And then I guess on that note, are you doing any lease expiration management to try to shift more of your leases towards more of that May peak leasing season, especially as opposed to the winter where there's not a ton of demand in those upper Midwest markets? Anne Olson: Yes, always. So we are constantly watching that lease expiration profile. It's a very large part of our revenue management as we look to see what the most attractive lease term for us is as well as where we can drive pricing for those lease terms. So we have been consciously working on maintaining that. You may recall, Ami, several years ago, we kind of completely redid the lease expiration profile after not having managed it to match the demand cycle, and that's been a constant focus for us these past few years. Ami Probandt: Got it. And then last one for me. You've seen a pretty consistent trend of same-store revenue per home growth being above same-store rent growth. Is that mainly driven by RUBS? Or is there something else that's causing that spread to remain elevated? And do you think it's sustainable? Anne Olson: Yes, it is mostly driven by RUBS. We also have things like pet rents, and that is sustainable. That has grown over time where we see more and more people having that ancillary items on their lease. And then, Bhairav, do you want to comment on that as well? Bhairav Patel: Yes. And then you kind of think about it specifically on a quarter-to-quarter basis, there can be some timing-driven volatility. But overall, as Anne mentioned, it's really some of the other line items from a revenue standpoint. Operator: Our next question comes from Rich Anderson with Cantor Fitzgerald. Richard Anderson: Just a couple of really quick modeling questions first. So NAREIT FFO went up $0.02, Core FFO went down $0.02. Can you just -- what's the $0.04 swing factor in the normalized lines? Bhairav Patel: Yes. I mean I can look into it further. But overall, from a Core FFO standpoint, the key driver is really the G&A spike that we saw in Q3 that kind of stays with us in Q4. So that's really what's driving the Core FFO, and I can look into it further and tell you what the difference is between the two. Richard Anderson: Okay. And then in terms of expense growth, you talked a lot about tax true-ups and whatnot. But if I'm doing this right, the 4Q number is sort of very impressive from a year-over-year basis, something like 4% reduction in same-store expenses. Is that in the ballpark that what you're seeing? Or are we doing something wrong here? Bhairav Patel: Yes. So that's in the ballpark. One of the reasons is it's a favorable comp for us this quarter because we had some R&M expenses last year that were pushed into Q4 and some -- so that was really driving the R&M expense higher last year. So it is a favorable comp. There is some benefit from the valuations that we received in Colorado, plus we expect some additional benefit in some of the other jurisdictions. When you kind of put it all together, that is what's creating that year-over-year number that you're seeing is in the ballpark that we have as well. Richard Anderson: Okay. Great. All right. Now some real questions. So you've had some success in St. Cloud, as you mentioned, and you did better than you thought. Still the negative spread between sales and purchases is some 150, 200 basis points. Now as you look ahead into 2026, you're not going to give me guidance, I don't think. But do you think that, that spread will hold as you continue to pursue this trade strategy? Or is there something about the environment or where you might sell and where you might buy where that spread between buys and sells might change in one direction or another? Anne Olson: Yes, I'll start, and then I'll ask Grant to comment on where he thinks cap rates are and going into 2026 for the markets that we're targeting. I don't think there's going to be a big change. We haven't seen much volatility in cap rates overall, either in the regional markets where we may look to sell or the markets that we're buying in. With respect to the current portfolio and where we might target sales, where we may see some difference is if we do have the experience, particularly in Minneapolis that we're projecting into 2026, where they're well into the recovery, demand and absorption has been really strong, and we're expecting strong rent growth. We could see the cap rates on the sales -- on any sales in Minneapolis and even places like North Dakota, where we have had a really good experience and they've now had several years of very strong growth. We could see those come in a little bit. And then Grant, what do you think about any movement on target market cap rates? Grant Campbell: Yes. Target market cap rates have been pretty constant here recently, well-located core communities in Denver, pricing in the high 4s, Salt Lake City, mid- to high 4s. Core communities in Minneapolis pricing in the low 5s. And then when you slide into the Class B space, well-located Minneapolis or Denver B is generally, call it, 5.5% to 5.75%. We don't see, as we sit today, any significant change to that profile. I think one theme that we have seen as we've explored sales in markets like St. Cloud or talked to others is there really is a deep bid right now for the secondary and tertiary market products. So there's a lot of capital desiring to be in those locations. They can obtain financing that is attractive to them. So we've really seen a strong bid and strong pricing in those markets. So that's something we are monitoring as we think about our future actions and where would those cap rates settle. Anne Olson: Yes. We're clearly focused on what's that differential and what does it do to our earnings and the immediate future of our earnings. But we're really trying to balance that with what is the best growth profile for the company longer term and what provides us with the liquidity we need that's demanded by public market investors and where we can take the company from a growth perspective over a longer period of time. Richard Anderson: Great. Okay. And then on Denver, you mentioned maybe fortune to start to turn in 2027. It is a big market for you, of course. Have you given any thought to moving around within Denver? Or do you think that the exposure to Denver will change as your -- as the world around it changes? And the reason I ask is you could probably get some decent cap rates there if you were to sell some assets and reduce your exposure to Denver. I don't know that, that's your plan. But I'm just wondering if you're having any change of thought about your exposure to Denver and if there might be any transaction activity buys or sells, maybe you get in front of what will be a recovery eventually. I'm just curious if you have any change of heart around Denver and your process in the transaction market. Grant Campbell: We like our position in Denver. We like how our portfolio lays out geographically as well as the different product type offerings that we have within our portfolio. So I would say no concrete plans to significantly change that composition via transactions. With that said, we always pick up the phone if people reach out and have an idea or a thought, and we'll continue to do that. So if somebody reaches out regarding one of our Denver communities, we will listen to them. But overall, we like our position. I think more so, the exposure level that Denver provides within our portfolio will change as the world around it, as you alluded to, changes here over the course of 2026 and 2027. Richard Anderson: Great. And last for me, leverage ticks down to low 7s after you're done with everything that's on the plate right now. Do you foresee a 6 handle at some point in your future in 2026? Or should we be assuming kind of a 7-ish type of leverage number for you guys for now and for the foreseeable future? Bhairav Patel: Yes. I mean the 6 handle comes through some natural deleveraging as earnings grow. Obviously, as you know, there's some portfolio repositioning that we've been doing. So things may be volatile for a while, as you saw this year. But from our perspective, the focus always remains on managing it at -- in the low 7s at the moment and then letting it tick down with some natural deleveraging through earnings. Operator: Our next question comes from Mason Guell with Baird. Mason P. Guell: Which of your smaller markets do you expect to outperform next year? And then when do you expect your larger markets to take lead in the portfolio over your smaller markets? Anne Olson: Yes. I think we're really have a lot of confidence that North Dakota is going to continue to perform. It's been outperforming our other markets. We see that continuing into 2026. I think Minneapolis is going to be close on its tail next year with some really good tailwinds we have here, particularly with respect to how much demand we've seen in this market. And then I think it's 2027, as Grant kind of alluded to before, we're really seeing the dearth of new supply coming online that can impact that can impact growth rates overall. So next year, I'd keep a close eye on North Dakota again. And then into 2027, we might see Denver and Minneapolis really start to outpace that. Mason P. Guell: Great. And can you talk about what drove the lower disposition proceeds guidance? Anne Olson: I'm sorry, Mason. Can you repeat that question? Mason P. Guell: Yes. Just could you talk about what drove the lower disposition proceeds guidance? Bhairav Patel: Yes. Mason, overall, the disposition proceeds when you compare it for all the assets were in line. We outperformed in St. Cloud a little bit. Minneapolis came in a little bit below what we had initially expected. That is mostly driven by the fact that the portfolio in Minneapolis is a little disparate. It's a collection of different kind of assets, and we were prioritizing execution there through the sale to a single bidder, which helps us from a 1031 standpoint, which was an integral part of this overall recycling transaction. So a bunch of different factors led us to prioritize execution over just optimizing the proceeds given everything that was incorporated within the transaction. Operator: [Operator Instructions] Our next question comes from Buck Horne with Raymond James. Buck Horne: Just a couple of quick ones for me. It sounds like you're doing a great job on resident retention in this environment and managing through the supply and sounds like there's not a lot of movement from existing tenants. I'm just wondering, though, to what extent -- I mean, there's been a lot of talk about the weakening of the job market, particularly for young adults, recent college graduates, just kind of financial pressures that are building on kind of the younger cohort. Are you seeing any signs of that in your recent new lease traffic? Or any -- is there any degradation in the renter tenant profiles? Or what are you kind of seeing in terms of front door leasing demand? Anne Olson: Yes. This is a great question. We haven't seen anything. Now it's a little hard to bifurcate. So a couple of things that we have seen that we mentioned. Incomes continue to rise. So -- and rent-to-income ratios are staying pretty steady. I think we're at 22%. So our bad debt has held really low, which is great. So we feel great about the health of the renter. Retention is higher, as you mentioned. The average age of our resident has ticked up and the -- and also the average amount of time that their tenure with us overall is ticking up. So it's hard to say if you look at that age is going up. Is that an indication that we're not seeing as many younger renters coming to the market? Maybe. It could also just be a factor of the -- not as many people able to buy homes at the same age as they historically have. But we're not seeing any degradation in traffic overall other than just in Denver, the market -- the traffic has been a little softer in the market but no indication that we're -- there hasn't been a big spike in age of residents showing that we aren't getting that younger renters still in. We haven't seen a change in the average residents per household either. So there's really no evidence that people are starting to double up. If anything, Buck, it may bode well for us if they're moving home for their parents, that will create future demand for us. Buck Horne: Great. Great. I appreciate the color there. That's very helpful. And just last one, following up the value-add CapEx shift. I mean, would that -- it sounds like the hurdle rate is getting a little higher. Would you consider diverting some of those previously budgeted proceeds to share repurchases in the year-end? Anne Olson: Yes. I think when I -- the levers that we have to pull would be not only share repurchases, but debt reduction. So we're looking at every option. It's too small amount to really allocate in a meaningful way to new acquisitions, but definitely look at debt reduction and share repurchases as alternative uses of that capital. Operator: We currently have no further questions. So I'll hand back over to Anne for any closing remarks. Anne Olson: Yes. Thanks, everyone, for joining us today. We'd be remiss if we didn't acknowledge again our team who did such a great job this quarter. And we are going to continue into 2026, given the environment, we think we're putting up great results for our shareholders, and we're going to keep that at the forefront of everything we do. Have a great day. Operator: Thank you very much, Anne, and thank you, everyone, for joining. That concludes today's call. You may now disconnect your lines.
Operator: Good morning, ladies and gentlemen, and welcome to the Hamilton Lane Fiscal Second Quarter 2026 Earnings Conference Call. [Operator Instructions] This call is being recorded on Tuesday, November 4, 2025. I would now like to turn the conference over to John Oh, Head of Shareholder Relations. Please go ahead. John Oh: Thank you, Danny. Good morning, and welcome to the Hamilton Lane Q2 Fiscal 2026 Earnings Call. Today, I will be joined by Erik Hirsch, Co-Chief Executive Officer; and Jeff Armbrister, Chief Financial Officer. Earlier this morning, we issued a press release and a slide presentation, which are available on our website. Before we discuss the quarter's results, we want to remind you that we will be making forward-looking statements. Forward-looking statements discuss our current expectations and projections relating to our financial position, results of operations, plans, objectives, future performance and business. These forward-looking statements do not guarantee future events or performance and are subject to risks and uncertainties that may cause our actual results to differ materially from those projected. For a discussion of these risks, please review the cautionary statements and risk factors included in the Hamilton Lane fiscal 2025 10-K and subsequent reports we file with the SEC. These forward-looking statements are made only as of today, and except as required, we undertake no obligation to update or revise any of them. We will also be referring to non-GAAP measures that we view as important in assessing the performance of our business. Reconciliation of those non-GAAP measures to GAAP can be found in the earnings presentation materials made available on the Shareholders section of the Hamilton Lane website. Our full financial statements will be made available when our 10-Q is filed. Please note that nothing on this call represents an offer to sell or a solicitation of an offer to purchase interest in any of Hamilton Lane's products. Let's begin with the highlights, and I'll start with our total asset footprint. At quarter end, our total asset footprint stood at just over $1 trillion and represents a 6% increase to our footprint year-over-year. While this number can and will swing quarter-to-quarter due to our AUA, it is worth noting that this is the first time the firm has crossed over the $1 trillion mark. AUM stood at $145 billion and grew $14 billion or 11% compared to the prior year period. The growth came from both our specialized funds and customized separate accounts. AUA came in at $860 billion and grew $44 billion or 5% relative to the prior year period. This stemmed primarily from market value growth and the addition of a variety of technology solutions and back-office mandates. Total management and advisory fees for the year-to-date period were up 6% year-over-year. This year-over-year change includes the impact of $20.7 million of retro fees in the prior year period versus $800,000 in the current year period. Total fee-related revenue for the period, which is the sum of management fees and fee-related performance revenue was $321.6 million and represents 23% growth year-over-year. Fee-related earnings were $160.7 million year-to-date and represent 34% growth year-over-year. We generated fiscal year-to-date GAAP EPS of $2.98 based on $124.6 million of GAAP net income and non-GAAP EPS of $2.86 based on $155.7 million of adjusted net income. We have also declared a dividend of $0.54 per share this quarter, which keeps us on track for the 10% increase over last fiscal year, equating to the targeted $2.16 per share for fiscal year 2026. With that, I'll now turn the call over to Erik. Erik Hirsch: Thank you, John, and good morning, everyone. We have had another very strong quarter. Our job is difficult but not complicated. Take care of the customer, build thoughtfully constructed portfolios, deliver strong risk-adjusted returns. We did all of those things this quarter, and the reward for that is being entrusted with more clients and more capital. Let me start here by recognizing the hard work and dedication of the entire team at Hamilton Lane. Our unrelenting focus on delivering for our clients has continued to fuel our growth and success. As I said before, we're building Hamilton Lane for the long term. Every decision we make is about positioning ourselves for sustainable growth and success well into the future. This quarter was another great example of that approach. We extended our product offerings, including the launch of additional Evergreen products. And just yesterday, we announced a significant new strategic partnership. Let me dive into some initial details on that now. Guardian Life Insurance Company of America has partnered with Hamilton Lane to be their core strategic partner within the private equity markets. Guardian is one of the nation's largest life insurers and a leading provider of employee benefits. With this partnership, Hamilton Lane will take on the management of Guardian's current and future private equity portfolio. Hamilton Lane will oversee Guardian's existing private equity portfolio of nearly $5 billion, and Guardian will also commit to invest approximately $500 million per year for the next 10 years with Hamilton Lane. This commitment maintains Guardian's typical annual contribution to the asset class and supports its general account target allocation goals. This capital will be managed by Hamilton Lane through a separately managed account and like most of our current SMAs, will include meaningful capital into our various investment funds. Part of the earlier capital deployment will be $250 million being used as seed and investment capital to help further expand and accelerate our growing global Evergreen platform. To support the partnership's shared goals of accelerating growth and driving value creation, Guardian will receive HLNE equity warrants and additional financial incentives. We will also partner with Guardian's registered broker-dealer and registered investment adviser, Park Avenue Securities, and look to deliver investment solutions for their clients and provide strategic support and education on the private equity markets for their 2,400 advisers who collectively cover approximately $58.5 billion of client assets as of December 31, 2024. In addition, the Guardian investment professionals currently supporting the private equity portfolio are expected to join Hamilton Lane after the transaction closes. Overall, we believe this partnership is a testament to our ability to provide customized solutions to the world's leading institutions. In recent years, the convergence of private market asset management and the insurance industry have taken on a variety of partnership forms. This evolving and growing opportunity set has been a focus for us as we have been scaling our insurance solutions platform to over $119 billion. In 2024, we formalized this focus when we announced the forming of a dedicated insurance solutions team. Our aim was straightforward, bring greater intentionality to how we serve insurers, deepen our expertise and relationships and elevate our ability to execute at a strategic level for this sophisticated client set. We believe the partnership with Guardian is a proof statement to these efforts. We are thrilled to have been selected by Guardian with this critical task of delivering for their policyholders with the goal that their private equity portfolio will continue to thrive. Jeff will provide some more specifics on the expected financial impact in his section shortly. Before I turn to our results, I'd like to share my perspective on the current popular narrative, that being that the industry is on some verge of a broader credit crisis. Today, we see no data to support this notion, particularly within the context of private credit. In fact, we are seeing a further reduction of what was already a very low bankruptcy rate. What we do see happening is simple. There have been a tiny number of high-profile bankruptcy filings and the broader public market has extrapolated this to believe a credit crisis is looming. I will note with some irony that some of the parties were warning about the impending doom are some of the exact same parties with losses stemming from these recent bankruptcies, seemingly saying, well, yes, I have a problem, and I'm taking a large charge-off, but I'm likely not alone. I bet others also have problems. Coming back to the data. Credit fundamentals are strong and defaults are low. Today, leverage levels remain prudent around 5x and are down a full turn from 2022. Interest coverage also remains healthy at 2.8x, having moved up 0.5 turn over the past 2 years. Today, the default rate sits at around 1%, below the historical average of 2.5% and well below the levels seen during the global financial crisis, where overall default rates peaked to near 10%. But even that statistic is noteworthy. In the midst of the global financial crisis, total bankruptcies and credit losses grew to 10%, but most of our managers were in the low single digits and still generated positive performance during that period. In fact, private credit as a whole posted positive annual returns each of the years from 2007 through 2010 at approximately 9% to 10% per annum. Top quartile private equity -- private credit managers were doing even better with returns over 12%. Private credit outperformed the S&P Leveraged Loan Index in each of those years. When we peer inside our own direct credit portfolio, we see more of the same, growing top line and cash flows, prudent leverage levels and near 0 losses on investments. This is the power of having actual data on a large segment of the industry and not living and prognosticating via anecdotes. Our database covers nearly 65,000 funds and 165,000 total private companies. We have great insight as to what is happening inside these entities. We have the visibility and we know the reality. This remains one of our strengths to customers, the ability to provide more clarity and transparency in an opaque world. Let me turn now to a few business highlights, and I'll start with fee-earning AUM. Total fee-earning AUM stood at $76.4 billion and grew $6.7 billion or 10% relative to prior year period. Net quarter-over-quarter growth was $2 billion or 3%. Fee-earning AUM growth continues to be largely driven by our specialized fund platform. Specifically, our semi-liquid Evergreen products continue to experience strong momentum. The combination of our fundraising, new product additions and strong performance has driven the growth of total fund net asset value. Our blended fee rate also continues to benefit from the shift of fee-earning AUM towards higher fee rate specialized funds, most notably our Evergreen products. Today, our blended fee rate stands at 65 basis points. This is up 8 basis points or 14% since we went public in 2017. At quarter end, customized separate account fee-earning AUM stood at $40.8 billion and grew $1.4 billion or 4% over the last 12 months. Net quarter-over-quarter growth was $517 million or 1% with the gross contribution stemming from a mix of new client wins, free-up activity from existing clients and contributions for investment activity. This was offset by returns of capital from exit activity and the timing mismatch of existing client legacy tranches rolling off and new tranches yet to come on. That said, we continue to maintain large amounts of committed and contractual dry powder to deploy, along with a strong backlog of business that has been won and is now in the contracting phase. As we've mentioned in the past, the scale and contracting dynamic in our SMA business can lead to some unpredictability as to when these dollars come on, but we simply remain focused on winning new business. And further, these quarter end numbers do not reflect the impact of the Guardian partnership I discussed earlier. Let's move now to Specialized Funds, and I'll spend a few moments and provide some updates on our closed-end fundraises and Evergreen platform. Specialized funds fee-earning AUM ended fiscal Q2 at $35.6 billion, having grown $5.3 billion over the last 12 months. This represents an increase of 17%. Quarter-over-quarter net growth was $1.5 billion or 4%. Specialized fund fee-earning AUM growth continues to be largely driven by our Evergreen platform, both in net inflows and net asset value growth, closes for certain closed-end funds in market and continued robust investment activity for those closed-end funds that derive their management fees on an invested capital basis. On the closed-end side of our lineup, we remain in market with our 6 equity opportunities funds. As a current reminder, this fund focuses on direct equity investments alongside leading general partners and offers 2 fee arrangements that either charge management fees on a committed capital basis and a 10% carry or on a net invested basis with a 12.5% -- prior direct -- the same arrangement and raised $2.1 billion. During the quarter, we held additional closes that totaled $246 million [indiscernible] and brought the total amount raised to nearly $1.6 billion. Of the $246 million [indiscernible] came in on a committed capital basis and $158 million came in on a net invested basis, which brings the total mix of capital raised to nearly 30% on committed and 70% on net invested. We have clear visibility into near-term expected closes that we expect will bring the total capital raise to over $2 billion, and we have a strong line of sight to exceed the prior fund over the coming months. Moving to our second infrastructure fund. We continue to make great progress with the second fund and have nearly doubled what was raised for our first fund. This is a good example of us launching a product, starting small, demonstrating strong performance, gaining trust from investors to support a larger product. As a quick refresher, the strategy for this product centers around direct equity and secondaries in the real assets and infrastructure space, and the fund generates management fees on a net invested basis. During the quarter, we held additional closes that totaled $270 million of LP commitments, which now brings the total raise to over $1.1 billion in and alongside the fund. Again, at this point, we have nearly doubled the size of our first infrastructure fund, which speaks to our ability to execute new product launches and scale them effectively. Capital continues to flow in, and we will look to wrap up fundraising for this fund in the coming months. This fund has also deployed meaningful capital, and we expect to be back in market sometime in late 2026 or early calendar 2027. Before I move on to Evergreen, a quick word on the secondaries front. We have just launched the fundraising effort for our next flagship secondaries fund, and we expect to have a first close in the first half of calendar 2026. We have a demonstrated track record of growing this platform by raising larger successive funds. We believe we are well positioned to continue this trend given the continued secular growth dynamics in the secondary market, underpinned by active portfolio management by both LPs and GPs and our strong investment track record with our current vintage secondaries fund having generated a net multiple of 1.4x and a net IRR of 44.1% for our investors as of June 30, 2025. We look forward to providing you with future updates on that front. Turning now to the Evergreen platform. For the quarter ending September 30, 2025, we took in over $1.6 billion in net inflows across our entire suite of Evergreen products. This was our largest quarter ever. This success came from a combination of 3 things: expanded product offerings, robust fundraising and strong performance. The $1.6 billion figure includes initial subscriptions to our newly launched Global Secondaries, Global Venture and Asia funds, all of which began accepting capital during the third calendar quarter. At quarter end, total Evergreen AUM reached $14.3 billion. At our 2024 Shareholder Day, we laid out a straightforward strategy to drive continued growth in our Evergreen platform, plan focused on expanding our then existing lineup of 3 funds and maintaining conviction in our ability to launch scalable new products. 18 months later, that vision has materialized. Our Evergreen suite has grown from 3 funds to 11 and AUM has nearly doubled to over $14 billion. We've also become more agile in bringing products to market, leveraging our scale to accelerate both launch and growth. While our initial 3 funds each took nearly 2 years to reach $500 million in AUM, our newer global infrastructure and secondary offers have already surpassed or on track to hit that milestone in under 12 months. I will also reiterate, we continue to see strong support from institutional investors for these products. Due to some of the structural advantages of Evergreen funds, we continue to see some migration away from drawdown funds and into this product line. Before I move on from Evergreen, currently, there remains over $1 billion of Evergreen AUM that is not yet earning management fees due to the timing of initial subscriptions and fee holidays that were put in place with the launch of several of our new funds over the last 12 months. And while these funds are not earning management fees yet, we are still eligible to generate performance fees for those funds that have a performance fee element. We expect that over half of that current $1 billion will move into specialized fund fee-earning AUM during the calendar fourth quarter of 2025 and the remainder to move over during calendar 2026 as the fee holidays lap for those respective funds. Now moving on to some technology updates. This quarter saw 3 recent announcements around our strategic technology balance sheet portfolio and our proprietary Hamilton Lane Private Market indices. First up is an exciting partnership regarding our proprietary private market indices and benchmarks. We are proud to announce a partnership with Bloomberg, where users now have access to a suite of Hamilton Lane Private Market indices and benchmarks via the Bloomberg Terminal and Bloomberg data license. While the revenue opportunity is in the early stages will be modest, more importantly, we now have a unique opportunity to reach a wider and increasingly growing private market audience, leveraging Bloomberg's global reach and scale. We see this as a large brand enhancer, particularly with the RIA community. Bloomberg remains a clear leader in financial news, data and analytics. Bloomberg terminals are found in nearly every corner of financial services and investment management. Bloomberg's clients range from the very largest global institutions to individuals and their advisers. The latter has served as a key segment of growth for private markets, and this partnership will now embed Hamilton Lane's brand and our indices into their workflows. They will demand better tools to measure performance across strategies, vintages and geographies. This new partnership will now be able to deliver on those demands and will raise the bar for how private markets are now benchmarked. And it will put the Hamilton Lane name and logo in front of thousands of terminal users around the globe. This marks an important and significant step in making Hamilton Lane benchmarks broadly available to this growing population of private market investors, expanding access to data and driving even greater transparency across the asset class. Let's now move on to news regarding Securitize. On October 28, Securitize announced that it had entered into a definitive business combination agreement with Cantor Equity Partners II, a special purpose acquisition company. On closing of the transaction, which is expected in the first half of 2026, Securitize will become a publicly traded company. As a refresher, Securitize builds trusted regulated technology that turns traditional financial assets into digital tokens to be issued, traded and serviced on chain. Hamilton Lane has cultivated a deep relationship with Securitize, having partnered initially in 2022 to tokenize several of our own offerings and then subsequently participating in a strategic fundraise in May of 2024 that was led by BlackRock. Together, we've shared in the vision of making the private markets more accessible to a broader set of investors. Securitize has established itself as a leader in tokenizing real-world assets, and we are proud to deepen our strategic partnership as they embark on this exciting new chapter. At the proposed pre-money valuation of the business combination, we expect to see a mark of more than 2x our initial investment. This outcome further demonstrates our ability to partner with and successfully invest our balance sheet capital into companies that we believe will transform our asset class for continued growth and scale. Wrapping up this section with an exciting announcement regarding Novata. On October 7, Novata announced a key strategic acquisition of Atlas Metrics, which expands Novata's global reach and unites 2 complementary companies to meet the growing demand from investors and corporates for trusted, efficient and scalable sustainability data solutions. The combined entity will now support more than 400 clients and over 13,000 private companies worldwide, equipping investors, banks and corporates with the tools they need to collect, report and act on sustainability data. As part of this acquisition, Hamilton Lane was proud to invest additional capital in a fundraising round in support of the acquisition and continued strategic initiatives, and we did this alongside of S&P Global, Modiv Ventures and the Ford Foundation. We continue to support efforts that increase both data transparency and analytic capabilities for our asset class and are proud to support Novata in their mission to empower private market sustainability. Novata has achieved tremendous growth since our initial investment in partnership back in 2021. The shared vision and focused execution, we believe Novata can continue to grow and scale, and we are excited for the opportunities ahead. And with that, I'll now pass the call to Jeff to cover the financials. Jeffrey Armbrister: Thank you, Erik, and good morning, everyone. I'll begin with some commentary on our business during the first half of fiscal 2026, and then I'll provide some additional details on the Guardian Life partnership and the potential impacts for our business. For the first half of fiscal 2026, management and advisory fees were up 6% from the prior year period. However, this includes the impact of $20.7 million of retro fees from specialized funds, namely the final close for our sixth secondary fund in the prior year period versus $800,000 of retro fees in this quarter stemming from our latest direct equity fund. Total fee-related revenue was up 23%, largely driven by fee-related performance revenue recognized in the first half of fiscal 2026 versus a minimal amount during the first half of fiscal 2025. Specialized funds revenue increased by $12 million or 8% compared to the prior year period. Growth in specialized fund revenue was driven by continued growth in our Evergreen platform, which continues to be a key driver of specialized fund fee-earning AUM. Again, the year-over-year growth here was impacted by the retro fee element that I just alluded to. Moving on to customized separate accounts. Revenue increased $2 million or 3% compared to the prior year period due to the addition of new accounts, re-ups from existing clients and continued investment activity. Revenue from our reporting, monitoring, data and analytics offerings increased by over $3 million or 21% compared to the prior year period as we continue to produce strong growth in our technology solutions offering. Lastly, the final component of our revenue is incentive fees, which totaled $91 million for the period. This amount includes fee-related performance revenues, or FRPR, stemming primarily from the quarterly crystallization of performance fees from our U.S. private assets Evergreen fund with additional contributions coming from our more recently launched evergreen funds. Let's turn now to our unrealized carry balance. The balance is up 14% from the prior year period, even while having recognized $102 million of incentive fees, excluding fee-related performance revenues during the last 12 months. The unrealized carry balance now stands at approximately $1.4 billion. Moving to expenses. Fiscal year-to-date total expenses increased $20 million or 11% compared with the prior year period. Total compensation and benefits increased $13 million or 10% due primarily to an increase in headcount and equity-based compensation. This was offset with lower incentive fee compensation due to a decrease in non-FRPR incentive fee revenue compared to the prior year period. G&A increased by $7 million. We continue to see growth in revenue-related expenses, including the third-party commissions related to our U.S. Evergreen product being offered on wirehouses that we've discussed on prior calls. We will continue to emphasize that while overall G&A expense has increased over time, the bulk of the increase stems from these revenue-related expenses, which is a good thing and can be an indicator of growth to come. We continue to successfully offset this with cost savings and expense discipline in other parts of the business where we have discretion. Let's move now to FRE. And just a quick reminder, FRE will now include the fee-related performance revenues and exclude the impact of equity-based compensation in the calculation of FRE. With that, fiscal year-to-date FRE came in at $161 million and was up 34% relative to the prior year period. FRE margin for the quarter came in at 50% compared to 46% for the prior year period and benefited from strong fee-related performance revenues in the period. Before I wrap up, I want to end with some balance sheet commentary -- before I wrap up and end with some balance sheet commentary, I wanted to take this opportunity to provide some additional detail on the Guardian Life partnership that Erik discussed earlier on. First, I'll reiterate that this partnership is a testament to our capabilities as a trusted private equity solutions provider, and we are excited to work with Guardian. As Erik highlighted, in exchange for the capital that we will be managing on behalf of Guardian, Guardian will receive HLNE equity warrants and additional financial incentives, which will primarily be revenue share arrangements related to their seed capital to advance shared objectives of growth and value creation. The revenue associated with the partnership will come in 2 forms. First, we expect to generate management fees from the capital that will be invested in our Evergreen funds more immediately, and this will get captured in specialized funds. Second, the separate account that we will manage going forward will generally mirror that of a standard institutional separate account by way of portfolio construction and fee schedule and will be captured in separate account management fees. We expect this will scale as the portfolio gets deployed over time. In both cases, we have the ability to generate performance fees commensurate with the associated strategies. As for the warrants, based on our current fully diluted share count as of September 30, 2025, the total dilution expected from the Guardian warrants is less than 1%. The warrant package will be governed by both a vesting schedule that aligns with the term of the partnership and tiered exercise prices that are based off of a reference price that was set by the HLNE 20-day volume-weighted average price as of the closing price on October 31, 2025. Additional information regarding the warrant package will be included in our 10-Q filing. I'll wrap up now with some commentary on our balance sheet. Our largest asset continues to be our investment alongside our clients in our customized separate accounts and specialized funds. Over the long term, we view these investments as an important component of our continued growth, and we expect that we will continue to invest our balance sheet capital alongside our clients. In regard to our liabilities, we continue to be modestly levered and we'll continue to evaluate utilizing our strong balance sheet in support of continued growth for the firm. With that, we will now open up the call for questions. Operator: [Operator Instructions] Your first question comes from Alex Blostein from Goldman Sachs. Alexander Blostein: On the Guardian announcement. Maybe we could start there. I heard your comments around just the structure of the arrangements, but maybe you could help us with the actual fees that are likely to hit P&L. I heard the geography of different line items. But as you sort of think about the $5 billion that's going to come over, maybe help us with the fee structure there and also with the $500 million a year that's going to get allocated over time. So maybe we can start there. Erik Hirsch: Thanks, Alex. It's Erik. I think you should expect that the vast majority of the revenue that we're generating is on the $5 billion that will be coming in over the next 10 years because the existing $5 billion is basically a monitoring assignment. That -- those are dollars already in the ground in a variety of partnerships. And so if you look at the $5 billion that will be coming over, we clearly called out the $250 million going into Evergreen. And then the SMA portion, I think, again, hard to predict exactly what the next decade looks like. But that's going to be a mix of primary funds and a bunch of our specialized funds at whatever the prevailing fee rate is for those vehicles. Operator: Your next question comes from Michael Cyprys of Morgan Stanley. Michael Cyprys: I wanted to ask about the Bloomberg partnership and more broadly partnerships on the data side. I was hoping you could elaborate a bit around that. What's the scope for more broadly enhanced monetization of your data sets as you look out from here as well as indices? And what's the scope for creating investable index products as you think about looking at over time? Erik Hirsch: Yes. Thanks, Mike. It's Erik. So the Bloomberg arrangement is going to be a revenue share model where that will grow over time as that installed base continues to grow and usage grows. I think we've been very tactical and selective at where we've been partnering. We view our data to be valuable. And so simply just running out and licensing it here, there and everywhere has not been part of our strategy. I think we've been thoughtful about where we see both chances for revenue and as I mentioned in my script, real chance for brand enhancement. And I think for us, this was a big opportunity for brand just given the number of RIAs who are regularly daily, minute by minute using Bloomberg terminals and Bloomberg data. And as we think about that world increasingly needing and wanting more private market benchmarks and information, we're going to be the provider of that. And we think that is a huge brand enhancer for us. I think investable indices, I don't see that as a focus. I know some have spoken of that. I haven't seen traction for that. I think trying to sort of synthetically replicate what happens inside of private market portfolios using publicly listed securities has been tried by many smart people, and generally, they've all failed. And so I don't see that as our focus today. I think it's really around data as an education tool, data as a brand enhancer and data for making better investment in portfolio selections. Operator: Next question comes from Ken Worthington of JPMorgan. Kenneth Worthington: Erik, I wanted to dig a bit further into the SMA business. Can you talk about how the pipeline is developing and at what rate that pipeline is growing? And then if we think about your sales force and the sales effort, to what extent do you have as many resources today sort of allocated to SMAs versus what you've had in the past, given the superior economics you see in Evergreen and the customized funds part of the business? Erik Hirsch: Thanks, Ken. So none of our sales team are organized by -- around SMAs, in particular, specialized funds. Think of the vast majority of the sales organization organized in geographic territories where they're owning that geography, getting to know all the respective players in that geography and figuring out what problem that customer is struggling with and then how we can be the solutions provider for that. I think what we've been finding is that given the multitude of products that we have in the market, those have been, in many cases, better solutions for a lot of customers. And so that's why you've seen such strong growth coming from that specialized funds. That said, the pipeline and even what you sort of see in kind of one but not contracted is billions of dollars. And so that will all just flow in over time as we get through contracting phase and the pipeline is robust. But from a relative market positioning today, if you think about where we were with SMAs 5 or 10 years ago, we had very few specialized funds. Today, we have a lot more specialized funds, and we're finding that those are able to meet the needs for the customer base, which, as you know, is a good thing for the business model given the superior fee model on those funds. Kenneth Worthington: Okay. Great. And I don't know if I'm allowed to do a follow-up, but I'll take a shot at it. In terms of Guardian, the warrants, you mentioned that the commitments will come over the next decade. Are the warrants being awarded over the next decade? Or are they more front-end loaded? And you mentioned like a rev share. Are the warrants attached to the rev share? Or was that separate? Jeffrey Armbrister: Ken, this is Jeff Armbrister. So the warrants are front-end loaded, but there is some period of time for additional warrants to be provided. The rev share is not tied to the warrants. They are 2 separate pieces. So that's how you should think about it. Operator: Your next question comes from Brandon (sic) [ Brennan ] Hawken of EMO (sic) [ BMO ]. Brennan Hawken: The core fee rate on specialized funds ex retro ticked up nicely quarter-over-quarter, likely benefited from the scaling of the Evergreen funds. But were there any other factors that impacted the fee rate? And how should we be thinking about that specialized fee rate going forward? Erik Hirsch: Yes, Brennan, it's Erik. I think this is just what we've been saying, which is as the mix of assets is changing and coming heavier into specialized funds, particularly Evergreen, given that, that comes at a higher fee rate, you're going to see that overall rate continue to blend up. We believe that, that will continue over time. So if you just look at relative flows and relative fee rates, stronger flows in specialized funds, both drawdown and Evergreen continues to be robust. All of those are charging at a higher fee rate than the current blended overall rate that we're showing. And so to the extent that those flows continue, that will continue to lift the overall fee rate. Operator: [Operator Instructions] And your next question comes from Alex Bond of KBW. Alexander Bond: Just wanted to ask about how you're thinking about sales incentives or fee holidays on a forward basis for both your more tenured evergreen funds as well as the newer funds. Curious how often this is something you all revisit and then also how this may evolve as more competing Evergreen funds enter the market? And also if you think this is something you may need to extend or enhance as competition continues to increase there? Erik Hirsch: Alex, it's Erik. Thanks for the question. I would look at it through a different lens. I see this really as when you are launching a brand-new product that's just got some Hamilton Lane balance sheet, seed capital in it, and you are trying to attract that first round of adopters, enticing them is important. It's a fund that's going to have short -- relatively short history, relatively short performance history and getting the folks in for the first, say, 6 to 12 months, which is generally the time frame you're talking about, has become more normalized where you're giving them financial incentive, which is a management [indiscernible]. As Jeff said, where that -- those are still being calculated and paid, and that was part of the driver of the FRPR that you saw this quarter. So I'm not seeing anything on the horizon that would cause us to have to go back and do that with established funds. I'm not seeing anything on the horizon that would cause us to need to do that for longer periods of time than we're already doing. I think what's happening, normal market becoming a lot more standard for that, again, as I said, that first 6 or 12 months on a brand-new offering. Operator: Your next question is from Brennan Hawken of BMO. Brennan Hawken: It sounds like from the Guardian deal, there's also some folks from Guardian joining Hamilton Lane. Can you speak about the potential impact on the expense side from that? And then a little bit more broadly, it sounds like this deal is one where the overall economics are going to scale over time. Is that right? Is it right to think about this as probably a pretty modest impact initially? And then as you continue to build and deploy that $5 billion, things are going to scale? Erik Hirsch: Yes, Brennan, it's Erik again. So yes, to answer the second part of that question first, that's the way to think about it because we're going to be building that $500 million per year. The initial impact will be higher in that first year because a lot of that capital going into the Evergreen products and so again, higher fee rate. But yes, you're going to continue to see that stacking. And so we think that's beneficial. The team acquisition, I would say, is a de minimis add. And frankly, while we're in process of working through all the details with the team and with Guardian, I would expect and assume that really what's going to be happening is that those team members are coming over, and they're simply causing us to not need to go fulfill one of our open recs that is currently sitting on our website. So we're in growth mode. We continue to have a lot of open recs and open positions. And this is a talented group of people who are very experienced in the private markets. And so I think the more logical answer is they're coming over and taking positions that would have otherwise gone to a brand-new hire. Operator: There are no further questions at this time. I will now turn the call back over to Erik Hirsch. Please continue. Erik Hirsch: Again, thank you for the time. Thank you for the questions, and thank you for the support. Have a great day. Operator: Ladies and gentlemen, that concludes today's conference call. Thank you for your participation. You may now disconnect.
Operator: Good morning. My name is Kelsey, and I'll be your conference operator today. At this time, I would like to welcome everyone to the SOPHiA GENETICS Third Quarter 2025 Earnings Conference Call. Kellen Sanger, SOPHiA GENETICS Head of Strategy, Investor Relations, you may begin. Kellen Sanger: Thank you, and good morning, everyone. Welcome to the SOPHiA GENETICS Third Quarter 2025 Earnings Conference Call. Joining me today to discuss the results are Dr. Jurgi Camblong, our Co-Founder and Chief Executive Officer; Ross Muken, our Company President; and George Cardoza, our Chief Financial Officer. I'd like to remind you that management will make statements during this call that are forward-looking statements within the meaning of federal securities law. These statements involve material risks and uncertainties that could cause actual results or events to materially differ from those anticipated, and you should not place undue reliance on forward-looking statements. Additional information regarding these risks, uncertainties, and factors that could cause results to differ appears in the press release issued by SOPHiA GENETICS today and in the documents and reports filed by SOPHiA GENETICS from time to time with the Securities and Exchange Commission. During this call, we will present both IFRS and non-IFRS financial measures. A reconciliation of IFRS to non-IFRS measures is included in today's earnings press release, which is available on our website. With that, I will now turn the call over to Jurgi. Jurgi Camblong: Thanks, Kellen, and good morning, everyone. I will start with a brief recap of Q3 performance and an update on major growth drivers. I will then turn the call over to Ross, who will provide a more detailed update on the business. George will close with a review of our Q3 financial performance before we take your questions. For the last several quarters, we've highlighted that the business momentum has been strong. New customer signings have been at record levels, and bookings have exceeded expectations. In Q3, these efforts continue to pay off as revenue growth accelerated for a third consecutive quarter. Revenue grew 23% year-over-year in Q3. Given the strong performance and the accelerating momentum we're seeing across the business, we are raising our 2025 revenue guidance to $75 million to $77 million. Our performance continues to be driven by the 3 growth drivers we outlined at the start of the year, implementing and expanding across new accounts, growing in the U.S. market, and capitalizing on new applications such as MSK-ACCESS. Starting with the first growth driver. In Q3, we signed 31 new customers. This brings our total new customers signed in 2025 to 94, surpassing the 92 customers we signed in all of last year. Our focus remains on implementing and expanding across these new accounts. From an expand perspective, we had an excellent quarter as we successfully encouraged many of our existing customers to adopt additional applications. In Q3, we expanded our footprint at several top-ranked institutions. Gustave Roussy in Paris is adding new solid tumor applications to the broad suite of SOPHiA apps they use today. Institut Paoli-Calmettes in Marseille signed a major expand deal to [indiscernible] hereditary cancer and solid tumor applications. In addition, New South Wales Pathology in Australia is adding a HemOnc application, and Tulane University in the U.S. is adding new applications in solid tumors. Congratulations to the team on this major expand as well as the 31 new customers landed in the quarter. I look forward to this customer implementing SOPHiA DDM and beginning to generate revenue over the next few months. On implementations, we were happy to see 15 sizable new customers move to routine in Q3. We also implemented an abnormally large number of expand opportunities during the quarter. Between both land and expand, total new business implemented in Q3 was strong. The second growth driver I will highlight is our continued growth in the U.S. market. In Q3, U.S. revenue grew an impressive 30% year-over-year on top of an increasingly larger base. We also signed a strong cohort of new customers to fuel growth. In Q3, we landed Geisinger Health System in Pennsylvania, who is adopting SOPHiA DDM for pharmacogenomics, Baylor Scott & White Health in Texas, who is adopting SOPHiA DDM for HemOnc, and Thermo Fisher Lights Labs, who is adopting solid tumor liquid biopsy and rare disorders applications. Welcome all to the SOPHiA community. The third growth driver I will cover is the continued success of our liquid biopsy application, MSK-ACCESS. As part of the update today, I will take a moment to reflect on liquid biopsy business overall, the progress we have made, and what the future holds. Two years ago, we partnered with Memorial Sloan Kettering to industrialize their world-renowned test and make liquid biopsy testing accessible to every lab in the world. This presented a series of challenges, not only due to the very small amount of circulating tumor DNA in the blood sample, but also because of workflow heterogeneity from lab to lab. In other words, reliably decentralizing liquid biopsy is complex and many variables are at play. To solve for this complexity, we leveraged decades of experience in our diverse data network to build proprietary AI agents that standardize, harmonize and analyze liquid biopsy data. These agents, which power MSK-ACCESS and other SOPHiA applications, apply AI to find signal in the noise and deliver actionable insights to our customers. Thanks to these AI capabilities, MSK-ACCESS is now available to labs across the globe. Since its launch last year, we have now signed more than 60 liquid biopsy customers worldwide. As our liquid biopsy network has grown, biopharma companies have recognized the value of such a network. Several months ago, we announced that AstraZeneca would sponsor the global deployment of MSK-ACCESS. For AZ, high-quality and affordable liquid biopsy testing is critical for expanding market access. In addition, the data generated from the network offers immense value for drug development and commercialization. During the quarter, we announced the next phase of our liquid biopsy strategy. In September, we announced a partnership with Myriad Genetics to develop MSK-ACCESS into a regulated companion diagnostic in the U.S. And then in October, we announced a collaboration with A.D.A.M. Innovations to do the same in Japan. Together, along with SOPHiA's robust regulated footprint in Europe, SOPHiA and its partners will offer biopharma a first-of-its-kind hybrid global CDx assay fit for purpose, depending on the needs of the local market. This innovative CDx will provide biopharma companies with a unique and cost-effective offering to potentially expedite drug development and approval. Post approval, it will also enable more patients to gain access to tumor profiling benefits from liquid biopsy. As we continue our mission to expand access to best-in-class cancer care, I would like to take a moment to look towards the future. Last month, at ESMO, we announced a breakthrough technology called SOPHiA DDM Digital Twins. Digital Twins goes beyond genomics by leveraging multimodal data to help oncologists make better treatment decisions. The AI-powered research tool creates dynamic virtual representations of individual patients to simulate potential outcomes and help oncologists select the best treatment. Starting with noncancer, oncologists can now generate Digital Twins for genomic patients analyzed with SOPHiA DDM, including MSK-ACCESS. This revolutionary tool takes SOPHiA's mission of data-driven medicine to the new age by leveraging AI and the collective intelligence for our community to provide oncologists with real-time real-world decision support based on multimodal data. Please stay tuned for more updates on the development of Digital Twins and the expansion of this exciting technology. Before I hand it over to Ross, I would like to recognize the SOPHiA team for their continued ability to deliver amazing new products like Digital Twins and drive revenue growth without increasing costs. In Q3, we held gross margin strong at 73.1% on an adjusted basis despite the data processed by our platform growing over 40% year-over-year. This performance was driven by innovation from our tech and data sales teams who continue to engineer new ways to optimize the data compute and processing power of SOPHiA DDM. I was also proud that we carried growth down to the bottom line. In Q3, we improved adjusted EBITDA 13% year-over-year after excluding the impact of elevated Swiss social charges on stock-based compensation. Excluding these charges, operating expenses remained mostly flat on a constant currency basis, a testament to the natural operating leverage in our business and strong expense control across our teams. In conclusion, Q3 was an excellent quarter for SOPHiA. Revenue accelerated once again and cost performance improved. We have built an expansive global network of customers who use SOPHiA DDM each day to generate insights for their patients. In Q3 alone, SOPHiA DDM analyzed over 99,000 patients across 70 countries worldwide. Thank you again to the team for an excellent quarter and for the impact you're making. With that, I will now turn the call over to Ross, who will provide a more detailed update on Q3 business performance. Ross Muken: Thanks, Jurgi. The go-to-market teams share your excitement and confirm there is broad and growing demand for the SOPHiA offering. Along those lines, I'll start today by giving a brief update on our third-quarter performance as 2025 continues to be a strong year across both new and existing business. I'll then cover broader market dynamics before closing with a look at what we are seeing in the pipeline. First, we delivered 23% revenue growth in the third quarter as biopharma headwinds subsided and the continued strength of the core business was able to shine. From a regional perspective, EMEA returned to historic growth levels with 24% revenue growth in the period. Major markets such as the United Kingdom and Belgium contributed significantly to regional growth as the countries grew 120% and 70% in the period, respectively. As Jurgi mentioned, North America continued to outperform in the third quarter with 29% revenue growth year-over-year. Asia Pacific also continued to outperform in Q3 as analysis volume grew 35%, driven by Australia and Taiwan. Of note, we also saw the first revenue from Japan come online as our partnership with A.D.A.M. Innovation begins to ramp. In Latin America, we continue to experience softness, but recent booking momentum gives us confidence that the region will return to meaningful growth in the medium term. From an application standpoint, we continue to establish ourselves as a global leader in hemato-oncology testing. HemOnc analysis volumes grew 18% year-over-year in the third quarter off an increasingly large base. Beyond HemOnc, we saw an initial wave of liquid biopsy testing coming online as we passed 2,000 liquid biopsy analysis in the quarter. As a reminder, more sophisticated applications like MSK-ACCESS carry a substantially higher ASP than other product lines. We will look to the fourth quarter and into 2026 for MSK-ACCESS to meaningfully drive overall growth as customers complete implementations and ramp up usage. With biopharma headwinds now behind us, revenue from biopharma returned to positive growth in the third quarter and is no longer a drag on our overall performance. We view biopharma as an additive contributor going forward as we deliver on recently signed biopharma wins, including the multiple projects signed with AstraZeneca this quarter. Moving to the new business side of clinical. I'm happy to share that we continue to book new business at record levels. We landed 31 new customers in the quarter, up from 22 signed in Q3 last year. As Jurgi mentioned, the expand engine was also exceptionally strong. We will continue updating you on the expansions going forward, as this will be a major strategic focus for us as we move into 2026. In North America, Jurgi highlighted our incredible momentum in the U.S. Beyond the U.S., we also expanded our partnership with Sunnybrook Health Sciences Center in Toronto. Sunnybrook is adding a sixth DDM application, now adopting MSK-ACCESS. Our expansion to 1 to 6 applications with Sunnybrook over a short period of time is a great example of our land and expand strategy in action. In EMEA, MSK-ACCESS continued to attract major interest. In the third quarter, we signed the University Hospital of Nice in France and HSL in the United Kingdom to the application, amongst others. We also signed the American University of Beirut to our newly launched solid tumor application, MSK-IMPACT Flex. In Latin America, we continued our expansion in the South and signed Clinica MEDS in Chile to our whole exome solution. We also continue to see new business momentum in Brazil and signed the Carlo Chagas Institute who will be adopting SOPHiA DDM to support HemOnc testing. We look forward to LatAm picking up growth in quarters to come as we implement the recently signed new business. In Asia Pacific, we were proud to announce the developments of our entry into Japan. A.D.A.M. Innovations is currently working on implementing a full suite of SOPHiA applications, including solid tumor, hereditary cancer, rare disorders, and liquid biopsy. As mentioned earlier by Jurgi, A.D.A.M. will also play an important role in the global CDx offering we are developing. I'm happy to say we are already seeing strong demand across Japan on both clinical and biopharma sides. On that note, I'll take a second to highlight our refreshed momentum with biopharma. As discussed in detail last quarter, we signed the largest contract in SOPHiA's history with AstraZeneca in August, kicking off a multiyear project to improve outcomes for breast cancer patients. In addition, in September, we signed a separate deal with AZ to enhance detection of breast and prostate cancer. As part of the partnership, AZ tapped SOPHiA to leverage our AI algorithms to develop an application which detects mutations in the P10 pathway, a key molecular signaling network linked to the development of breast and prostate cancer. The pathway is also notoriously complex from a variant calling perspective, and we were proud that AZ chose SOPHiA as its partner on this project. This project should also serve as yet another proof point of the value of SOPHiA's AI and our reputation as a leading data science and tech player in the space. Broadly across markets in the business, customers are increasingly turning to SOPHiA to help them make sense of complex data. Over the past 3 years, we've seen an explosion of data production in healthcare. Sequencers and other multimodal equipment are becoming cheaper, and capabilities are becoming more advanced. Illumina, Ultima, MGI, Element, and now Roche have all deployed products that are producing increasingly larger, deeper, and more complex data. In addition, as data capabilities increase, more sophisticated therapies and tests are emerging. Among other indicators, ctDNA is increasingly recognized as a valuable way to follow patients longitudinally and determine proper treatment. Further, sophisticated tests like liquid biopsy, MRD, ENHANZE exomes, and HRD are all in high demand. Broadly, these trends mean one thing, hospitals, labs, and health systems are increasingly looking for partners like SOPHiA to help them analyze processes that make sense of complex data. As a company that has invested more than $450 million in bringing an AI platform to help clinicians analyze complex health data, SOPHiA is perfectly positioned to take advantage of these trends. At ESMO last month, we constantly heard these dynamics echoed by our customers. Data is exploding. Data complexity is rising, and these new sophisticated tests continue to excite. In addition, it has become clear that the decentralized approach like SOPHiA are reaching an inflection point. Biopharma companies clearly prefer a decentralized testing landscape over one that is controlled by a few larger players. In addition, large hospitals and health systems, especially in the U.S. and U.K., are waking up to the benefits of in-house testing. It enables them to get closer to the patient, build local expertise, and make better use of valuable patient data. In-house testing also drives operational efficiencies by reducing test turnaround times, making better use of labor resources, and keeping testing profits in-house instead of giving them up to a centralized player. Combining all of these trends, what does it mean for SOPHiA? In short, it means that demand is higher than ever. Pipeline in the third quarter is up substantially since last year. Bookings in the first 3 quarters of 2025 are more than double those of 2024. Not only are we landing more customers than ever, but our customers are getting larger. Average contract value of the 31 customers in Q3 was up over 180% year-on-year. Additionally, the number of $1 million opportunities in our pipeline has expanded materially. I continue to be pleased with our positioning as well as the growth of our pipeline and of our end markets. And I look forward to updating you on these items in the coming months. With that, I will now turn the call over to George, who will provide a more detailed look at our third-quarter financial results. George Cardoza: Thanks, Ross, and good morning, everyone. As Jurgi and Ross highlighted, Q3 results came in ahead of expectations as the influx of new business begins to come online. Total revenue for the third quarter was $19.5 million compared to $15.9 million for the third quarter of 2024, representing year-over-year growth of 23%. As a reminder, revenue grew by 13% in the first quarter and 16% in the second quarter, so the growth momentum continues to build. Platform analysis volume was approximately 99,000 during the quarter, compared to 91,000 in the third quarter of 2024, representing year-over-year growth of 9%. Core genomic customers were 488 as of September 30, up from 462 in the prior year period, but down 2 customers relative to Q2 2025. As Ross mentioned, we have intentionally focused our sales team on winning larger accounts. While we moved 15 new customers into routine this quarter, we also churned out small accounts. The average revenue across all churn customers in Q3 was less than $8,000. Going forward, we will continue to focus our sales team on larger accounts, and the favorable results are showing. Net dollar retention for the quarter was 108% with strong performance in Europe, Asia Pac, and North America, partially offset by a decline in growth in Latin America. Annualized revenue churn remains at approximately 4%. Gross profit for the quarter was $12.9 million compared to $10.7 million in the prior year period, representing year-over-year growth of 21%. Gross margin was 66.3% for the third quarter compared with 67.2% for the third quarter of 2024. Adjusted gross profit was $14.2 million in Q3, an increase of 23% compared to adjusted gross profit of $11.6 million in the prior year period. Adjusted gross margin was 73.1% for the third quarter, remaining flat year-over-year despite the substantial increase in volume of data computed by the platform. As Jurgi mentioned, targeted platform improvements have driven cloud compute and storage costs lower throughout 2025, an achievement we remain proud of and expect to continue going forward. Total operating expenses for Q3 were $30.8 million compared to $26 million in the third quarter of 2025. However, Q3 results were adversely affected by a series of items during the quarter, which temporarily impacted results but do not reflect the company's underlying operating performance. I will take a moment to walk through each item. First, share price depreciation of 54% at the end of the third quarter resulted in higher Swiss social charges on share-based compensation, as these are remeasured with the company's share price under local regulations. These elevated social charges accounted for a $1.3 million increase to OpEx this quarter as compared to a $700,000 benefit last year in Q3. These costs are not reflected as an adjustment in our adjusted EBITDA table per SEC guidelines. Second, adverse foreign exchange movements at the end of the quarter negatively impacted reported OpEx by approximately $700,000, primarily due to the strengthening of the Swiss franc. The Swiss franc has appreciated by 14% since the start of the year, which means that our payroll and rent expenses in Switzerland are translating 14% higher when viewed in U.S. dollars. Third, Guardant Health filed suit against us in Europe and the United Kingdom, alleging patent infringement in the MSK-ACCESS application, which we believe to be without merit. This resulted in higher legal expenses in the quarter of approximately $600,000, which is reflected as an adjustment for litigation in our adjusted EBITDA table. Fourth, during the quarter, we completed an at-the-market facility with TD Cowen, along with completing a shelf offering that the SEC declared effective on August 8. There were $445,000 of costs associated with the A.D.A.M. facility and the shelf that we have adjusted for in our adjusted EBITDA table, as they are not expected to recur in 2026. After adjusting for these items and other standard IFRS adjustments, operating expenses grew only 1%, driven by sales and marketing investments, which continue to deliver high returns. Despite these temporary charges, we remain proud of our ability to grow revenue 23% without substantially increasing headcount or OpEx. Moving down the P&L., Operating loss for the quarter was $17.9 million compared to $15.4 million in the prior year period. EBITDA loss for the third quarter was $15.4 million compared to $13.2 million in the prior year period. Adjusted EBITDA loss was $10.2 million, up 8% from the prior year loss of $9.4 million. Excluding Swiss social charges and share-based compensation for both years, adjusted operating loss and adjusted EBITDA would have improved 13%, demonstrating our ability to deliver operating leverage. As with previous quarters, we remain laser-focused on driving efficiency gains across the business and reducing costs down the P&L. Lastly, total cash burn, which we define as the change in cash and cash equivalents for the third quarter of 2025, was $13.1 million compared to $9.6 million in the prior year quarter, representing a year-over-year increase of 36.5%. The cash outflows in the third quarter of 2025 include $500,000 invested in ATM Innovations in Japan, a $1.7 million reduction in our accounts payable balance as some large vendor payments were processed, and interest expense, which increased by $1.1 million from the prior year due to increased borrowings under the Perceptive credit agreement. We finished the quarter with cash and cash equivalents of $81.6 million as of September 30. We remain confident in our current capital position with respect to the achievement of our long-term goals. I'll now turn to our 2025 outlook. Given the promising reacceleration of revenue growth we've had in the last 3 quarters, SOPHiA GENETICS is updating our full-year revenue guidance for 2025. We are raising our full-year revenue guidance range as revenue is now expected to be in the range of $75 million to $77 million, representing growth of 15% to 18%. This compares to the previous range of $72 million to $76 million. Adjusted EBITDA loss guidance has been revised to a loss of $39 million to $41 million compared to $40.2 million in fiscal year 2024. The primary drivers of the change are the Swiss social taxes on our stock-based compensation, along with the appreciation of the Swiss franc and the euro, and the impact that they have on our European-based expenses, such as payroll and rent when translated over into U.S. dollars. On a constant currency basis, our expenses remain as expected, excluding the social taxes. Despite these impacts, we expect we'll be able to continue to show operating leverage for future revenue growth. We continue to make targeted investments in our platform and optimize cloud compute and storage costs, and expect to have modest gross margin expansion beyond current levels. We expect to continue to hold the line on operating expenses in local currencies and excluding social charges as we currently have the correct team size to support our medium-term growth objectives. This excludes some high ROI investments we will continue to make related to marketing activities, as well as certain investments in the commercial team, including commission payments for overperformance. We also expect a modest increase in our implementation teams to handle the increased volumes of new accounts. Our growth has been accelerating, and we believe these investments will pay off in 2026 and beyond. Finally, we will continue to revisit our discretionary expenses and execute on identified savings in systems, professional services, and certain public company costs throughout 2025. We continue to believe that we are on track to be approaching adjusted EBITDA breakeven by the end of 2026 and crossing over to positive adjusted EBITDA in the second half of 2027. With that, I would like to turn the call back over to Jurgi for closing remarks before we take your questions. Jurgi Camblong: Thank you, George. To close, this quarter marked another period of accelerated revenue growth with 23% year-over-year revenue growth, reflecting strong execution of our teams and the growing impact of our platform. Forward-looking indicators remain strong across the business as we continue to see a steady stream of new customer signings, substantial new biopharma partnerships, rising average contract size, and a healthy expansion in pipeline across regions and applications. On top of this, we continue to be laser-focused on optimizing costs and delivering sustainable growth. I am confident as ever in our long-term trajectory, and momentum in our business is building. I look forward to continuing to update you all on our progress in the future. With that, thank you to the SOPHiA team, customers, partners, and investors for joining us on our mission to transform patient care by expanding access to data-driven medicine globally. Operator, you may now open the line for questions. Operator: [Operator Instructions] And your first question comes from Bill Bonello from Craig-Hallum. William Bonello: So just a couple of things I'd love to follow up on. So first of all, in terms of the guide, and I think I get what you're doing here and appreciate it, but I just want to make sure. The midpoint of the guide sort of implies a mid-teens growth for Q4 versus the 23% growth that you had this quarter. Is there any particular reason that we would expect growth to decelerate next quarter? Or is this just kind of prudence? Jurgi Camblong: Thanks, Phil, and good question. I would say, obviously, all year, we've been generally conservative with our approach to guidance, right? Coming off of 2024, we wanted to make sure we were set up well to be able to continue to overachieve. And obviously, you see us do that this quarter and raise our guidance. I think in general, the business has fantastic momentum. We had another tremendous quarter of bookings. We're bringing quite a lot of business online. I think we wanted to just be prudent, right, heading into the year-end. But frankly, though, we don't see any change in kind of the key drivers of the business and feel very confident that our growth overall will continue to perform in line with our expectations and/or continue to accelerate. William Bonello: And then MSK, you talked about 60 customers now signed up. Can you give us a sense of how many of those customers are already performing analysis or generating revenue, and how many are yet to go live? And then maybe -- I know you talked about it a little bit, but maybe a little more color or commentary on the pipeline of potential customers that you might be able to add going forward? Jurgi Camblong: Yes, sure. I will start, Bill, and then Ross Christos. But I will start by telling that indeed to your point on the pipeline, the demand in liquid biopsy is growing, right? ctDNA is becoming more and more adopted clinically, more and more important for diagnosis, for monitoring, but eventually, as well for mRNA testing. So definitely, this is a platform where we see a lot of demand. When it comes to the numbers, we highlighted that this quarter, we did over 2,000 analyses on MSK-ACCESS. So basically, this gives you a sense as well of our numbers are ramping up. We grew more than triple digit on more than 100% basically on liquid biopsy, actually over 300% year-on-year. So again, there is a lot of demand there. And when it comes to the number of sites that were implemented, it's still a minority. So Ross, maybe you want to give us some more color to give. Ross Muken: Yes. Thanks, Bill. So obviously, as Jurgi said, liquid biopsy remains, I would say, a super hot area for diagnostics in general and one where we're seeing a lot of demand. Certainly, we're very happy with the rate of adoption over the last 12 months in terms of the 60 signed logos. So assume about 20% of those have started to enter routine, although still based on the numbers we shared in terms of the monthly cadence, it's still quite modest. We expect that to ramp pretty materially over the next 1 to 2 quarters. We have some very large accounts coming online in the fourth quarter and into the first quarter of next year. And so we're quite confident that that trajectory will continue to inflect. And then for 2026, we will see very strong growth from this product and one as well, as we think about CDx and our announcements there, and we can touch on that we continue to see a multiyear trajectory that's going to be driving this business for the foreseeable future. William Bonello: And if you'll allow me, just one last question. You mentioned Thermo Fisher as a customer. Can you just talk a little bit more about what they'll be doing, how they're using the product? Ross Muken: So Thermo is using it in one of their laboratories. I would say we're probably not at liberty to share a ton more. But certainly, as you think about many of the typical vendors and they are one who does CDx, you tend to do orthogonal studies and work, and also tend to use other technologies of other competitors, of which you do not have sort of applications and/or bioinformatic capabilities. And so I would say, think about it in that vein, we're very excited to have them as a customer. Obviously, we already serve quite a lot of thermal instruments as well in the field. And so I would say in this vein, this is sort of a new avenue for us and an important one. But unfortunately, I can't give you a ton more detail on the project just because of its confidential nature. Operator: And your next question comes from Subbu Nambi from Guggenheim. Subhalaxmi Nambi: What is your outlook for biopharma R&D spending and overall funding for 2026? Jurgi Camblong: Subbu, we have been speaking a bit about the biopharma penalizing in the past, right, and us changing the strategy, being focusing on things that were very well, I would say, defined around data, around diagnostics. And as we've been highlighting in the previous quarter, this strategy has been taking off. We announced last quarter as well a deal we made with AstraZeneca on the data side, which we qualified as being the bigger deal in the biopharma historically. But beyond that on '26, Ross, what can we share? Ross Muken: Yes. So I would say, Subu, coming out of ESMO, I was super encouraged. So if you think about a lot of where we're positioned relative to pharma pipelines as well as where pharma is allocating dollars, we're in a very favorable position, right? Pharma is increasingly, I would say, looking to support a hybrid centralized, centralized approach for CDx, and us with our partner, Myriad, have fantastic, I would say, capabilities in that front and also to do CDx and other sponsored testing. Additionally, I would say, if you look at what they're doing with AI, we have really unique capabilities in terms of algorithm development and unique data sets that we have access to that, as you saw in the breast example, garner a lot of interest, and we would expect to see more of that. Additionally, again, being well positioned in liquid biopsy, which is an area that's inflecting at the moment. I would say also, we're having quite a lot of conversations and discussions around a myriad of different opportunities there. And so across the board for us at least, biopharma year-on-year and certainly on a 2-year running basis is materially healthier. Our pipeline is in fantastic shape. Again, we still need to execute and drive some of these large deals home. But I would say for us right now, the positioning is quite good and the budgets are there. And we're seeing not only heightened activity level, but for us, and again, this -- I'm not sure as a read on the market, but more specific to us, we're engaged with most of the top 20, right? And so if you think about many of the large names that have had a lot of pipeline success, obviously, AstraZeneca being at the foremost, but many of the other large names are ones that we have active dialogue and very, I would say, concrete potential deals in the pipeline with. And so we're quite encouraged about what that could contribute in '26 and beyond. Subhalaxmi Nambi: How did customers' onboarding setup times trend in 3Q? Did you notice the macro environment elongating this in any way? Or do you have concerns about this? Any U.S. government shutdown impacts? Jurgi Camblong: So first, as you know, Subbu, for us, signing deals is great, and we have been highlighting that actually bookings and ACVs of bookings have been very good, but then we don't generate revenue until our platform is being implemented, given we're being paid on usage, right? So more color on the implementations and the impact of the macro. Ross Muken: Yes. So in general, we're actually seeing healthy activities across the entire funnel. So pipeline remains robust. Bookings were very good in the quarter, and implementation, certainly on a dollar basis, continue to accelerate. So this quarter, we had a bit more expand applications come live than new logos, but I would expect Q4 to be quite strong. We actually just had a record October, and so on that level, activity levels, again, and this is across multiple geographies, continue to be quite good. So for us, on the macro side, the environment is super healthy. And I think you've heard this from some of the sequencing providers as well. We've talked about clinical volumes being strong. And so obviously, with that and the increased data production on those volumes, for us at the moment, things are continuing to be quite strong. Yes. So no impact from the government shutdown so far, at least on our side. Operator: And your next question comes from Mark Massaro from BTIG. Mark Massaro: Congrats on the strong quarter. I wanted to ask a little bit about the large pharma customer you have in AstraZeneca. How much -- was there a benefit in Q3? And if not, should we -- I think we're expecting that to pick up here in Q4. I was hoping if you could just sort of walk me through that. And then related to that, can you just speak to the strength in biopharma if you exclude AstraZeneca? Jurgi Camblong: Yes. So Mark, George will start on your question regarding the financial side, and then Ross will give you some more color on the recent activities we have. George Cardoza: Yes, there was a fairly small amount of pharma in Q3, and we had said that last quarter that pharma was really going to ramp up in the fourth quarter. Again, typically, these type of contracts take a couple of months to get projects going, and the revenue is typically recognized when milestones are hit. So -- but we do expect to hit some of those milestones in the fourth quarter. And as Jurgi said, really, the thing that we're excited about with the pharma side is really when you start to look out in 2026 and 2027, we're still very bullish on this business and what it can become. And it's exciting to see the projects that we've already won, and the pipeline is not -- you think you signed a lot of contracts, maybe your pipeline to be down. The exact opposite has happened. The pipeline has actually even gotten stronger at the same time. So we're -- we remain very bullish about the pharma business. We've talked about the Myriad partnership, what we're doing in Japan, and we believe wholeheartedly, there's a great business here. Ross Muken: Yes. So Mark, I would say, obviously, AstraZeneca is a fantastic partner, particularly given the health of their pipelines, right? So being tied to one of the large pharmas that has a ton of new product introductions is obviously as a diagnostic and data player, incredibly beneficial. But to your point, obviously, we've been super focused on broadening out the pipeline, as I was mentioning before, that has expanded pretty materially, not just in size, but also in the sheer number of pharmas in the pipeline. I can also confirm we won other deals outside of AstraZeneca, some that are quite significant. But I would say for various reasons, you can't always press release depending on where the drug is or where the project is in its stage sort of the wins. But I would say, overall, we're quite happy with that momentum, and we would expect, again, to see further adds on that side over the upcoming quarters and into 2026 as the business continues its recovery. Mark Massaro: And between Myriad Genetics and the customer formerly known as Genesis Healthcare, I think you've got companion diagnostics with both. Can you just give us a sense on timing, how you're thinking about regulatory, and when you think these might start contributing to your business? Jurgi Camblong: Yes. So as you understand, right, depending on the regions, regulatory basically frameworks are different. So the partner we have in Japan is to fulfill basically the regulatory authorities in Japan, and the one we have in the U.S. is to fulfill as well regulatory duties and opportunities in the U.S. market, right? And the why we've been expanding our offering. As you know, Mark, we've been very successful with our decentralized model. But in some instances, premarket, pharma wants to do that in a single site P&L. So hence, like the inception of this partnership. Anything else you would like to add? Ross Muken: Yes. So I'd say, Mark, again, coming out of ESMO and even more so than ASCO, we heard consistently at drumbeat of huge interest in MSK-ACCESS as kind of a global CDx tool. And again, if you think about the existing environment, typically today, if you hire one of the current vendors who are centralized, you're normally having to hire probably another 5 to 7 vendors to cover the diagnostics globally through commercialization, whereas now with a strong partner at Myriad is obviously very well known in this space, having delivered really strong results with myChoice and other products in the past. So they have great regulatory experience for the U.S. market. We have Genesis or now A.D.A.M. Innovations, who's generating quite a lot of interest, honestly, in Japan as well, and obviously, our ability to sort of deliver applications for the rest of the world. I think that's garnered quite a lot of kind of curiosity of pharma that's now turning into real opportunities. We actually already have several opportunities we're involved in, in the market. Again, it doesn't mean we will win. But certainly, we're already engaged. So that should give you a sense of our preparation and timing of when we expect this to be able to be available as certainly we're already in sort of that process. But I would say, certainly, we want to take our time. We obviously work with our partners closely on bringing these tools to market. But again, I would say on a multiyear basis, this has the potential to be a really significant driver for SOPHiA going forward. Mark Massaro: And just one last one for me. You made some really good progress signing new customers, including the MSK-ACCESS on SOPHiA DDM. You talked about the majority are expected to complete implementation and begin generating revenue in the next 3 to 6 months. I'm just trying to get a sense, as we think out to 2026, is there -- in your view, do you think you'll continue to onboard new MSK-ACCESS customers each quarter? Or do you think there's a big bolus sort of like Q4 into Q1, and then that will start to level off? I'm just trying to get a sense for the business in '26. Ross Muken: Yes. So I would say, in general, Mark, we're obviously quite enthusiastic about this product ramp. As we've said, these will come online, as you mentioned. I would say it's never perfectly linear, as you would expect. So there will be some step function changes. But ultimately, the potential here with the existing signed accounts is quite significant to contribute to our business, and then obviously, CDx as well. And so we remain very confident in that contribution to the '26 growth rate and beyond. Jurgi Camblong: And Mark, if I may add, I know you're interested in knowing what our plans for MRD as well. In a decentralized world, what would be the MRD applications, both clinically and technologically? But typically, MSK-ACCESS, which enables as well to measure ctDNA could become an MRD application. Operator: And your last question comes from Dan Brennan from TD Cowen. Kyle Boucher: This is Kyle on for Dan. Just wanted to build off the last question a little bit on the customer implementation. You added over 30 customers this quarter. And I believe exiting Q2, you had somewhere around 100 customers in the backlog waiting to be implemented. Can you discuss what this backlog is today? Ross Muken: Yes. So the backlog remains for better or worse at the highest levels in our history. Certainly, I would say we did a good job in the third quarter of continuing to make progress and accelerate go-lives in terms of accounts coming online in the third and fourth quarter and into Q1 of next year. And we have some, as I mentioned, quite significant ones coming online over the next 2 months. Certainly, you can always improve and get better. And so we're spending a lot of time and effort to optimize the end-to-end process. Some of that also at times, is outside of our control, whether it's someone needing a regulatory approval or something on the reimbursement side. But generally, I would say the trend is favorable. The backlog is substantial. It gives us a lot of forward visibility. And again, it's why we remain confident in continuing in our path to kind of growth acceleration in the fourth quarter and into 2026. Kyle Boucher: And then maybe on that then, maybe it's too early to tell, but looking at where consensus is for '26 right now, I think it implies somewhere around mid-teens growth. And I mean, if you add the clinical momentum, pharma getting better, not being a headwind next year, is there any reason to think that growth couldn't be better than that next year? Jurgi Camblong: George? George Cardoza: We've always tried to guide conservatively. And I think, as Ross said, sometimes things aren't always linear. You kind of have a bit of the trends going one way or another. So I think we want to put out guidance that is reasonable. And then certainly, yes, I think you've just seen this past quarter where we put up a very nice number, and we're going to continue to try to overachieve. But I think in terms of the 2026 expectations, where the consensus is, is probably reasonable, and we're going to do everything we can to overperform. Ross Muken: Yes. And so Kyle, I would say, certainly, we're several quarters into a reacceleration. There's no reason to think that there's anything changing in that trajectory in our business. Obviously, we've talked about strong new business momentum all year. And this quarter, we're talking a bit as well around the pharma reacceleration and recovery. But as George said, obviously, we want to be prudent. But at the moment, we're obviously feeling quite confident on our trajectory. And again, our long-term goal is to get back to more historical growth rates that you saw from us in the past. And so that's the ambition. And so we're going to continue to push towards that. Operator: There are no further questions at this time. You may proceed. Jurgi Camblong: Thank you very much for joining us today, and please continue following up. And once again, congrats to the SOPHiA team who delivered a fantastic quarter. Operator: Ladies and gentlemen, this concludes today's conference call. We thank you very much for your participation, and you may now disconnect. Have a great day.
Douglas Constantine: Good morning, and thank you for joining us today for Progressive's third quarter investor event. I'm Doug Constantine, Treasury Controller and I'll be moderator for today's event. The company will not make detailed comments related to its results in addition to those provided in its annual report on Form 10-K, quarterly reports on Form 10-Q and the letter to shareholders, which have been posted to the company's website. Although our quarterly Investor Relations events often include a presentation on a specific portion of our business, we will instead use the 60 minutes scheduled for today's event for introductory comments by our CFO and a question-and-answer session with members of our leadership team. Introductory comments by our CFO were previously recorded. Upon completion of the previously recorded remarks, we will use the balance of the 60 minutes scheduled for this event for live questions and answers with members of our leadership team. As always, discussions in this event may include forward-looking statements. These statements are based on management's current expectations and are subject to many risks and uncertainties that could cause actual events and results to differ materially from those discussed during today's event. Additional information concerning those risks and uncertainties is available in our annual report on Form 10-K for the year ended December 31, 2024, as supplemented by our Form 10-Q for the first, second and third quarters of 2025, where you will find discussions of the risk factors affecting our business, safe harbor statements related to the forward-looking statements and other discussions of the challenges we face. These documents can be found via the Investor Relations section of our website at investors.progressive.com. To begin today, I'm pleased to introduce our CFO, John Sauerland, who will kick us with some introductory comments. John? John Sauerland: Good morning, and thank you for joining Progressive's Third Quarter 2025 Investor Relations Call. We had an excellent quarter with an 89.5 combined ratio, 10% premium growth and policies in force growth of 12% versus a year ago. That policies in force growth equates to 4.2 million more policyholders or almost 7 million more vehicles in force than a year ago. While growth is lower than in recent years, we are still gaining significant market share in capitalizing on the opportunities for growth through robust media spend and competitive rates. Year-to-date, our combined ratio is 87.3%, with 13% premium growth and comprehensive income of $10 billion, which is over 30% ahead of 2024. Rounding out our key performance metrics, our trailing 12-month comprehensive return on equity stands at 37.1%. Before moving to questions, we'd like to take a moment to offer more commentary on the $950 million estimate for policyholder credit expense for Personal Auto customers in Florida that we recognized in September. Florida is Progressive's largest market, and we are the leading provider of Personal Auto insurance in Florida. In 2023, Florida legislators responded to rapidly rising insurance rates by passing House Bill 837, which, among other things, move Florida to a modified comparative negligent system, meaning drivers who are more than 50% at fault for an accident could no longer sue for damages, and this allowed one-way attorney fees. Since House Bill 837 took effect, our average loss cost or pure premiums for Florida injury claims are down between 10% and 20%, and the percentage of Florida personal injury protection or PIP claims, for which we receive lawsuits is down around 60%. While we have been responsive in reflecting these changes in our loss costs through 2 rate reductions for Florida consumers in the past year and another plan for December, the drop in loss cost was more pronounced than we expected. Additionally, obviously, there was significant risk of very costly storms in Florida, and we have seen virtually none in 2025. The Florida excess profits law calls for the return of profits in excess of 500 basis points better than our filed and approved underwriting profit margin over a 3 accident year period. And at quarter end, we estimated that liability at $950 million. For perspective, in 2022 alone, inclusive of Hurricane Ian, our Personal Auto combined ratio was over 100, and those results translated to around $750 million decrease to the excess profits equation for the periods that included 2022. Our Florida auto business is more than 50% bigger now than in 2022. We applaud the legislative changes in House Bill 837 and resulting in more affordable personal auto insurance premiums for consumers, and desire to continue to grow our presence in Florida. Our loss reserves will continue to develop as we handle more claims into the new system, and our estimate for the policyholder credit expense for the 2023 to 2025 period will develop accordingly, with monthly adjustments showing up in the expense line on our income statement. Naturally, going forward, our intent is to manage profitability in Florida to avoid excess profits. And finally, in response to questions we received, while a few other states have statutes covering excess profits, we don't currently foresee other similar exposures. Thank you again for joining us, and we'll now take your questions. Douglas Constantine: This concludes the previously recorded portion of today's event. We now have members of our management team available live to answer questions. [Operator Instructions] Operator: The first question is from the line of Bob Huang with Morgan Stanley. Jian Huang: My first question is on advertising spend. Ad spending this quarter in terms of dollar amount is fairly similar to the last quarter. Just given the increased competition policy in force growth has decelerated, specifically in Personal Auto. Curious if there's a way to think about ad spending going forward. Clearly, these policies are very profitable. Do you need to maintain the current level of ad spending in an increasingly competitive environment? Just curious how you should think about ad spending going forward? Susan Griffith: Yes, Bob, we monitor that every month on an ongoing basis and monitor most importantly, efficiency. So we want to make sure our cost per sale is lower than our targeted acquisition cost, and that remains to be the case. So Pat Callahan and his team, we do a lot of our buying of advertising internally. They look at it overall for a year, with things you have to buy in advance. But ongoing, we have the lever to increase or decrease depend on competition. That's what we'll continue to do. Again, our operating goal is to continue to grow as fast as we can and advertising is a great lever to reach that goal. Jian Huang: Okay. Maybe just clarifying that point a little bit. When you say that you kind of have -- you're buying ads 12 months in advance. Does that mean that essentially for the next 12 months your ad spending is more or less set already? Or are there some levers around that? Or is it just that most of it still is kind of not so certain? I just want to see if there's a clarification on that point. Susan Griffith: We'll do some buys in advance to get some discounted buys, but -- a big majority, a big majority of the ads that we buy are in the auction, and we can -- that's where we can have the levers to pull back or go forward that you've seen in the last several years. Operator: The next question is from the line of Elyse Greenspan with Wells Fargo. Elyse Greenspan: My first question, I was hoping you could just comment just on the competitive environment in general and what you observed in the Q3, and I guess, like a forward view, right, we've seen others pivot to growth as we move through the year? And just how has that impacted that combined, right, with the fact that we're in this environment where you guys said in the Q, you don't need that much rate right now? How does that help you formulate your view about growth, right, both in the near term, like in the fourth quarter, but then also as we think about 2026? Susan Griffith: Thanks, Elyse, and thanks for acknowledging your report last night that we had strong growth in Q3 of '24 because I've been comparing the growth and the fact that we've slowed is sort of funny to me because of how much we've grown on such a big base. So I appreciate you acknowledging that. So yes, the competitive environment has gotten stronger, which we knew would happen. That's why we got out in advance of rates to capture all the growth that we did, and we did. This is when the fun starts. So competition is great. It's great for customers and consumers. And so we'll continue to find ways with which to grow. We have a lot out there in terms of as we look at each state, each channel, different factors in terms of Sams, Wrights, Robinsons, and we have a strategy to grow all of the above. And probably, the biggest growth point for us, Elyse, is when we think of Robinsons. So we have -- we want to grow in every single persona. So we love Sams as long as we can make our calendar year profitable. But we want to grow Robinsons because that market is about a $230 billion addressable market, and we have a low percentage of that share. So there's a lot of opportunity. I'll probably go into a little bit more detail than you need. But I think as you think about not just fourth quarter, but especially as we get into '26 and '27. And the area of our focus will be more Robinsons because we're in such a different position than we were a few years ago. So as you know, we needed rate increases, we needed better segmentation, we needed some cost sharing to go into the policies, we needed to exit DP3. There's a lot of things that we did that I referred to a couple of different times of our 5-point blueprint to get to where we need to go to. We did just that. We increased rates from 22% to 24%, about 55% and continue, but on a much more moderate level because we're in such a different position. Our calendar year combined ratio now on property is about 78%, and granted some of that is favorable reserve development as well as we haven't had many storms at all in 2025, but that is a great position to be in. And so as we think about our growth, we think about -- we have a framework that we're using called a new business readiness growth. And we look at the assessment of adequate rate level, segmentation, so which product is in the market, cost sharing, interstate diversification, regulation and market conditions. And when we look at all those factors, what we look at state by state is where do we want to grow and where we think we can grow and how are we positioned in those states. So currently, there's about 30 states -- 33 states where we want to -- we're going to spur on growth. And about 20 of those are in our growth states that we've called growth states and 13 are more volatile. We'll be a little bit more conservative in the volatile state, but that really opens us up broadly for more Robinsons, for more growth. And as you can imagine, in John's opening statement, he talked about VIF, Vehicles in Force, which we don't publicly talk about. We talk about PIF. But when you compare the $4.2 million PIF growth year-over-year, that equates to about $7 million VIF growth. You can imagine that this growth with more Robinsons is much higher because they're multicar and multiproduct households. So competition is there. We have a lot on the horizon to spur on growth, and we're pretty excited about it. Elyse Greenspan: And then my follow-up is just, I guess, on margins and tariffs. It seems like from the Q commentary that you guys really have not seen an impact yet. So I just want to make sure I'm reading the comments correctly. And then, do you guys still expect that perhaps we could see an impact on loss trend in margins as we move through the balance of the year? Susan Griffith: Yes, you read that exactly correct. We haven't seen much on that. It might be because there's inventory and of course, the tariff schematic has changed along the way. But we're still -- we're looking at low single digits, and we have the margins to be able to absorb that. So we're not too worried about tariffs at this point. Of course, that could change. But at this point, we're not too worried about it. Operator: The next question is from the line of Mike Zaremski with BMO. Michael Zaremski: My first question is on, hopefully, teasing out premiums per policy when we just kind of prudently divide premiums by PIF, and this is for Personal Auto. It's been slightly negative for a while now, which appears to be different from the kind of the flattish pricing you've been speaking to. So trying to tease out whether the negativity is coming from just some of the Florida rate reductions? Is the December one going to be a large one if you want to preview that? Or is it coming from just other actions you're talking about policyholders switching to lower-cost policies, et cetera? Susan Griffith: Yes. I think, Mike, there's a lot of things happening. Our average written premium is affected by our rate decreases. And obviously, it went up tremendously in '23 into '24 with all of the increases that we took based on inflation. I think the reaction might be a little bit on growth, although 12% PIF growth on a 14% PIF growth to me is really unheard of. And any time we're in anywhere near that double-digit growth, we're pretty darn excited, at an 89.5% with the $950 million accrual. So the Florida situation is just that. And we're going to tell you what we know when we know it. So as John said, we'll continue to revise our accrual as the year plays out. So in a couple of weeks, you'll know if the accrual has gone up or down for October and then there are sometimes late year storms, I think in 2024, Helene and Milton were both in September and October. So we'll watch those. But I feel really good about where we're at. I mean if we had a crystal ball in Florida, we might have done things differently. But I think we have handled that really well. We're very large. They're the largest. And as John said in his opening statements, I -- and I've said this before, I'm going to commend Governor DeSantis and Commissioner Yaworsky for this legislative change with House Bill 837. It really has had a profound and a momentous effect on the state of Florida's insurance market. And I've been in this business about 38 years. I would never imagine these changes and how great they are for the benefit of Florida consumers. So we'll continue to watch that. But I think from a premium per policy, we're always going to be competitive and segments change, and that kind of all goes into the math. Michael Zaremski: Okay. Got it. Maybe pivoting to, Tricia, your remarks about share buybacks potentially being a bigger lever than historically. Can you talk about just the framework there? Should we -- are you alluding to the special dividend being put into buybacks instead at current valuations or for both? Or anything -- any color would be helpful. Susan Griffith: Yes. When we have excess capital, we think of it in 3 ways. And obviously, we're -- I just talked a little bit when I answered Elyse's questions about our desire to continue to grow and our actions around that. And then, of course, we look at share buybacks if we believe it's under our intrinsic value. Of course, we always buy enough shares to dilute the stock compensation in any given year. We have the ability to do that. And you'll see in our monthly release the actual number of shares we buy back each month as well as the average price. And so you'll see that in a few weeks as well. We have a company-wide 10b5-1 that we file with certain price points to buy back stock if we think it's under our value. And so you'll see our actions that we took in October in a few weeks. And then we've been in party discussions with the Board of Directors in the last couple of meetings on what we think could be a dividend. And of course, that will ultimately be their choice, and we'll have another conversation in December. And with that, we'll kind of be watching our ability to buy back more as well as what we think if we have a dividend, what it will be. But those are conversations that are constantly happening within our walls and with our Board of Directors. Michael Zaremski: So just, Tricia, just to be clear, were you signaling a change in capital management tone by stating the buyback language? Or are you saying this is just business as usual discussion with the Board? Susan Griffith: All I was saying was that we're very cognizant when the shares -- when we believe the shares are under our intrinsic value, and we typically, if we have the capital, take action when that happens. Operator: The next question is from the line of Tracy Benguigui with Wolfe Research. Tracy Benguigui: I have a question about your Florida excess profit statute. When you perform the same exercise next year, let's call it, September for accident years '24 to '26 to see if you owe any excess profits in early '27. Is there a scenario where you'll be paying another Florida excess profit statute given all the favorable reserve development you experienced in the state in recent years? Or do the excess credits you're paying in '26 basically neutralize a lot of those excess profits that you could owe in '27? Susan Griffith: Well, we don't know. And we're going to -- as I said earlier, we're going to continue to refine our accrual as each month goes by for this 3-year trailing period. It's -- and at that point at the end of this year, we'll know the sort of fully like you said, neutralized amount for that. And so the hard part, and we've tried to signal this about Florida is the storm season is typically at the end of the year. So we're putting another decrease in, in December. We'll watch that closely. I think John said, we'll do what we can to avoid a similar situation in '27 for calendar year '26, '25, '24, but we feel good about where we're at right now with the accrual and we'll continue to revise that. Tracy Benguigui: Okay. And you saw that Florida auto business is more than 50% bigger now than in '22, and you're managing the profitability in Florida to avoid those excess profits and you took two rate cuts and you're going to take another one. So my question is on bundling. Can you share how much of your homeowner policies have grown in Florida? And how you're thinking about your property exposure relative to your risk appetite? Susan Griffith: Yes. Our property growth in Florida has been minimal. Several years ago, we reviewed our policies in Florida to get to where we -- where we are in terms of our readiness growth. We had a lot of DP-3. We had a lot of coastal properties. And so we had a lot of nonrenewals that we gave to another company to be able to write. We will write a little bit in Florida now, mostly new construction. That's a place where like we say, when we talk about volatile states that we will not be -- have huge aggressive growth, but we'll grow where we think we can and make our target profit margins. But the growth in the property book has not been huge. Operator: The next question is from the line of Jimmy Bhullar with JPMorgan. Jamminder Bhullar: I had a question just on competition in Personal Auto. Most competitors have been increasing marketing spending in recent months. Many have alluded to potential price reductions as well just given strong margins. So your comments on competition, is that what they reflect? Or are you seeing competitors get more aggressive with pricing and writing business either with sort of implied losses or very low margins, so just whether its exactly rationale? Susan Griffith: Yes, I just want to say, I think we're seeing all of the above. I think we're seeing a lot of -- we saw a lot of price decreases. We've seen more increase in advertising, and I think that all goes to competitiveness. So I think we think that's good for consumers. And when we think of -- when we think of the strategic pillars, that's one big piece of it but you have to have a really great brand, and our brand has continued to evolve and will continue to evolve to get us on that short list. You have to have for us broad coverage where, when and how customers want to shop. And we have that across the board from our independent agent channel, our direct channel and then we have multiple different areas with which to buy our products or the products of our unaffiliated partners. And then we have -- and this is sometimes underestimated because part of what's been Progressive's success is our people and our culture. That's really hard to put on the spreadsheet for an analyst. We just finished our Gallup survey, we're in the 99% of culture and engagement. That's really important because when you have times where you want to get something done, whether it's growth or decrease expenses or roll out a new product, execution is the name of the game and you have to have a great culture to be able to do that because people want to be able to rally around a singular goal. So those four things we think about all the time. But as far as competitive prices, we're seeing increased advertising and much more competitive pricing out there. Jamminder Bhullar: Okay. And then maybe on a different topic, if I think about your commercial lines business, I would have thought that it would be growing at a fairly fast clip since you were expanding your target markets, broadening coverage, adding new types of coverages, policies. And if we look at the numbers the last couple of years, they've been high single digits, which is decent, but high single-digit premium growth the last couple of quarters. I think premium growth has actually been negative off of modest comp. So how do you think about like maybe talk about your aspirations or growth potential of your Commercial Lines business over the longer term? Susan Griffith: Yes. I think longer term, we have great aspirations. Clearly, FHT has been a headwind, those are -- that was -- it's higher margin business, but we have slowed growth there, a lot due to both rate and non-rate actions. And we've increased our growth in business owners and contractors which are a lower premium, and we've done some 6-month policy. So there -- so what you're seeing is real in the data. However, I think you're correct. We have a couple of areas that we have grown over the years and really wanted to understand them more deeply. And we have pretty complex plans to spur on growth in a couple of different areas. I'm not going to talk about those today. I'll talk about those maybe as we get into them. More specifically, I don't want to show my cards. But yes, we believe that the runway in Commercial Lines continues to be really strong. Operator: The next question is from the line of Gregory Peters with Raymond James. Charles Peters: In your letter in previous comments, you've talked about new products, your Personal Auto product, 8.9 and 9.0 and then in the property area, your next-gen product, 5.0. So as we're sitting here on the outside watching these developments, trying to understand what does Personal Auto product 9.0 mean versus product 8.9 and is the difference that material? And the same question would be applied to the property next-generation product, too? Susan Griffith: Yes. That's a great question. First, I would say we're not very creative when we name our new product model. So I'm going to give you that because you'll see on 5 -- we're 5.0 and 5.1 in property, 8.9, 9.1. I'm going to let Pat take that. But what I would say is years ago, probably around 2016 maybe, we decided that we really wanted to have the pace of our models increase to get more and more variables out there that are predictive of either loss cost or if we wanted to increase a certain segment like the Robinsons. And that's why we end up doing that. But -- and we -- I don't think we're going to go into the specific variables. But I'll let Pat talk about that a little bit more because we have very large R&D groups that work on these product models constantly. Pat, do you want to add anything? Patrick Callahan: Sure. So from a product perspective, we try to do a couple of things every time we roll out a new product. And the first is primarily to match rate to risk better than we did in the prior product. And insurance is a scale game. We have more data than most competitors, and our product is more complex. So we have more segmented or finite data than virtually all competitors in market. So that data enables us to solve what predicts and fits losses more precisely or more accurately than others can. So the first and foremost is to match rate to risk. Second, though is to introduce differentiating coverages that meet consumers' needs to transfer risk to us as the carrier to smooth household cash flows. So a couple of examples of that between 8.9 and 9.0. So 8.9, we introduced Progressive vehicle protection. Think of it as a mechanical breakdown coverage for vehicles that supplements a new car warranty and provides things like lost key fob and dent and ding repair as well as supplementing the OEM warranty as the powertrain warranty or bumper-to-bumper warranty kind of runs off on a new car. And 9.0, similarly, we come out with new segmentation where we solve all the math and the factors to fit the loss curve more precisely while also introducing with 9.0 embedded renters. So now you can embed and buy a renter's insurance coverage as part of your progressive auto policy. So we recognize that renters insurance is a potential gateway product for us in the property space, and we want to make sure that we are attracting multiline customers early in their insurance shopping and buying journey, and we want to protect their household goods as part of a renter's product and allow them to move them into a home or a condo as they change their living situation. So really, a couple of things we do with every product, but primarily it's solved the math to make sure we're as accurate as we can, leveraging our massive scale; and secondarily, get that product to market, as Tricia mentioned, as quick as possible. Charles Peters: As a follow-up question, I'm going to focus pivot to technology and autonomous driving. The new cars coming out have a lot of embedded technologies. Some of them actually can drive themselves to locations, the new Tesla I'm thinking about, in particular. So I think it's appropriate for us to -- as we think about Progressive, what's your view on this technology, emerging technology? And in that moment in time, maybe 15 years from now when we get to a fully autonomous type of environment. Can you talk about how the company is thinking about that? And any color there would be helpful. Susan Griffith: Yes. We've been watching this for many, many years. I think we first did our first, what we call runway model, in 2012 and to try to understand, okay, the implications of cars that are safer. First of all, safer cars are better for the world. So we think that's a great thing. And I think we build that into our product as we think about vehicles that have safer components. Just like you would have at any time with seat belts or backup cameras, those sorts of things. So we're continuing to revise our model. In fact, we're in the midst of doing it right now to try to understand when that will impact us. And we see a lot -- we gather a lot of data. We see a lot of data even when you compare like the Waymo cars in Austin, and we look at our relationships with TNC, we've not seen too much of a change and the changes there with pretty heavy Waymo use has not muted TNC miles. So we're continuing to watch that getting as granular as we can. But at a higher level, what we did years ago is we constructed the 3 horizons to really understand how we can grow across the board, not just in where we've typically grown in our private Passenger Auto and our Commercial Auto, which we're still going to continue to do. But that's when we really built our Commercial Lines product models out. So think of BOP fleet, our relationships with our TNC partners and many other things. And then, of course, our Horizon 3, which are smaller now, but we believe will be bigger in the future. We're going to continue to look at that, we call it, execute, expand, explore to make sure that we have a really robust model as cars get safer and as frequency goes down, and we'll watch that and make a determination of what we need to do to continue to grow. And we talk about this all the time because it's important for society, but it's also important for us to know areas where we can grow, where we can leverage our people, our data, our scale to grow in different ways, and that's what we talk about as we think about autonomous vehicles. It's -- the time frame is always sort of the big question mark. Because if you look at articles in 2012, it would have said everyone is driving around playing bridge in the back of their car. In 2019, that hasn't been the case. So we still think there's a lot to go again. We don't have our heads in the sand, and we'll continue to think about growth in different areas. Operator: The next question is from the line of Alex Scott with Barclays. Taylor Scott: First one I had is on shopping and retention. I was just interested if you could compare sort of the time period where you're taking bigger increases or the industry is taking bigger increases in the shopping activity that was going on then in sort of reaction to higher prices as opposed to maybe what you're expecting over the next 12 months on retention related more to well, you could shop and go get a lower price potentially somewhere. Are you seeing different kinds of sensitivity to that related to up in pricing versus potential for down? Susan Griffith: Yes. I mean I think we're seeing a lot of shopping, which means all customers are going to shop including ours, and you see that in our PLE. Our feeling is just as we talked about in the Q, oftentimes, our customers will reach out to us and we can do a policy review with our cancer preservation team to see if there's something we can do to help them out from a price perspective. If we end up writing a brand-new policy that starts the clock ticking. So that is a little bit of a headwind to PLE, but not when we think about our consumer life expectancy, our household life expectancy. When you look at that, we don't share that data externally. We share PLE. But if you look at our, say, household life expectancy of having a product with Progressive, that's relatively flat. So we feel decent about that. Now if you shop and you end up leaving us, we believe that is just adverse selection because we believe we have the most current up-to-date price, as Pat talked about and I talked about briefly. Our models are constantly changing and revising them to make them more specific to rate versus risk. And if you end up leaving, we believe that we have more data than wherever that customer is going to in terms of profitability. Taylor Scott: Got it. That's helpful. And then going back to the capital discussion. I mean, M&A was something you didn't mention as much relative to like the buyback and variable dividend conversation. And just in light of that conversation you had on autonomous and potentially expanding into other products and so forth. I mean, how does M&A fit into that? How do you think about M&A over a little bit longer time period? And why wouldn't you use a really strong capital position now to explore that? Susan Griffith: I mean M&A is really complicated. We've done a couple of acquisitions in the last 10 or so years, and they were very specific. So we bought ASI, which is now Progressive Home because we wanted that bundled customer and access to that customer, especially in the agency channel. We bought Protective a few years ago to increase our fleet capacity and we'll continue to kind of close the gap on that on the Commercial Lines part. But acquisitions can be tough and integrations can be tough. So we want to make sure it's the right company, the right culture and something that can be additive. . So if we think we want to grow, and there's a company that has a bunch of private passenger auto that we believe we can get anyway, I'm not sure you want to pay the premium on that. That said, we have a group of corporate development group that's always scanning to look to see if something makes sense. And we always want to have dry powder in case something comes up. But again, that's something that I think every company does, including us in terms of just making sure we're on the growth trajectory. Do you want to -- John, do you want to reiterate sort of our capital structure and how we think about regulatory contingent in excess? John Sauerland: Sure. So M&A would be one deployment of excess capital in our minds. Reinvesting capital in the core business is always the first option that we pursue is obviously our returns in that space have been very good. We also obviously considered previous discussions here, the dividend and buyback. And as Tricia noted earlier, as we believe the stock is below what we view as fair market. We will be in market buying back shares when we have the capital to do so. And obviously, right now, our capital position is robust. So we -- as Tricia noted, we have a corporate development team. They are constantly looking at opportunities. And as she said, those opportunities would be focused on expanding the breadth of offerings for Progressive and less so around adding to our core products is our market share growth has shown pretty consistently that we can acquire that business efficiently and effectively in the marketplace, and we think that's a better way to go. Operator: The next question is from the line of Josh Shanker with Bank of America. Joshua Shanker: A couple of things. I'm looking at the Travelers numbers and the Allstate numbers and Hartford's and I have some guesses around GEICO's numbers looking at what they've done. And it doesn't seem like they're growing very quickly as Progressive's on net policy count growth has decelerated. I'm not looking for you to name names, maybe you have some thoughts on where the business is churning to, whether it's mutual, whether it's smaller competitors who are stronger than they've been in the past, whether it's direct business that's going to agencies. Where do you think the churn is moving towards? Susan Griffith: Well, I think that -- and I won't talk specifically about competitors either, but there have been competitors that were all captive and now have access to a nonstandard in the independent agent channel. There's competitors that were only direct that are trying to get into the agency channel. We've always been broad. So that's really the beautiful part about our growth and trajectory, and that's an important part to make sure we are where customers are. And so I won't talk about where things are coming from. But again, I have to reiterate, our growth is substantial based on the best year in the history of Progressive. So much of that growth comes to us. And so we feel great about that, and we'll continue to grow. And I think I've said this the last couple of calls that I want to make sure as we compare ourselves to the best year in the history of Progressive, that we're that were pragmatic about the fact that we still grew PIFs 4.2 million year-over-year, which is substantial, especially at the margins that we have. So that gives us the opportunity to continue to spur on growth, especially with our efficiency around our media spend. Joshua Shanker: And then changing gears a little bit and following up on some other questions. From 2007 to 2019, the dividend program at Progressive is pretty formulaic. We could play at home using gain share month-to-month to figure it out. And then I think in '19, you said there were so many opportunities for investment that you don't want to be forced into that paradigm and it became less possible for us to follow along. And now while you said when the stock is attractive to us, we would also be repurchasers of that, if that were the right thing to do. Is there any formula or way that investors can think about the transparency of capital return the way it was prior to the 2020 year? Susan Griffith: Probably not. That was pretty formulaic, and we were -- one of the reasons we changed that to go from the gain share was that we were experiencing high growth, and we needed that capital to grow. And so we didn't want to have something that we needed to pay out when the better use of that capital was to grow the firm, which is what we were doing over those years. But that program worked well during that time frame, but no longer served us. I mean how you can think about it is we have a lot of capital right now. The Board will make a decision as we do in our 10b5-1 for stock buybacks. The Board will make a decision to make sure that we think about that and the best use of it and the best use of any capital returns to our shareholders. And I can't give you a formula because, again, we do want to have dry powder. We want to make sure that we thought of a bunch of contingencies. But I think that's -- and that's sort of what I tried to say in my letter is that we feel like we have excess capital at this juncture. John Sauerland: I might add a bit on that, Josh. So you all recognize our regulatory capital needs. So historically, we've been in the 3:1 range for our Personal Lines businesses -- Personal Auto business, excuse me, and about half that for home. You might have noted in the Q that we now have approval in a couple of key markets to move to 3.5:1 predominantly for our Personal Auto businesses, but a fairly broad approval so we can move operating leverage higher. So you can do the math around what required surplus is necessary. And when we do that math, we look forward, of course, and we expect to grow. And then we have that contingency capital layer that doesn't change based on that regulatory layer, and that is intended to ensure that we, on a modeled basis, have a very low percentage chance of needing additional surplus. Capital in excess of that, again, we first want to reinvest. But secondly, we look to dividends and buybacks to the extent we feel our stock is undervalued. But you can come to a pretty close estimate of what we consider capital in excess of regulatory and contingency and that would be the capital from which a variable dividend would come. Now what portion of that is up to ultimately the board. But that is a good way to frame what a variable dividend or first excess capital would be, but secondly, what a variable dividend would be. Operator: The next question is from the line of Paul Newsome with Piper Sandler. Jon Paul Newsome: I was hoping you could give us a little bit more thought on and information on the severity trends for auto, both the private passenger and Commercial Auto businesses. It looks like severity is accelerating a little bit in Personal Auto and a little bit more about why that may or may not be happening. And similarly, in Commercial Auto, you've got some peers who have had some pretty significant troubles in that line. Any thoughts on where you may or may not be experiencing similar trends for them? Susan Griffith: Yes, Paul, that's a good question. Just as a reminder, when we look at severity trends, we report out incurred and a lot of our competitors report out in paid. So as an example, when you look at our PD from quarter 3 '24 to '25, it appears to be about 7%. We had a large decrease in reserves in quarter 3 '24, about 2.5 points. So that would be about 4.5 points versus the 7. So that's where it might be a little bit different comparison. BI continues to be specials are outpacing attorney rep, meds are up. So -- and actually some states that minimum limits have gone up. So we feel like industry severity where we're pretty close to the industry on the private passenger auto side. On the commercial line side, I feel like we are in a better position than most of our competitors. We got ahead of rate. The severity is up. But again, same sort of thing with you've got high limits, you've got attorney reps. And -- but we feel good about where we're at from a margin perspective and our ability to grow perspective as well. Jon Paul Newsome: Maybe a second question and a different one. Could you talk a little bit about the level of telematics and whether or not we're getting to at least closer to a point where that is a more mature part of what it does in terms of usage and the ability to slice and dice? Susan Griffith: Yes. I mean telematics has always been a key part of us understanding. I threw out some specific data that we have on our OBD device, I think I did, at least on -- I guess maybe I didn't. It was on frequency. We know from our OBD device that vehicle miles traveled have been down to about 4% in the quarter. So those are kind of things we can point to as we try to dissect and attribute frequency and severity changes. It's -- we have our mobile device, which is the majority of what people choose now in 47 states. So we feel like it's a really powerful part of our variables. And more importantly, for customers that drive safely, it is really an ability to lower your insurance rates pretty substantially. And so that's really the main component of it. And we learn a lot. We have many, many, many miles. How many miles do we have now, do you think? Some billions -- yes lot of miles, a lot of data. And so it will continue to be a big part of it. I'm not sure if that answered your question. Jon Paul Newsome: No, I was just trying to get a sense of whether or not we're getting to a point where the amount of folks that are using the telematics is where you can sort of a maximum given how a certain percentage will never use it, right? So just whether or not we're getting towards the maturity of the product itself. Susan Griffith: I think we have an opportunity to increase that specifically on the agency channel is what I would say. Patrick Callahan: Yes. What I would add to that is Telematics is a really predictive rating variable but it's not one size fits all. So we continue to collect data. We continue to innovate and we continue to refine how we use that data against what you would expect to see from similar drivers and similar vehicles to rate more accurately. So Telematics is a broad brush. And while we're seeing strong consumer adoption, and I think your intuition there is that consumers are getting more comfortable with monitoring on a continuous basis, which, as Tricia mentioned, is just a great way to modify their own behavior to control their insurance costs. But we are not standing still by any means. We have an entire team that leverages larger and larger data sets on a continuous basis to refine how accurately we can use it to ensure that people are getting the most competitive price that's personalized for them and how they drive. Susan Griffith: And one thing I'll mention, which is a little bit further field, but important because it's important for consumer safety is we have the ability for -- to understand that people have been in accidents. And whether the tow-truck or ambulance, I think is really a key important part of feeling like you're cared for as a customer with our Snapshot devices or mobile devices. Operator: The next question is from the line of Ryan Tunis with Cantor Fitzgerald. Ryan Tunis: I just had a follow-up on what's going on in Florida and I wanted to know if I'm thinking about something right. But clearly, that's been an important market for Progressive. I think you guys have top market share there by a mile. I guess my perception has always been an important reason for that is it's a tricky market to underwrite. But talking about the listing of some of the tort reforms, it sounds like it's become a more insurable market. So I guess my concern would be, just like any state where you have meaningful amounts of tort reform kind of creates a lever for competition to come in. So I'm wondering if I'm thinking about that right or if it's something maybe that's unique to Florida that we wouldn't necessarily see in some random state like Minnesota? Susan Griffith: Yes. I think every state has a little nuance, right? You said Minnesota, I went to their high PIP coverage. So I have like all of my thoughts of every state. I think the fact is that it will be more -- there will be more competition because of the tort reform. I think that's good. But again, we are so well ahead of it because it's been our biggest state for a long time, and we feel really good about it, and we feel great about serving the consumers of Florida, and we want to grow there. So we're going to continue to grow and having the right rates and the right legislative changes is going to make that, I think, better for everybody, but most importantly, consumers. Ryan Tunis: Got it. I better shore up my knowledge on Minnesota, sorry about that, Tricia. But the follow-up is -- you mentioned in the 10-Q, there's this dynamic of customers replacing existing policies with new progressive policies. I was just curious if that had a meaningful impact on the new issued app number? Susan Griffith: Yes, I think it does and had a meaningful on the PLE numbers because this is a very unusual dynamic that's been happening. And I think I've heard in other calls, it's happening in some of our competitors. So yes, I don't have the specifics for you. But I think customers are super sensitive right now. We get it. We're doing our best to keep rates stable, lowering rates when it makes sense and we believe that we can grow in certain demographics. But I think it's meaningful kind of across the board. John Sauerland: Yes. I think the ultimate metric, Ryan, is PIF growth. So yes, you're right. To the extent we are rewriting more customers. Those we do report as new customers. But at the end of the day, the PIF count and VIF count to previous conversations, I think, is what you should look at in terms of our growth and our market share. Operator: The next question is from the line of David Motemaden with Evercore ISI. David Motemaden: I was hoping just to touch a little bit on pricing. And I was a little surprised the stable pricing that you put through in the third quarter, just given how strong the margins are even if we put in sort of like a normal catastrophe loss level for the auto business. Is this something that you guys are considering? Is there something on the horizon that would prevent you from doing this? It didn't sound like you were concerned really about tariffs. But just trying to get you just a sense for how you're thinking about potentially lowering price to accelerate growth and also improve retention. Susan Griffith: Yes, we absolutely have been thinking about that. We were more conservative, I think, when the tariffs came out. And so now that, that seems today to be more certain, we are a little bit less concerned. Of course, that could change. I think we decreased rates in about 10 states in this quarter, increased rates in about 6. So we're very surgical on channel, product, state, but we do want to grow. And so we will look to that for both growth and retention in terms of reducing rates. We just want to make sure because of the competitive environment that if we -- we get something for that. So that you don't want to reduce your margins and not get growth. So we're trying to be, like I said, really surgical in each state of when we think we can get growth and that unit growth is important. And so we know we have some margin to play with, and that's really what we're talking about now at every individual state and DMA level. David Motemaden: Got it. And then maybe sort of a higher-level question. Just as we think about the impact of collision avoidance systems and ADAS as it penetrates the fleet more and more. I don't think -- I'm sort of looking at ISO data. I think for 10 years up until 2019, industry frequency was pretty flat. And now when I sort of look since 2019, we obviously had COVID in there, but it's a pretty substantial decrease. So I'm wondering if you can think of -- like just maybe just talk about unpacking some of that decline and improvement in frequency that looks like it's still continuing and sort of how we can think about that as impacting the longer-term growth of the business? Susan Griffith: Yes. I can't predict the future, but take aways that kind of couple of years during COVID because things were so strange with driving. Frequency has been going down for the last 50 years. And as vehicles get safer, as laws around DUIs and other things get more stringent and have gotten more stringent, I think that's a really good thing. Now it's been offset and then some by severity. And that's been where when you look at the models, we have -- when we do our models for our runway, we look at that and severity has increased well more than frequency. And so we'll continue to see what happens in terms of parts, the ability to repair vehicles, the ability to have talent that can actually repair those vehicles as they get more complex, and those are things that we can't predict, but we look at those all the time, and we're deeply looking at those right now as we think about our next 3-year strategy. John Sauerland: The number of cars on the road -- I'm sorry. I was just going to add that the number of cars on the road has also increased. The average age of those vehicles has increased. So all those factors, in addition to the pure premiums or the frequency and severity, affect the size of the marketplace. And the marketplace actually has grown faster than we had anticipated when we first started assessing the long-term runway or market size of the Personal Auto marketplace. David Motemaden: Got it. That's interesting. Yes, it definitely feels like -- I mean, I think it's like '07 until 2019 industry frequency was flat. So like if we look at it over a 50-year time frame to this point, it's definitely still down, but like there is definitely an air pocket in there where the industry was benefiting from like flattish frequency. And so yes, just something I'm sort of thinking about, but I appreciate the -- I appreciate the answers there. Operator: The next question is from the line of Brian Meredith with UBS. Brian Meredith: The first one, and this is I know it seems like it comes up every quarter, but on the PLE drop, can you talk maybe a little bit, is it mix driven this quarter that's kind of dropping everything? Or is it kind of across all the cohorts that you're seeing the drops in PLE? Susan Griffith: I think it's probably more pronounced than Sams. I'm not quite sure, but I think it's mainly across the board. I think everyone's shopping. And when we look at our mix of business just in terms of even growth as you look through our Q and think about just our prospects and conversion, you can see that -- even though that's relating to consumers coming in, we think that has an impact. Do you have anything to add, Pat? Patrick Callahan: Yes, it's pretty much across the board, but driven by different aspects and that Sams are obviously more price-sensitive and household costs are rising. On the Robinsons side, we certainly have taken some action to redistribute our book and to limit access to our property product at some agencies, which has an effect on where they place that business and whether it retains with us. So we are seeing it more broadly. But -- yes, more broadly. Brian Meredith: Great. That's helpful. And just a second question, if I look at where your pure premium was in the third quarter, and granted, I understand it's calendar year, so it's not exact here. And versus average written premium per policy, there's a pretty meaningful kind of spread difference, which would imply some pretty meaningful margin compression here going forward, granted from very attractive margins you're seeing right now. As you think about kind of going forward and what you're looking at, is that something you're anticipating? Is that your margins will compress here in personal auto insurance going forward here closer to the target level? Susan Griffith: I mean I think it depends on if we can get the growth for that. So our operating goal is to grow as fast as we can at a 96 or lower. We're obviously well in advance of that. We've had some conservativeness baked in because of tariffs and some other things. But yes, we could see it compress if we believe we can get that growth, and we're always kind of managing that trade-off. But I believe that's an accurate statement going forward because our ultimate measure of growth is units. So PIFs and VIFs, as we talked about today, and we'll do what we can to continue that growth because, again, if we have a plan around our property, the more auto we can get in there, the more bundles we can get in sort of a nice circle. So we're going to do what we can to grow as long as it serves us in terms of our target profit margins and our operating goal that has been in place for decades. Douglas Constantine: We've exhausted our scheduled time. And so that concludes our event. Those left in the queue can direct their questions directly to me. Alissa, I will hand the call back over to you for closing scripts. Operator: That concludes the Progressive Corporation's third quarter investor event. Information about a replay of the event will be available on the Investor Relations section of Progressive's website for the next year. You may now disconnect.
Operator: Good morning. Welcome to Norwegian Cruise Line Holdings Third Quarter 2025 Earnings Conference Call. My name is Sherry, and I will be your operator. [Operator Instructions]. As a reminder, all participants, this conference is being recorded. I would now like to turn the conference over to your host, Sarah Inmon. Ms. Inmon, please proceed. Sarah Inmon: Thank you, Sherry, and good morning, everyone. Thanks for joining us for our third quarter 2025 earnings call. I'm joined today by Harry Sommer, President and CEO of Norwegian Cruise Line Holdings; and Mark Kempa, Executive Vice President and Chief Financial Officer. As a reminder, this conference call is being simultaneously webcast on the company's Investor Relations website. We will be referring to a slide presentation during the call, which can also be found on our website. Both the conference call and presentation will be available for replay for 30 days following today's call. Before we begin, I would like to cover a few items. Our press release with third quarter 2025 results was issued this morning and is also available on our IR website. This call includes forward-looking statements that involve risks and uncertainties that could cause our actual results to differ materially from such statements. These statements should be considered in conjunction with the cautionary statement contained in our earnings release. Our comments may also reference non-GAAP financial measures. A reconciliation to the most directly comparable GAAP financial measure and other associated disclosures are contained in our earnings release and presentation. Unless otherwise noted, all references to 2025 net yields and adjusted net cruise costs excluding fuel per capacity day are on a constant currency basis and comparisons are to the same period in 2024. With that, I'd like to turn the call over to our CEO, Harry Sommer. Harry? Harry Sommer: Well, thank you, Sarah, and good morning, everyone. Welcome to our third quarter 2025 earnings call. I'll begin my remarks today with a discussion of the third quarter results and recent booking pace, and we'll then get into some recent highlights on our 3 brands and strategy. I'll then provide some brief comments on how 2026 is shaping up before handing the call over to Mark, who will provide a deeper dive into our financial performance and outlook. So to dive right in, I am pleased to report another record quarter with the results that met or exceeded guidance across all metrics. As a result, we are reiterating our full year adjusted EBITDA guidance and raising our guidance for adjusted EPS. Our performance this quarter was driven by solid customer demand which drove load factors higher, reflecting the continued strength of our brands and the execution of our charting the course strategy. As previously stated, we remain committed to balancing return on investment with return on experience, delivering exceptional vacations, driving sustainable financial performance and strengthening our balance sheet. Now delving a bit more into the details of our third quarter results shown on Slide 4, we achieved another quarter of strong performance and solid execution across the business. We met or exceeded guidance we provided in July and delivered the highest quarterly revenue in our company's history. Load Factor finished ahead of expectations at 106.4% driven by stronger-than-anticipated demand from families, particularly at the NCL brand, resulting in net yield growth of 1.5%. Costs were essentially flat year-over-year, which resulted in adjusted EBITDA of approximately $1 billion, a milestone achieved for the first time in company history. As a result, our trailing 12-month adjusted operational EBITDA margin reached 36.7%, an improvement of 220 basis points from last year and another meaningful step towards achieving our charting the course margin target. Finally, adjusted EPS came in at $1.20, exceeded guidance by $0.06. Turning now to recent demand. Bookings in the third quarter marked the strongest third quarter bookings in company history with bookings up over 20% from last year. With this trend continuing into October, all collectively driven by strong demand, not only for short Caribbean sailings this winter, but also for our luxury brands. These results not only underscore the strength of today's demand but also provides a solid foundation for growth in the quarters ahead. Of course, there are other highlights in this eventful quarter that I would like to share. First, on the financial side, which Mark will cover in more detail, we completed a multifaceted capital market transaction that, among other benefits, reduced our share outstanding on a fully diluted basis by more than $38 million or over 7%, materially improving our adjusted EPS. On the guest experience side, we introduced several enhancements, including our new tri-branded loyalty recognition program, which I'll discuss later, and the launch of an enhanced website for the NCL brand. The new site is already delivering results with faster performance, better guest experience and higher conversion rates, resulting in increased bookings. We have also made it easier for guests to personalize their vacation with more targeted pre-cruise offerings. For example, we are now promoting high-value onboard products such as Vibe Beach Club passes, drinks and dining packages, streaming WiFi, spa treatments and short excursions through personalized e-mails and push notifications. Pre-cruise sales at our all-time high levels, which drives higher onboard revenue and higher guest satisfaction and repeat rates. On the sustainability front, we recently announced a landmark agreement with Spain's Repsol for supplying renewable marine fuels at the Port of Barcelona. This 8-year agreement starts this upcoming European season and is a first-of-a-kind partnership in the industry, underscoring our sale and sustained commitment. This agreement is a great example of cross-industry collaboration that could unlock meaningful progress and secure long-term access to renewable marine fuel in Europe. Now I'd like to take a few minutes to discuss the high-level strategies we're executing across our 3 brands, which are summarized on Slide 5. These strategies are designed to ensure we continue delivering exceptional experiences for our guests while advancing our charting the course targets and creating long-term value for our shareholders. At Norwegian Cruise Line, our focus is enhancing the family appeal and experience. At Oceania Cruises, we're working to firmly position the brand within the luxury sector. And at Regent Seven Seas Cruises, we're focused on maintaining its well-earned reputation as the pinnacle of ultra-luxury cruising. Moving to Slide 6. I'll dive into the strategic evolution underway at Norwegian Cruise Line. This is a transformation that has been underway for several months and is now accelerating with sharpened focus under the brand's new leadership including a new Chief Commercial Officer and a new Chief Marketing Officer with a robust search for a world-class leader to head the NCL brand well underway. As part of this evolution, the brand is executing a focused 3-part commercial strategy to drive yields and profitability higher over the next year and into the future. First, we're focusing more on families as a core demographic. We're building brand familiarity through our short Caribbean sailings, which give guests -- which give more guests, particularly families, a chance to experience our amazing product. That exposure helps build loyalty and creates a pipeline of repeat guests for the future. Over time, this will increasingly support one of our key priorities, boosting Load Factors. We are working diligently to attract more families to the brand to experience everything Norwegian has to offer, both onboard and other destinations, particularly our upgraded private island Great Stirrup Cay and through enhanced onboard offering geared towards families. Second, we're strengthening our brand positioning and marketing. To reach the broader family market, NCL is developing a refreshed brand campaign designed to elevate awareness and strengthen emotional connection, which we should launch in early 2026. Alongside that, we're optimizing our marketing mix and spend to ensure we're getting the best possible return on every marketing dollar, creating efficiencies throughout 2026. Lastly, we're elevating the guest experience. We are pleased to reiterate that our previously announced enhancements at Great Stirrup Cay are all on track to open around the holidays, including the new multi-ship pier, welcome center, tram system, an expansive 28,000 square-foot heated pool, the size of an entire cruise ship with a swim-up bar, kids flash zones, 5 shore club, new dining and beverage outlet and dozens of new cabanas. The upcoming summer '26 launch of the Great Tides Water Park will mark another milestone moment for the brand, spanning nearly 6 acres, the water park will feature 19 thrilling water slides, a dynamic river, a huge kids splash zone, a 10- and 15-foot tall cliff jump and an innovative jet karts attraction. It will be the perfect family-friendly addition to our already exceptional island amenities, which includes Silver Cove, and exclusive retreat offering magnificent villas and a beach club. And that's just the additions at Great Stirrup Cay. We're also looking ahead to enhancements across other destinations in our portfolio. In addition, we are expanding our kids and family programming with improved activities and entertainment, ensuring engaging experiences for guests of all ages. At the core of this approach is our ambition to be the brand of choice in the contemporary space for both seasoned travelers and premium families while maximizing profitability. Future travel intent, current bookings, guest satisfaction scores and future onboard cruise sales are all at or near record levels, clear signs that our strategy is working. We continue to actively balance between load factor and price with the goal of optimizing net yield, margins and most importantly, profitability. Now turning to Slide 7. This strategy is already leading to tangible results. Our increased Caribbean presence, additional short sailings, which capitalize on demand for closer to home family vacations and continued investment in our private island destinations are already driving higher Load Factors. The fourth quarter marks the first period where we're truly seeing the shift in strategy come to fruition. In Q4 of this year, we will have the highest mix of short sailings since 2019, reflecting our deliberate move to rebalance Norwegian's deployment towards closer to home itineraries. This approach expands our reach, appealing to a broader mix of guests, particularly premium families and unit cruise travelers, while allowing us to better leverage our private island investments. In Q4, short sailings capacity is increasing over 80% versus prior year. And our Caribbean deployment is moving to over 50% of our total capacity. As a result, we now expect Load Factors to improve over 100 basis points year-over-year to nearly 102%. Now I know many of you will probably ask why our fourth quarter yield guidance has changed from our prior implied guide to growth of 3.5% to 4%. So let me get ahead of that question. As mentioned earlier, we are very focused on Load Factor and increasing brand visibility through our Caribbean product. It has been quite some time since we've had this level of short sailings in our deployment and demand has exceeded our expectations. In the fourth quarter, our Caribbean short sailings are performing quite well, particularly among our targeted family demographic, driving Load Factors higher than we had forecasted. On our Caribbean sailings, we are seeing more families, which means more children in each cabin. We expect core pricing for the first and seconds to be well up. The addition of child as third and fourth in the cabin, however, will naturally dilute blended pricing. The end result remains strong yield growth and strong margin expansion. This is an intentional planned trade-off to drive margins and profitability higher in both the short- and long-term. These early results from our increased short sailing Caribbean deployment are encouraging and reinforce our confidence in the strategy. Now looking ahead, we expect this dynamic to accelerate in the first quarter of 2026 with Load Factor projected to be 200 to 300 basis points higher year-over-year, driven by a meaningful 40% increase in short sailings. Additionally, this will coincide with the soft opening of Great Stirrup Cay new amenities around the holidays, while the more meaningful enhancements will be coming when Great Tides Water Park opens later in summer 2026. When we return next winter, we'll have the full benefit of the new amenities at Great Stirrup Cay and the word of mouth from thousands and thousands of satisfied guests, which will further strengthen performance. Moving on to Slide 8. We're confident this positive momentum will continue throughout 2026 with Load Factors building on 2025 levels and returning to, if not exceeding, 2024 levels, reaching at least 105%. This is sustained progress driven by this new deployment strategy. Now I've spoken a bit about the Norwegian brand, and now I want to turn to our luxury portfolio, Oceania Cruises and Regent Seven Seas Cruises on Slide 9. The opportunity we're seeing in luxury cruising has never been stronger. Global luxury spending continues to expand with experiences ranking as the fastest-growing segment in 2024. Both Oceania and Regent are perfectly positioned to capture this demand. Oceania delivers luxury by choice, offering guests elevated personalized experiences with exceptional culinary offerings, while Regent is the pinnacle of the ultra-luxury all-inclusive luxury segment. To fully capitalize on this opportunity, we brought back Jason Montague earlier this year to lead both brands and drive the next phase of growth. Turning to Slide 10, you can see the tangible progress already underway. The first thing Jason did was optimize the organization, ensuring we have the right leadership structure and the right people in the right roles to support long-term growth. Next, he's been deeply engaged in our fleet management program, including our pipeline of 6 luxury ships, overseeing the design and launch of Oceania Allura and Regent Seven Seas Prestige, both of which will set new standards for design, experience and efficiency. He has also been very focused on elevating our existing fleet and Seven Seas Mariner is the latest example of that commitment. The ship entered dry dock just yesterday, where we're undertaking a full transformation, refreshing suites, reimagining public spaces and introducing an enhanced pool grill featuring a new wood-fired pizzeria concept for relaxed alfresco dining. Seven Seas Voyager will be undergoing a similar revitalization when she enters dry dock next year. Coupled with our 3 new vessels and the upcoming Prestige delivering in 2026, we truly will have the world's most luxurious fleet. Finally, Jason has been laser-focused on enhancing brand positioning and marketing across both brands, ensuring that Oceania is fully recognized in the luxury space, while Regent maintains its place as the pinnacle of ultra-luxury cruising. We know we have 2 extraordinary luxury products. Now it's about telling these brand stories more powerfully and consistently in the market. I want to take a moment to recognize Jason and the entire luxury team, they're doing an outstanding job executing on this strategy, elevating both Regent and Oceania and positioning our luxury portfolio as a key growth driver for 2026 and beyond. Finally, moving to our loyalty program on Slide 11. I'm thrilled to share how we're taking guest recognition to the next level. We recently launched our new loyalty status honoring program, allowing members of Latitudes Rewards, Oceania Club and the Seven Seas Society to have their tier status honored across all 3 of our award-winning brands. Our guests will now be able to enjoy the loyalty perks they've earned, no matter which of our brands they choose to sail. It's a major step forward that makes it easier than ever to explore the world within our NCLH family. This change will also encourage our top guests to try our other brands. It's really about deepening our connection with our most loyal guests, rewarding their commitments and giving them even more ways to vacation better and experience more. And while it's early, the preliminary results of this program have well exceeded our expectations, proving again the power of our brands. And with that, I'll be happy to turn the call over to Mark. Mark Kempa: Thank you, Harry, and good morning, everyone. Let me start with our third quarter results highlighted on Slide 12. We delivered another strong quarter, exceeding or meeting guidance across all metrics. Occupancy came in at 106.4%, nearly 100 basis points above guidance, driven by strong family demand across all itineraries. Net yields grew 1.5%, in line with guidance, fueled by strong pricing growth of over 3%. On the cost side, adjusted net cruise cost ex fuel was down 0.1 point, coming in slightly better than expected as our cost control efforts continue to bear fruit. As a result of better-than-expected fuel consumption, adjusted EBITDA for the quarter was $1.019 billion, above our guidance of $1.015 billion. Adjusted net income came in at $596 million. Adjusted EPS came in $0.06 ahead of guidance at $1.20. Overall, this was a solid quarter, consistent with our expectations. Moving on to fourth quarter and full year guidance on Slide 13. We expect occupancy to be approximately 101.9% in the quarter, roughly 100 basis points above the prior year and our previous implied guidance. As Harry mentioned, we are very focused on Load Factor and brand visibility at the Norwegian brand, and we are encouraged by the progress we have made this quarter as family demand surpassed our initial expectations driving occupancy higher. I want to reiterate that we continue to balance Load Factor and price recognizing the natural give and take between the two. As we attract more families, we are seeing more third and fourth guests in a cabin. And naturally, those guests come in at a lower price point which has a modest impact on overall pricing. As a result of this dynamic in the fourth quarter, we expect net yield to grow approximately 3.5% to 4% reflecting our deliberate decision to welcome more families while taking a slight trade-off on price, which remains healthy at nearly 3% growth. As a result, full year net yield growth expectations have been adjusted slightly to 2.4% to 2.5% for the year. Turning to cost in the fourth quarter. Adjusted net cruise cost ex fuel is expected to be essentially flat, up only 50 basis points year-over-year. This is slightly higher than our prior implied guidance for the quarter, primarily due to the timing of certain expenses. As a result, for the full year, we now expect cost to increase 75 basis points, well below inflation. The second year in a row, we have been able to achieve this strong cost control, all while achieving record guest satisfaction scores and repeat rates. We expect fourth quarter adjusted EBITDA to be approximately $555 million and adjusted EPS to be $0.27. As a result, we are reiterating our full year adjusted EBITDA guidance at $2.72 billion and increasing our full year adjusted EPS guidance to $2.10, which represents almost a 19% increase year-over-year. Moving on to Slide 14. I want to take a moment to highlight the strong progress we've made on our cost savings program. Back at our Investor Day in May 2024, we set a bold goal to achieve more than $300 million in savings and we remain fully on track to deliver on that commitment. In 2024, we realized over $100 million in savings, and we're on pace for another $100 million plus in 2025 which has allowed us to limit net cruise cost growth to only about 3/4 of 1%. We are carrying this culture of cost discipline into 2026 and we have full line of sight to achieving at least another $100 million in savings next year, keeping our unit cost growth well below the rate of inflation while continuing to deliver an exceptional guest experience. These cost savings have been a major driver of our continued margin expansion, as you can see on Slide 15. Our adjusted operational EBITDA margin has increased by roughly 600 basis points since year-end 2023, and we remain on track to reach approximately 37% by the end of this year. Looking ahead to 2026, we expect this positive momentum to continue supported by our proven algorithm of low- to mid-single-digit yield growth and sub-inflationary cost growth. The strategic initiatives Harry outlined earlier are central to this plan, from bringing more families to the Norwegian brand and increasing Load Factor, to refreshing our brand and marketing and the launching of new amenities at Great Stirrup Cay this year around the holidays and the new water park next year. At the same time, our luxury brands continue to benefit from strong demand trends and their truly best-in-class offerings. Oceania is building momentum as we position it squarely in the luxury space, and Regent remains the clear leader in ultra-luxury cruising, delivering an unmatched product and service experience. I'm confident that all of these efforts driving both the top and bottom line will enable us to further expand margins and achieve our approximately 39% target next year. Turning to Slide 16. You can see our debt maturity profile, which has been extended and strengthened following our recent capital markets activity. In September, we successfully completed a series of strategic transactions that significantly enhanced our financial flexibility. We refinanced the majority of our 2027 exchangeable notes extending our maturity profile, and reduced our shares outstanding on a fully diluted basis by approximately 38 million shares, all while remaining essentially net leverage neutral. In addition, we refinanced approximately $2 billion of debt, including the replacement of about $1.8 billion of secured debt to unsecured. As a result, we have now fully eliminated all secured notes from our capital structure. These actions underscore our continued focus on optimizing our balance sheet, improving collateral utilization and positioning the company for sustainable long-term growth. Turning to net leverage on Slide 17. I want to emphasize that reducing leverage remains our top financial priority. In the third quarter, net leverage increased slightly from the second quarter to 5.4x from 5.3x. This modest uptick reflects the delivery of Oceania Allura where we took on the associated debt but have not yet annualized the EBITDA contribution from the ship. We now expect to end the year at approximately 5.3x. And excluding the impact of noncash foreign exchange revaluation on our euro-denominated debt related to Norwegian Aqua and Allura -- and Oceania Allura, our leverage would end the year at approximately 5.2x. In a year when we've taken delivery of 2 new vessels, keeping leverage flat is a notable accomplishment and positions us well to achieve our 2026 target of reaching the mid-4x range. Wrapping up, our solid performance so far this year and the ongoing benefits from our cost initiatives reflect meaningful progress on our top financial priorities, deleveraging, expanding margins and fortifying the balance sheet. I'll hand the call back over to Harry to close out the call. Harry Sommer: Well, thank you, Mark. Now looking at Slide 18, I'd like to once again highlight the significant progress we're making towards our key charting the course financial targets. By year-end 2025, we expect adjusted operational EBITDA margin to expand by more than 600 basis points versus 2023. Adjusted EPS to grow nearly threefold, net leverage to decline by 2 full turns and adjusted ROIC to continue its upward trajectory. I'm incredibly proud of what we've accomplished so far in 2025. Looking ahead, 2026 is shaping up to be another outstanding year with capacity set to grow approximately 7% as the Regent Luna and Seven Seas Prestige join the fleet, we expect to see continued strength across all 3 brands. At Norwegian, we anticipate even more families sailing with us further lifting Load Factor and driving margin expansion. Our strong capacity growth, combined with low- to mid-single-digit yield gains and sub-inflationary cost growth is expected to drive meaningful margin expansion and continued deleveraging in 2026. I'm confident in our trajectory and excited about with the last months of 2025 and the year ahead will bring as we continue charting our course to our sustainable, long-term value creation. With that, I'll hand the call back to Sherry to begin the question-and-answer session. Operator: [Operator Instructions] Our first question comes from Brandt Montour with Barclays. Brandt Montour: So heard loud and clear '26 high-level targets are reiterated here. But guys, with a little bit of pressure from mix in the fourth quarter, based on the shift to families as well as it looks like incremental confidence in the occupancy lift for next year, can you give us some sort of additional insights into how that mix shift would affect yields for next year, all else equal? Mark Kempa: Good morning, Brandt, this is Mark. So first and foremost, our job is to maximize yield margins and, of course, earnings growth. And I think that we've been telegraphing consistent with our strategy, we aim to grow yields next year in the low- to mid-single digits. But going back to in line with our strategy, we've been clear that we continue to expand the Norwegian brand into the family segment. As we do that, that obviously brings higher Load Factors, which we have clearly seen both in the third and more importantly, into the fourth quarter, we will see that a significant benefit from that in the first quarter of about a 200 to 300 basis point improvement year-over-year. With that, families and children often bring slightly lower pricing in the overall mix. But importantly, our core customer, that first and second customer, we are seeing meaningful growth in pricing. So we expect to continue to grow yields in that low- to mid-single-digit algorithm. And again, this is in line with our strategy, and we're executing as planned. Brandt Montour: Really helpful color. A second question I have would be on the bookings comment. Harry, you said bookings were up 20%. And maybe clarify if that was in the quarter or the month, I think it was the quarter. But either way, and I don't think that was adjusted for capacity growth, but either way, that's still a really strong figure. Could you kind of square that with the commentary in the release that you're still within the optimal range? I would think that this would sort of push you up toward -- well, at least would push you up within that range, but also the mix is going more Caribbean, you -- that's more shorter in. So again, all else equal, I would think that you're moving away from longer lead time bookings, and it would be something that would be a counter for us there. So maybe square those -- sorry, that's a lot, but could you square those things and what you're kind of seeing with that with that bookings? What's driving that booking acceleration? Harry Sommer: Sure, Brandt. So just to -- there's a lot there. I'll try to cover as much of it as I can, or at least as I can remember. So first off, bookings were up 20%. That was for the entire quarter, not for a specific month. And then I also mentioned that, that increase went into October as well. So both for the quarter, the third quarter, and for the month of October, and I'll just provide further color that it applied to all 3 brands, NCL, Oceania and Regent, all saw that growth. So the growth was broad-based. And of course, while Oceania and Regent don't play much in the Caribbean, the growth on the Oceania and Regent have nothing to do with the Caribbean, but more about the progress that the brand is making from a consumer demand perspective. So on NCL, yes, there are some unique tailwinds, if you will, on bookings. You mentioned capacity. There's also a shift to shorter cruises, which would require us to have more bookings. But fundamentally, we are just seeing a stronger consumer in this Q3 than we saw in last Q3. Operator: Our next question is from Lizzie Dove with Goldman Sachs. Elizabeth Dove: I appreciate what you've said about the kind of dilution from families totally get that. But at the same time, there has been a lot of focus on the Caribbean and whether there is kind of more of a promotional environment there with so much kind of competition, everybody kind of moving the ships there. So curious what you're seeing and whether that has kind of impacted you at all or you expect it to going forward? Harry Sommer: So Lizzie thanks for the question. We're not really seeing anything unusual in the promotional landscape, at least within the competitive set that we play in. What we're seeing this year is normal from both a price and promotional perspective, which is one of the reasons that it will allow us to have this 3.5% to 4% yield increase in Q4 that we've discussed. So no, nothing unusual. Elizabeth Dove: Okay. Got it. And then, I guess, thinking about longer term, your Caribbean capacity is growing, what is the kind of strategy to kind of absorb that capacity in Caribbean? I know you've got the GSC development, but I'm curious if you feel like there's a need to kind of push marketing or how we should think about costs from those kind of private island investments? Just anything like we should consider as we move to 2026. Harry Sommer: So listen, I think it starts with consumer demand, right? And our goal is to create both a brand construct and specific marketing vehicles that will appeal to the demographics that we think would find the Caribbean of interest. We've talked about the shift in both our branding and our marketing communications in my prepared remarks, so I won't repeat them again here. But between the new CMO and the new Chief Commercial Officer that we onboard over the last few months, we're definitely making progress along those fronts. I think things like the build-out of GSC is absolutely going to help. I'll mention that about 1/3 of our guests next year on the NCL brand will visit GSC. It will be our most -- what sort I'm looking for, the destination we go to the most of any destination of the world. So clearly, our investments there are important. I think I mentioned that everything that we're hoping to launch over the holiday period, which is just about a month away is on track. I just personally visited the island about a week ago, and it really looks spectacular. I remind the analyst community that the footprint that we have on GSC is far greater and some of the competitive set, and we plan to utilize it. I think the next phase with the water park coming in the summer of next year, should be a second milestone and an additional game changer in terms of demand. But I think ultimately, between the brand, the marketing vehicle and then the thousands, the tens of thousands of guests that will be visiting at least the initial set of amenities that come online in the holiday period we expect to get pretty good word of mouth. I want to address the second question you asked about marketing. So we have increased marketing spend this year. I want to get the analyst comfort that this flat cost year-over-year was not at the expense of cutting marketing. If anything, we've increased marketing by well over the 75 basis points that our overall cost structure increase, and we were able to save money through efficiencies elsewhere to fund that, and we plan to continue spending on marketing. Marketing is an important part of driving consumer demand. We think we're spending about the right amount now relative to our revenue generation and our goals for next year, and we will continue to spend at these levels into next year, while having strong cost control throughout the P&L, which will enable us to continue the tremendous margin expansion, the 600 basis points we've seen over last year, an additional 200 basis points that we're planning to do margin expansion next year will all be possible even with this increased marketing spend. Operator: Our next question is from Steve Wieczynski with Stifel. Steven Wieczynski: Okay, Mark, you'll probably hit this question. But if we think about next year, you basically just said you expect to grow yields kind of in that low- to mid-single-digit range. And if I look at Slide 14 and I get my handy dandy ruler out to kind of gauge where costs are projected based on that bar chart. They look like they're going to be higher, but not anything crazy. So if we put all that together, it seems like there would be maybe a good bit of upside to your charting the course EPS targets, I'd say, especially now also including your recent capital market transaction. So I'm not sure what you can say or not say about that, but any comments there would be super helpful. Mark Kempa: So first, I love all questions from you. Second, yes, when you get your ruler out on that chart, I want to reiterate through the broader constituency that our target, as we've been maintaining is to deliver sub-inflationary or better unit cost growth. And we've been very successful at doing that now for 2 years in a row. And we certainly maintain and have a clear line of sight on that for 2026. Look, I think when it comes to the charting the course targets as you've heard today, we are reiterating our confidence in hitting those targets. We are executing on our strategy. Of course, it's early in the year. We do have a lot more Caribbean sailings. So bookings are naturally a little bit closer in. But everything we're seeing today indicates that we're well on our way. So we have confidence on our path. We have confidence in executing our strategy, and that's what we're maintaining. And we'll continue to deliver on that path. Steven Wieczynski: Okay. Got you. And then second question, if we think about the fourth quarter yield guide, Harry and Mark, you kind of -- you obviously called out the yield headwind from adding the third and the fourth and the higher Load Factors. But did you guys embed any impact from things like -- obviously, we've seen an uptick in weather in the fourth quarter or things like the government shutdown? I'm just trying to figure out maybe what that like-for-like yield would look like, excluding the Load Factor lift. Harry Sommer: It's hard to sort of break things down into their components. So I'll start out by saying that we believe a 3.5% to 4% yield growth on a year-over-year basis is strong, and we're very happy with it. If you're asking whether they were modest impacts by the government shutdown, hard not to believe that, that's a modest headwind to the business. I wouldn't necessarily say the weather was a big deal. It was actually a relatively a modest hurricane season as these go, we only had an impact to a handful of Bermuda cruises and 1 or 2 now to Jamaica, none of which had to be canceled, just re-routed. But maybe on the government shut down a little bit. But the macro environment continues to be strong, economy continues to grow, unemployment rates continue to be low. The things that we measure, cruise intent, future cruise sales onboard to ship are all at or near record levels. So we're pleased. And of course, the proof is in the pudding, I've gone out not just for Q3, but for the actual month of October, the month that just ended, that bookings were up over 20% year-over-year across all 3 brands. We think that's a pretty good setup, but we'll continue to move forward. Operator: Our next question is from Robin Farley with UBS. Harry Sommer: I think we lost Robin. Sorry. Operator: Our next question will now be from Matthew Boss with JPMorgan. Matthew Boss: So Harry, maybe a 2-part question. If you could elaborate on the progression of booking trends that you saw through the third quarter and into October. And then if you parse through the mix impact that you cited in the Caribbean, could you speak to underlying pricing trends across itineraries that you're seeing across both family and luxury? Harry Sommer: Well, I don't think there's been a material change. If you're asking whether we saw an acceleration July, August, September, October, they were all 4 of them were good months. I wouldn't necessarily say that one of them stood up or that things have decelerated in any way, maybe a modest acceleration coming into October, but nothing that material. All 4 months were very good months for us. And on the pricing side, I'd make a similar comment. There's nothing that stands out, if you will. I think across the board, we've seen strength. I just want to echo Mark's comments on pricing, you just have to think about NCL a little bit different. We're seeing good pricing increases on the first and second in the cabin as we increase third and fourth, that naturally is a modest headwind to overall average price but still a benefit to yield margin and profitability. So I just want to emphasize that point. But across the board, nothing that stands out one way or another, we're seeing good strength everywhere. Matthew Boss: And then maybe, Mark, as a follow-up, could you help break down the drivers of Load Factors in 2026 that you're expecting to exceed 2024. What you're embedding for the Caribbean relative to opportunity you see year-over-year in Europe? Mark Kempa: Look, thanks, Matt. I think it's a couple of things. Obviously, when we look at '26, we've said we've clearly stated today that we expect to be at least 105% or better. That's clearly being driven by the increased family dynamic, which we have been very clear that we continue to go after. So I think you'll see some significant tailwinds in the first quarter, where we called out at least a 200 to 300 basis point improvement. And then I think as we transition into the latter part of the year, when GSC launch comes online fully, you're going to start to see that accelerate in the latter part of Q3 and Q4 of next year. That, combined with, I think, some further opportunity in Q3, all should contribute to a healthy increase in Load Factor year-over-year. We've said, we've committed, we want to get back to historical Load Factors better. We're doing that not only organically but by expanding our segment into the premium families, and we're starting to see evidence of that. Harry Sommer: And I just want to provide just a little bit more color because while the Caribbean is certainly the headline of the story for Q4 and Q1, when you go into the rest of the year, there are a few other modest tailwinds that will be helping us. On the NCL brand, we shifted from longer European itineraries to shorter European itineraries, primarily 7 nights in the Med, which should allow for a slightly larger family market as well, which is consistent, of course, with the brand strategy. And we're also focused on, if you will, minimizing the number of single cabins that we take across all 3 brands, not just for NCL, but Oceania and Regent. I think '26 will certainly be a year where the entire cycle of the booking curve was booked under what we consider to be good booking conditions. And I think we're just going to -- we're looking for modest benefits in every single aspect of the business. So again, while the Caribbean certainly the headline for Q4 and Q1, it is not the only initiative we're working on to improve occupancy Load Factor for next year. Operator: Our next question is from Conor Cunningham with Melius Research. Conor Cunningham: Maybe to just follow up on that a little bit more. So I understand that the customer dynamic kind of lingers into the first half of 2026. But it seems like the mix headwind becomes a tailwind when Great Stirrup Cay comes online, like the Water Park comes online. So one, is that even right? And then two, can you just talk about the ramp around Great Stirrup Cay as all the new investments start to come online in general? Mark Kempa: Yes. Look, Conor, I think you're absolutely right. When we look at the second half, as we bring on GSC fully, we absolutely believe that's going to be a tailwind. And as a reminder, we -- in our last call -- prepared remarks on our last call, I think we had said that GSC was going to be at least around a 25-point tailwind to yield next year, in part and at a full point on 2027. Recall that although we're passing about 1/3 of our overall system-wide customers through the island next year, by the time the water park gets on, about 2/3 of that base will have already gone through the island. So we're not getting the full benefit in 2026, but we will certainly start to see that ramp up in the latter half. I think when you look -- when you think about Great Stirrup Cay and the announcements about the new amenities in the park, we have certainly seen and -- seen a heightened level of interest from the consumer. We've seen more website bookings, more intent to travel. I think that in part is why we've seen the 20% bookings increase as well. So it's creating excitement. That said, we view what's happening in the latter part of December as the first soft opening. Certainly, we're opening great amenities with one of the largest pools. In fact, I think it's about as large as an entire cruise ship, if I recall correctly. So we are getting buzz. We're getting momentum. And I think as Harry said, as we start to see more word of mouth, on that to the latter part of this year into early next year, I think we're going to continue to see strength and momentum build out of that. Conor Cunningham: Okay. And then maybe I can ask a question on the cost side of the mix dynamics. So it seems like that as occupancy moves up, you get economies of scale, I mean, that naturally makes sense to me. But like are you seeing the cost offset that you would expect? Because at the end of the day, I think you really got -- you're out your whole thought process is around the spread between unit costs and in net yield. So just are you seeing the cost offset as yields are kind of partially -- there's a modest headwind from the ship, the mix dynamic? Mark Kempa: Yes, Conor. I think it's across the board. We continue to see margin expansion. We've expanded margin this year by more than 150 basis points or 200 points of 600 basis points in 2023. That's in part to almost everything we're doing. It's not only the mix, the better and more efficient, closer to home itineraries. But more importantly, it's also the muscle and the scale that we continue to get that we've been demonstrating over the last 2 years. So I think when you put all that together, we continue to flex that muscle. We continue to improve. And of course, in part to some of that is the mix, but that's starting to come into play now. When you look at the last 18 to 24 months, that has not been a mix issue. That just means we've simply been better at delivering a better unit cost overall system-wide. So we certainly are seeing the fruits of that. We're bearing fruit, and we expect to continue to see that into 2026 and beyond. Harry Sommer: And I just want to emphasize, not cost at the extensive product, our guest satisfaction scores and our future onboard bookings continue at record levels that it is super critical to get that message across. Operator: [Operator Instructions] Our question is from Ben Chaiken with Mizuho Securities. Benjamin Chaiken: Maybe the first question is maybe a 3-parter. Maybe remind us to refresh us. You mentioned '26 costs are sub-inflation. What are -- I guess, part one, what are some of the specific opportunities you see next year. I remember at one point during the Investor Day, you went through a couple of kind of like critical examples, I'm not sure if there's anything you can share next year. Part 2, is higher Caribbean exposure on net benefit to cost? Or how should we think about it? And then part 3, how should we think about the impact of occupancy as there should be around, I think it's like 200, 250 basis points of growth. I guess, mechanically, is there any rule of thumb you have on the translation between occupancy to net cruise cost? Mark Kempa: All right. And I'm going to see if I can get all 3 of these. I think the first was on the 2026 detail larger and the larger opportunity. Look, Ben, we've been clear. In this business, there is no silver bullet to just snap your fingers and find a large cost. It is a deliberate and methodical way of looking at the business from the entire process -- development process to the product delivery. So we are focused on a lot of little things and over time, that flywheel starts to turn, and we find more efficiencies across the board. So it's -- we're focused on everything. But again, we've been doing this in a very disciplined and methodical manner. I think when you said -- when you talked about Caribbean capacity, is that a tailwind to cost? Absolutely, sailing closer to home -- sailing closer to home, obviously, gives you some benefits in terms of the ability to deliver the product at a better scale and at a better unit cost. But again, that's all just part of the broader mix. And I think on the last part in terms of the occupancy, when we think about increased occupancy from thirds and fourth, that's typically children or some or the teenage set, there's very little marginal cost related to that. Obviously, that brings in a higher revenue. But I think even when you look at our third quarter, where increased -- were occupant increased by 1 point, fourth quarter, our occupancy is increasing by 1 point, we're not seeing any significant shifts in the cost base for that. So I think that's just another benefit in overall tailwind as we bring more of that third and fourth guest to our mix, we'll continue to improve on our overall unit cost. Benjamin Chaiken: Okay. Got it. That's very helpful. And then just for '26, a quick one. Obviously, capacity growth is higher in '26 than '25. Is there anything abnormal on the D&A side specific to the island investments we should consider? Mark Kempa: No. I think when you look at D&A, and I think when you look at it historically, whether you're doing it on a gross or a net percentage of revenue, I think it's going to be pretty consistent. We've been very clear that our investments in Great Stirrup Cay generally have been modest. Our largest investment, obviously, is the pier where that was around $150 million plus, and I think that gets depreciated probably over at least 30 to 40 years, I don't have the exact number on. So I don't think you would expect to see any sort of uptick in D&A as a result of the Island investments. I will remind you, we do take on -- we do have 7% capacity growth next year. So we will be taking on 2 new ships, Luna in March, April and then Prestige in the latter part of December of '26. Operator: Our next question is from Vince Ciepiel with Cleveland Research. Vince Ciepiel: I wanted to dig into the yield set up a little bit more for next year. And there's been a lot of helpful commentary so far. But I guess I wanted to take it in parts. First, I imagine you have close to half of next year booked a good amount of the first half. Like the core trend line that you're seeing in like-for-like, any way to describe it? And then the second part, there's obviously some moving pieces. You already laid out GSC should be accretive, which is great and helpful. But the 2 other ones I just wanted to clarify. The first new hardware, like accretive, dilutive or probably somewhat neutral -- and then finally, the shift to the Caribbean, a lot of helpful commentary on occupancy should benefit, maybe some cosmetic dilutive impact to per diem. But at the end of the day, like does the shift to the Caribbean a tailwind, a headwind or neutral to yield in '26 as you sit here today? Harry Sommer: So try to get through all 3 parts, if I remember everything, Vince. And by the way, good morning, thanks for joining us today. So you are right. We are about half booked for next year. That's about where we would be at the cycle at this time. When you ask about core trends, we have come out with our algorithm that on this type of measured capacity growth, we're looking for low- to mid-single-digit yield growth, and I believe that our book position right now confirms that, that will be attainable, which, of course, we need to attain in order to hit our target in the core targets, which we forcefully reiterate again today that we'll obtain. In terms of the accretiveness of new hardware, listen, any time a new ship comes on board, we saw it with Aqua this year. We're seeing it with Luna next year on the NCL fleet, we absolutely see a modest tailwind. But keep in mind, it's one ship in a 34 ship fleet. So it's not going to be a tremendous tailwind at the NCLH level. Certainly, on the Oceania and Regent side. We have a new ship for Oceania this year Allura, a new ship for Regent coming on the very end of next year won't really impact 26 months -- 26 months, excuse me, those also function as a modest tailwind. So overall, yes, new ships are accretive. But again, it's just 1 ship in the overall fleet. On Caribbean, we absolutely view this. When you say a tailwind or headwind to yield, I'll make the question a bit broader. We viewed it a tailwind to margin, which is more important to us than a tailwind to yield. So yes, we believe Caribbean are good yielding cruises, but the more important thing is that we can deliver Caribbean at a higher margin than we can deliver some of the exotic itineraries in places like Africa and South America and Asia that these ships have replaced, especially the shorter 3- and 4-day cruises. Vince Ciepiel: It's a really helpful overview there. And then maybe one final one. Just as you shift more Caribbean in the business, probably looks a little bit closer in, I would imagine. And when you watch that trend line in close-in bookings over the last 60, 90 days. How would you characterize it? Harry Sommer: So yes, these Caribbean cruises both in general and certainly the 3- and 4-day cruises, do book closer in. And I think that was one of the factors why we've seen record bookings in Q3 in October, clearly not the only factor, but one of the factors. I'd say the bookings have been nothing short of incredible. I mean, the demand we're seeing for close-in up until a week of sailing even has been unprecedented from at least recent history. So we're very, very pleased with the strength of the consumer and their ability to book across the entire length of the booking curve, including up to the day before cruise. Operator: Our next question is from Patrick Scholes with Truist Securities. Charles Scholes: Two questions. One, can you give us an update on the progress of finding a new Brand President? And then secondly, can you talk a little bit about the changes in selling strategy with the Oceania brand, specifically recent unbundlings. Harry Sommer: Yes. Thank you, Patrick, and listen, on the Brand President, we are conducting an extensive search. We have been very pleased with the caliber of world-class talent. We've been able to attract for the search, I'll say we're pretty deep into it now. No announcement today or probably the next week or two. But I hope we're going to be able to see someone soon. The most important thing for us is to attract a world-class leader that can continue on with the brand promise as we've been evolving it certainly over the last few quarters. On top of the other wonderful talent we have with our new CMO, new Chief Commercial Officer, new Head of Technology and other excellent internal and external candidates that we've brought into the brand to help evolve and make things -- make NCL even greater in the future. In terms of the promo strategy for Oceania, it was a -- I saw a lot of write-ups on it, but honestly, it was a relatively modest change. We've run a series, let's -- I'll call them different promotions over the last year. And we've gotten very good data on what it is that customers value and are willing to pay for, which is one of the core strategies to provide guests with things they value and are willing to pay for. So the promotion we aligned with on Oceania, not really different that much in nature to what we've been doing recently, but really allows us to optimize the construct for our guests and maximize yields and margins. I will say, I've been incredibly pleased both with the level of bookings and the consistency we've been seeing on Oceania. I mean it's become almost like clockwork, that in the Regent brand in terms of their weekly bookings and revenue. So I find that as encouraging as anything else. Operator: Our next question is from Andrew Didora with Bank of America. Andrew Didora: Maybe Harry thinking about these brand changes a little bit more strategically. When you think about -- how do you think about the time line for repositioning these brands? I guess I think about particularly for Norwegian, how long do you think it takes to change that the way you describe it the brand familiarity with families? How long until you reach your targeted run rate? Harry Sommer: So I think with Regent, we're already there. I think -- because the brand changes there were relatively minor. I'd say with Oceania, we're probably about 2/3 along the journey with the evolution of the Oceania brand to luxury and to focus not just on food, but on destination service experiences things that our guests truly value. I think it still is a slightly longer runway. I think I mentioned in my prepared remarks that we're going to be launching some new brand campaigns in Q1 that will certainly help us along. Clearly, the shift to families and the reliance or the focus, I should say, on GSC has already come forward as witnessed [Audio Gap] by our Q4 in '26 occupancy. So it's already beginning to take hold. My guess is on NCL by the middle of next year, I think we would have reached the... Mark Kempa: Andrew, first and foremost, what we've been -- what we've said is reducing leverage is our #1 priority. And we continue to look for ways to do that. Of course, margin expansion is the #1 driver of that, which results in a significant free cash flow. And we continue to see that -- expect to see that to ramp up over the course of the next 24 months. So of course, as we look at the remainder of our capital structure in terms of what's left on the debt side, we're always looking to be opportunistic and we'll continue to do so and we'll continue to strategically make opportunistic trades where it makes sense and improves our overall structure and ratings. Harry Sommer: All right. So with that, I want to thank everyone for today's earnings call. For those of you listening, for those of you who have participated, particularly pleased with our record earnings, our record revenue, our record EBITDA, our record future book position, in terms of new bookings, and all the other wonderful tailwinds that the brand is undertaking. We look forward to sharing the journey ahead with all of you. Thank you all very much. Have a great day. Operator: Thank you. This will conclude today's conference. You may disconnect at this time, and thank you for your participation.
Operator: Good morning and welcome to the Diversified Healthcare Trust Third Quarter 2025 Earnings Conference Call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Matt Murphy, Manager of Investor Relations. Please go ahead. Matt Murphy: Good morning. Joining me on today's call are Chris Bilotto, President and Chief Executive Officer; Matt Brown, Chief Financial Officer and Treasurer; and Anthony Paula, Vice President. Today's call includes a presentation by management, followed by a question-and-answer session with sell-side analysts. Please note that the recording and retransmission of today's conference call is strictly prohibited without the prior written consent of the company. Today's conference call contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and other securities laws. These forward-looking statements are based upon DHC's beliefs and expectations as of today, Tuesday, November 4, 2025. The company undertakes no obligation to revise or publicly release the results of any revision to the forward-looking statements made in today's conference call other than through filings with the Securities and Exchange Commission, or SEC. In addition, this call may contain non-GAAP numbers, including normalized funds from operations or normalized FFO, net operating income or NOI and cash basis net operating income or cash basis NOI. A reconciliation of these non-GAAP measures to net income is available in our financial results package, which can be found on our website at www.dhcreit.com. Actual results may differ materially from those projected in any forward-looking statements. Additional information concerning factors that could cause those differences is contained in our filings with the SEC. Investors are cautioned not to place undue reliance upon any forward-looking statements. And finally, we will be providing guidance on this call, including NOI. We are not providing a reconciliation of these non-GAAP measures as part of our guidance because certain information required for such reconciliation is not available without unreasonable efforts or at all, such as gains and losses or impairment charges related to the disposition of real estate. With that, I would now like to turn the call over to Chris. Christopher Bilotto: Thank you, Matt and good morning, everyone. Thank you for joining our call today. I will begin by providing a high-level review of DHC's third quarter results and an update on the progress we are making toward our key strategic objectives, including an update to the previously announced transition of our AlerisLife-managed communities. Then Anthony will provide more details regarding our quarterly financials and capital spending. And finally, Matt will review our financing activity and liquidity before discussing our outlook for the remainder of the year. After the market closed yesterday, DHC reported third quarter results that highlight continued momentum across our operating segments and steady execution on our initiatives to strengthen DHC's financial position. Total revenue for the quarter was $388.7 million, an increase of 4% year-over-year. Adjusted EBITDAre was $62.9 million and normalized FFO was $9.7 million or $0.04 per share. During the quarter, we took a significant step forward in repositioning our senior housing operating portfolio with the announced sale by AlerisLife of its management contracts and our results reflect a temporary decline in NOI due to elevated labor costs as we transition the 116 AlerisLife communities to new operators. For the transitioning portfolio, compensation expense as a percent of revenue was approximately 240 basis points above the portfolio average for prior periods, representing an incremental cost of roughly $5.1 million for the quarter. These elevated labor costs are primarily driven by required investments in operational support, including payroll allocation for property tours, community reviews, training and onboarding to support incoming operators. Additionally, temporary employee overlap necessary to meet required notice periods prior to terminations has contributed to the increase. As previously communicated, these transitions are part of AlerisLife's planned wind down of its business, which included a broadly marketed process for the sale of the management contracts for the DHC-owned communities to 7 operators and the sale of 17 Aleris-owned communities to unique buyers. 21 of the 116 communities were transitioned to new operators as of quarter end and a total of 85 communities have transitioned as of today's call. We are tracking all 116 communities to transition by year-end. As a 34% owner of AlerisLife, we expect to receive approximately $25 million to $40 million of net proceeds upon the completion of the wind down in 2026. Importantly, this transition -- transaction advances our strategy to establish a more efficient and geographically aligned operating model in line with broader industry trends favoring regional densification. The new DHC operating agreements include a 10-year term and incorporate performance-based incentive and termination structures that enhance accountability and align operator interest with DHC's objectives reinforced by the operators' purchase of these contracts. As part of the diligence and selection of the 7 operators, 5 of whom are new to DHC, our asset management team developed specific criteria to evaluate each operator's capabilities and market expertise. We expect these measures will result in occupancy rates and NOI margins that are more consistent with industry averages. During the third quarter, SHOP occupancy increased 210 basis points year-over-year to 81.5%, marking the fourth consecutive quarter of occupancy growth and RevPOR rose 5.3%, reflecting annual rate increases, gains in care level pricing and reduced discounts and concessions at higher occupied communities. ExpensePOR for the same period increased by 5.1%, driven primarily by temporary labor cost increases associated with the community transitions, wage adjustments and filling of previously opened positions. Collectively, these trends resulted in a 6.9% year-over-year increase in SHOP revenues and a 7.8% increase in consolidated SHOP NOI to $29.6 million. Sequentially, the decline in SHOP NOI is primarily attributable to higher seasonal utility costs, favorable onetime adjustments in Q2 and the noted temporary labor costs related to the community transitions, which are expected to moderate through Q4. Initial feedback from the new operators has been encouraging with feedback complementing opportunities to drive top line revenue with the introduction of additional care levels, above-market rent increases, the opportunity to reduce expenses through rightsizing services with meal offerings, equipment leases and procurement of recurring services and the ability to improve leads to move-in conversion across the portfolio through the integration of each operator's broader CRM tools. We expect to see these initiatives complement our performance over the next several quarters. Based on year-to-date performance and current trends, we are maintaining our full year SHOP NOI guidance range of $132 million to $142 million. Turning to our Medical Office and Life Science portfolio. During the quarter, we completed approximately 86,000 square feet of leasing at weighted average rents of 9% above prior rents for the same space with an average term of nearly 7 years. Consolidated occupancy increased 370 basis points sequentially to 86.6%, primarily driven by the asset sales of vacant or low occupancy properties and leasing during the quarter. Same-property cash basis NOI increased 1.6% year-over-year with margins improving 100 basis points to 58.9%. Looking ahead, 1.5% of annualized revenue in our Medical Office and Life Science portfolio is scheduled to expire through year-end 2025, of which 22,000 square feet or approximately 30 basis points of annualized revenue is expected to vacate. We maintain an active leasing pipeline totaling 717,000 square feet, including approximately 103,000 square feet of new absorption, providing momentum toward higher portfolio occupancy and continued rent growth with average lease terms of 7.6 years and GAAP rent spreads averaging more than 8%. Turning to our capital markets and balance sheet initiatives. In August, our Seaport Innovation joint venture completed a $1 billion refinancing of the Vertex Pharmaceuticals' headquarters in Boston. As part of this transaction, DHC received a $28 million cash distribution, reflecting our 10% share of the proceeds. Following our September issuance of $375 million of senior secured notes in 2030 and with the expected payoff of our remaining 2026 zero coupon bond notes as early as the fourth quarter, DHC will have no debt maturities until 2028. We continue to make significant progress with our noncore asset sales. Year-to-date, DHC has sold 44 properties for $396 million. And as of November 3, we are under agreements or letters of intent to sell 38 properties for $237 million. We are also tracking close -- to close on 25 of these properties in Q4 for total proceeds of $211 million with the remaining balance planned for Q1 2026. These asset sales will reduce capital spending in 2026 and beyond, improve overall occupancy and margins and will contribute to the portfolio's cash flow growth. Looking ahead to 2026, the company is positioned to have its strongest liquidity maturity profile in several years. We believe our share price does not reflect the underlying value of our portfolio or the initiatives management has undertaken this year. With a fully transitioned SHOP portfolio, we believe DHC is well positioned to drive margin expansion, cash flow growth and continued balance sheet improvement, all of which are clear catalysts to drive shareholder value. With that, I will turn the call over to Anthony. Anthony Paula: Thank you, Chris and good morning, everyone. During the third quarter, our same-property cash basis NOI was $62.6 million, representing a 70 basis point increase year-over-year and 9.5% decrease sequentially. Our third quarter SHOP same-property results include improvements in both occupancy and average monthly rate. Same-property occupancy increased 140 basis points year-over-year and 100 basis points sequentially. We also continue to see positive momentum with pricing and achieved an increase in same-property SHOP average monthly rate of 5.3% year-over-year and 60 basis points sequentially. These increases resulted in year-over-year same-property SHOP revenue growth of 6.6%. Excluding the $5.1 million of temporary compensation expense increases related to the transition of management contracts from AlerisLife, adjusted SHOP NOI for the quarter would have been $34.8 million and SHOP NOI margin would have been 10.4%, an increase of 150 basis points from the reported margin of 8.9%. Turning to G&A expense. The third quarter amount includes $5.7 million of business management incentive fee. This incentive fee is driven in part by an increase in DHC's stock price of approximately 90% year-to-date. Any incentive management fee incurred would not be due until January 2026. Excluding the impact of the incentive management fee, G&A expense would have been $7.1 million for the quarter. During the quarter, we invested approximately $43 million of capital, including $35 million in our SHOP communities and $7 million in our Medical Office and Life Science portfolio. We are pleased with our recently completed refreshes and redevelopments as we achieved incremental NOI of $2.8 million during the quarter when compared to prerenovation NOI. These returns are in line with our expectations of delivering a mid-teens ROI. We believe there's continued upside in NOI and occupancy growth at these communities. Based on our current expectations for the fourth quarter, we are reaffirming our 2025 CapEx guidance of $140 million to $160 million. Now I'll turn the call over to Matt. Matthew Brown: Thanks, Anthony and good morning, everyone. We ended the quarter with approximately $351 million of liquidity, including $201 million of unrestricted cash and $150 million available under our undrawn revolving credit facility. In September, we advanced the repayment of our January 2026 zero coupon bonds by issuing $375 million of 5-year secured bonds at a fixed coupon of 7.25%. We used $307 million of the proceeds to partially redeem our January 2026 bonds. The offering was several times oversubscribed, allowing us to improve pricing. This bond is secured by equity pledges on 36 properties, including 21 SHOP communities with an implied valuation of $226,000 per unit. The remaining balance on our 2026 bond is $324 million after a $10.2 million paydown from an encumbered property sale. In addition to this October property sale, subsequent to quarter end, we also sold 11 properties for aggregate gross proceeds of $31 million. As of November 1, we had a total of 38 properties under agreement or LOI for aggregate proceeds of $237 million, with the majority of these closings expected before year-end. We expect to use cash on hand, our undrawn credit facility and proceeds from our pending dispositions to repay all amounts on our January 2026 bonds as early as year-end. After this repayment, we estimate the weighted average interest rate on our remaining debt to be approximately 5.7% with no maturities until 2028. As of September 30, our net debt-to-adjusted EBITDAre was 10x, primarily reflecting the temporary compensation expense increases from our SHOP segment. Excluding these $5.1 million of elevated compensation expenses, leverage would have been 9.3x, an improvement of 70 basis points from the as-reported number. We remain confident in our strategies to reduce leverage by executing on our pending asset sales to repay debt and to drive stronger performance in our SHOP segment. Looking ahead, we expect improvements in adjusted EBITDAre with a full year 2025 range of $275 million to $285 million and trending towards positive cash flow as SHOP operations stabilize and leverage declines. In closing, based on our current liquidity and asset sales, we are confident that January 2026 bonds will be repaid in full as early as year-end. With our next scheduled maturity in 2028, our near-term focus is on ensuring a smooth transition of the remaining communities from AlerisLife to our new managers. While the transition of these communities presents a temporary increase in cost, we are reaffirming our 2025 SHOP NOI guidance of $132 million to $142 million. Looking ahead, we are optimistic about the long-term performance of our SHOP segment. We believe our strategic initiatives will continue to drive improvements in NOI, margins and occupancy across our portfolio. That concludes our prepared remarks. Operator, please open the line for questions. Operator: [Operator Instructions] The first question comes from John Massocca with B. Riley Securities. John Massocca: Maybe looking towards 4Q '25 and in light of the unchanged GAAP NOI guidance, what impact are you expecting from operator transition OpEx costs in 4Q, especially relative to what you experienced in 3Q? Matthew Brown: John, thanks for the question. So as we noted in prepared remarks, approximately $5.1 million of costs in the quarter related to the transitions. As of today, the majority of our communities have now transitioned. So I would say maybe somewhere around $1.5 million to $2 million of impact in the fourth quarter. As it relates to the overall NOI guide, we do expect to continue seeing increases in occupancy and some reductions in expenses, mainly utilities that support the overall guidance being unchanged at $132 million to $142 million for the year. John Massocca: Okay. And then in the prepared remarks, you mentioned you had 10.1% margin ex the transition labor compensation expense. Was that a same-store number? Or was that just for the consolidated portfolio? Matthew Brown: That's a consolidated number. John Massocca: Okay. And then continuing with kind of the operator transition costs, is that something that was kind of contemplated when you put out guidance -- your adjusted guidance in October or even earlier this year? And maybe kind of why -- I understand there are other parties involved but why now for the transition from the AlerisLife assets to third-party operators? Christopher Bilotto: We'll answer that in parts. So with respect to the guidance, we hadn't necessarily contemplated specific interruption or quantified that with respect to the AlerisLife management contracts. But I think the real kind of opportunity is for us to kind of meet the needs and going through the process. And we understood that there was going to be some disruption and quantifying that -- it's variable. And so I think we've done the best we can to kind of help monitor that and mitigate it where appropriate and understand it's kind of a necessary temporary commitment to a broader strategy to bolster the overall performance for the company through the change in relationship to, again, to the 7 new operators and kind of the information that we provided supporting the benefit of that. I think the latter part of your question was why now? I mean, this was really a decision through AlerisLife and its business needs. And I think kind of looking at various option supporting a go forward. Management on that side has done an amazing job turning around performance. And I think that's reflected in kind of the multiyear improvement for DHC. When you look at Aleris-managed communities relative to the other operators, they've outperformed. And given where SHOP is today, they felt like strategically, it was the best benefit and value proposition for the company. And then certainly, with DHC being a 34% owner, there's inherent benefits for that and we've talked about what a lot of those things are, including the diversification of operators. It cleans up the story for DHC without an affiliation. And I think strategically, it positions us to be kind of a better partner with the new operators and to grow our overall performance as we head into 2026 and future years. John Massocca: Okay. Sticking with the SHOP portfolio, I know you kind of gave the updated guidance on the NOI. But are you still expecting occupancy to be in the 82% to 83% range by year-end? Christopher Bilotto: Yes. John Massocca: And then any kind of, I guess, maybe pull on the revenue side you've seen from the transition, just any kind of temporary disruption there? Or has that largely been unaffected by these operator transitions? Christopher Bilotto: Look, it's difficult to kind of quantify the top line with respect to where there may have been disruption or not in the sales process. I mean, certainly, you're seeing in our results that top line performance is trending favorably and really the impact to the quarterly performance is on the expense side. But there's likely some disruption and we think going forward as the transitions are complete, and as Matt noted, we're largely through those in October and I think all but a handful will wrap up towards mid-November. That clearly will provide a lot of -- a better runway, if you will, to avoid any other noise with respect to a transition and focus solely on operations. So again, hard to quantify, probably some impact as we get to mid-November, that will be behind us. John Massocca: Okay. And then anything else to call out on the SHOP operating expense side that was maybe unrelated to these transitions that increased in the quarter versus in 2Q or 1Q? Matthew Brown: No. The major headline was clearly the $5.1 million of elevated comp costs. We did have about a $2.5 million increase sequentially on utilities that was expected and we highlighted that on our Q2 earnings call. But those are the major drivers. John Massocca: Okay. And then switching gears to the disposition activity. Can you maybe provide a little more color on the items in the pipeline today? How close are those to closing? Do you expect that entire pipeline to close by year-end? And I guess maybe what are the variables that could cause some of those to slip into 2026 or maybe fall out of the pipeline, if at all? Christopher Bilotto: Yes. We do expect a small portion of the highlighted dispositions will close in Q1 2026. That's primarily on the SHOP side. There's about 13 communities as part of kind of a portfolio transaction. But just over $200 million is expected to close for the balance of this quarter. And that's a combination of MOB and kind of select SHOP assets. I think the risk with that, I think, is minimal at this stage. I think a lot of what we see today are the -- the closing periods are within the year for the most part. And so we feel pretty good about being in a position to achieve a lion's share of that number this year. So again, close to $200 million for the balance of this year. And then again, there will be some dispositions that will fall into next year. John Massocca: Okay. And then I think with the disposition activity as it seems to be closing, you would have maybe a little bit of excess capital but I guess it depends on how much kind of cash you want to leave on hand. I mean, is there any potential to pay down additional debt with disposition activity completed in '25 beyond those -- that debt maturing in 2026? Or is that more likely to stay as kind of dry powder to deal with whatever comes next in 2026? Matthew Brown: Yes, that would be left on the balance sheet as dry powder as we kind of turn our focus to offense. Our next debt maturity after the '26 is in 2028 and the interest rate on that is 4.75%. So we're better off leaving that debt on the balance sheet and increasing our cash position. Operator: [Operator Instructions] Since there are no more questions, this concludes our question-and-answer session. I would like to turn the conference back over to Chris Bilotto for any closing remarks. Please go ahead. Christopher Bilotto: Thank you. We would like to thank you all for joining our call today and we look forward to meeting with many of you at the Nareit conference in Dallas in December. At that time, we will have substantially completed the SHOP operator transitions and we plan to publish an updated investor presentation for the conference with additional color on our transition progress and supporting performance. Please reach out to Investor Relations if you're interested in scheduling a call with DHC or meeting at Nareit. Operator, that concludes our call. Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Operator: Good day, and welcome to the InfuSystem Third Quarter 2025 Earnings Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Joe Dorame of Lytham Partners. Please go ahead. Joe Dorame: Good morning, and thank you for joining us today to review InfuSystem's Third Quarter 2025 Financial Results ended September 30, 2025. With us today on the call are Carrie Lachance, Chief Executive Officer; and Barry Steele, Chief Financial Officer. After the conclusion of today's prepared remarks, we'll open the call to questions. Before we begin with prepared remarks, I would like to remind everyone certain statements made by the management team of InfuSystem during this conference call constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Except for the statements of historical fact, this conference call may contain forward-looking statements that involve risks and uncertainties, some of which are detailed under Risk Factors in documents filed by the company with the Securities and Exchange Commission, including the annual report on Form 10-K for the year ended December 31, 2024. Forward-looking statements speak only as of the date the statements were made. The company can give no assurance that such forward-looking statements will prove to be correct. InfuSystem does not undertake and specifically disclaims any obligation to update any forward-looking statements, except as required by law. Now I'd like to turn the call over to Carrie Lachance, Chief Executive Officer of InfuSystem. Carrie? Carrie Lachance: Thank you, Joe, and good morning, everyone. Welcome to InfuSystem's Third Quarter Fiscal Year 2025 Earnings Call. Thank you all for joining us today. I will provide a third quarter overview, highlighting key successes, addressing notable challenges and outlining our strategic priorities as we wrap up 2025 and look forward to 2026. Then Barry will provide a detailed summary of our financial results. I will then come back to some closing comments before opening the line to questions. This morning, we published our third quarter earnings report, which illustrated another strong quarter of financial performance, marked by continued revenue growth, margin expansion, robust cash flow, debt reduction and returning capital to our shareholders. In the report, we shared examples of the activities and initiatives we have underway that have contributed to these improved financial metrics. I'll take a few minutes now to walk through some of them. I'll start by discussing some very important projects driving our Wound Care initiatives. We see an opportunity to leverage strategic competencies present in our Patient Solutions segment beyond our existing therapies of oncology and pain management. A key driver for long-term success in this initiative has been taking steps that will lower the processing cost for each patient referral. This is why we acquired Apollo in May of this year. Integrating this company and its systems not only brought us Wound Care customers, but more importantly, presented a quick and low-cost means to upgrade to a more streamlined billing software that will allow us to process upfront paperwork and insurance claims more quickly and efficiently. During the third quarter, we completed key integration tasks, including connecting the new RCM application to our insurance billing clearinghouse, which effectively plugs in our large portfolio of insurance payers. We are now focused on additional system and process improvements, particularly building out the AI and automation enhancements that, that new tool allows and completing the transition of our existing Wound Care volume into the new system. While it's still too early to measure the exact cost reduction benefit, we believe the new system will allow us to process the highly complex Wound Care claims on a cost-efficient basis. The ongoing progress also brings us a few steps closer to onboarding our Oncology and Pain Management billing volume onto the application, further leveraging the investment and improving our overall RCM efficiency. Also in the third quarter, we began accepting patient referrals and booking revenue for pneumatic compression devices, or PCDs, through a new relationship with the device manufacturer. Although the amount of revenue was relatively small, the quickness to launch illustrates not only the strength of our payer portfolio when we bring it to bear on new products, but the significant improvements that the team has made to accelerate the speed at which we bring new products online. For now, we are classifying these revenues in Wound Care category with hopes they will grow large enough in the future to report them separately. Next, I'd like to note 3 developments positively impacting our business beyond Wound Care. First, in addition to the new billing system acquired and integrated via the Apollo acquisition during the third quarter, we went live with a machine learning tool focused on our front-end intake process, which is another complicated and time-consuming manual task. This was done even while continuing the implementation of our ERP level software system upgrade that we began in 2024. Second, we secured a significant new contract with a large hospital system for our Oncology business. Our sales team has had tremendous activity, and this win, along with others, increases our market share and will help us to continue to report Oncology revenue growth at levels exceeding expectations, a challenge given our high market share. The contract win resulting in higher volume will, of course, require us to spend capital on pumps, a fair trade, given Oncology is our most accretive revenue source. In addition, I'll note that Oncology revenue for the third quarter reached an all-time record, which is a common accolade for the business. Finally, we secured a multiyear contract extension with one of our largest national insurance payers. This type of event is not normally newsworthy since we routinely extend existing contracts and add new payers to our very extensive portfolio. However, this one stands out as particularly exciting because it provides enhanced service coverage in product areas we are focused on, such as negative pressure wound therapy devices and PCDs. The extension also contains a much appreciated price increase. The accomplishment demonstrates the depth of our contract relationships as a whole and the value our payers see in our capabilities. Before I turn the call over to Barry, I need to provide an update on developments in our biomedical services business. As we mentioned in our last quarterly call, we've been working with our largest biomedical services customer to modify the contract to reflect changes in market economics and developments in the relationship. During the third quarter, we signed a contract amendment that will improve pricing and shift the relationship to reduce device volume and lower service levels on most of the devices remaining on the contract. These changes will result in a reduction in revenue under the contract by an estimate $6 million to $7 million annually starting in December of this year. However, it is important to note these changes will also result in an expansion of our operating income by reducing costs and expenses in an amount greater than the revenue decline. We are now focused on resizing and relocating our field-based biomedical technician team to conform to the changes. While we are always disappointed by changes that reduced our revenue, we believe that profitability is a key driver of shareholder value and that these strategic adjustments are essential to our continued progress and will leave us with a very solid core field-based biomedical service business from which to build upon. Now I'll turn it over to Barry for a detailed review of the third quarter financial results. Barry? Barry Steele: Thank you, Carrie, and thank you, everyone, on the call for joining us today. I'm going to focus on the main drivers for the current quarter's results, and I'll update you on our current financial position and how it changed during the quarter. And let me start with our financial results for the period. During the third quarter of 2025, our net revenue totaled $36.2 sic [ $36.5 ] million. This was another record, and it represented a $1.2 million or 3.3% increase from the prior year third quarter. The improvement was applicable to increased net revenue for the Patient Services segment, partially offset by lower revenue from Device Solutions. Patient Services net revenue increased by $1.6 million or 7.6% and included increased patient treatment volumes in Oncology and Wound Care. Oncology net revenue increased by nearly $700,000 or 3.6%, and Wound Care revenue was up by 116%, totaling $2 million, which was mainly driven by volume increases in negative pressure wound therapy treatments related to the Smith & Nephew partnership, increased volume from the Apollo acquisition and first-time revenue for pneumatic compression devices. Device Solutions net revenue decreased by $400,000 or 2.9%. This decrease was primarily attributable to about $400,000 in lower revenue volume in biomedical services and a standout large equipment sale during the prior year to a large rental customer that bought out $1 million in lost pumps from their contract. Partially offsetting these declines was a $600,000 nonrecurring benefit to adjust the contract asset related to our largest biomedical services customer. The lower revenue from the biomedical services mainly relates to a remediation contract that benefited the prior year but was nearly completed prior to the current year period. Gross profit for the third quarter of 2025 was $20.8 million, which was also a quarterly record and a $1.8 million or 9.3% increase over the prior year third quarter. Our gross margin percentage at just over 57% increased by 3.1% from the prior year's amount, which was a significant improvement even without the onetime 1.7% boost that received from the contract asset adjustment. The remaining increase was mainly driven by improved labor efficiency and pricing in biomedical services, improved revenue mix favoring higher-margin revenue such as Oncology, lower procurement costs and lower pump disposal expenses. Selling, general and administrative expenses for the third quarter of 2025 totaled $17 million and was $1.2 million or 7.8% higher than the prior year third quarter amount. More than half of this increase was attributable to $773,000 in expenses associated with our project to upgrade our main enterprise resource planning software. Other increases were related to additional headcount and revenue cycle and other personnel needed to support the higher revenue volume and a higher accrual for short-term incentive compensation. Partially offsetting these increases was a lower sales commissions rate related to shifts in revenue mix. Adjusted EBITDA during the 2025 third quarter was $8.3 million, which represented an increase of just over $400,000 or 5.6% from the prior year third quarter adjusted EBITDA. This represented 22.8% of net revenue for 2025, which was slightly above the prior year rate of 22.3% despite a $500,000 increase in spending on the ERP project. On a trailing 12-month basis, adjusted EBITDA totaled $30.2 million, representing a margin of 21.4%. This demonstrates that our focus on profitable revenue growth and operational efficiency is yielding meaningful results. Now a few points on our financial position and capital reserves. On a year-to-date basis, for the first 9 months, we generated operating cash flow totaling over $17 million. This amount was $4.8 million higher than the amount realized during the prior year-to-date period. This increase was due to the higher adjusted EBITDA, which on a year-to-date basis was also up by $4.8 million. Our net capital expenditures were $3.1 million so far in 2025, which represented a significant decrease from $10 million spent during the first 9 months of last year. The amount during the prior period was focused on infusion pumps needed to support increased volume in the Device Solutions rental business, which grew more significantly during that period. Although we anticipate an increased amount of medical equipment purchases during the next quarter to support some new customers in Oncology, we continue to anticipate that our overall capital spending requirements will remain at moderate levels as compared to amounts in prior years as the sources of our future revenue growth will continue to be more weighted towards less capital-intensive revenue sources. We continue to be positioned well to fund continued net revenue growth with the growing cash flow from operations backed by significant liquidity reserves available from our revolving line of credit and manageable leverage and debt service requirements. Our net debt decreased by $5.7 million during the third quarter. We were able to do this despite purchasing $2.2 million of our common stock during the quarter under our $20 million stock repurchase authorization. This brings total shareholder capital return under the plan so far this year to $8.6 million. Our available liquidity continues to be strong and totaled nearly $65 million as of September 30, 2025. At that time, our ratio of net debt to adjusted EBITDA was modest at 0.66x. Our debt consists of borrowings on our revolving line of credit with no term payment requirements. Early in the third quarter, we amended our credit agreement, extending the facility for 2 additional years. The facility now expires in July 2030. We continue to benefit from an outstanding interest rate swap, which fixes our interest rate on $20 million of the outstanding borrowings at a below market rate of 3.8% until April 2028. I'll now turn the call back over to Carrie. Carrie Lachance: Thanks, Barry. As we close out the year with strong momentum, we are reaffirming our full year outlook, targeting adjusted EBITDA margin to be 20% or greater and revenue growth between 6% to 8%. We are entering 2026 as a stronger and more focused company, well positioned to build on this progress. As I reflect back on the efforts we made during the third quarter, the updates that we've shared with you today and what we are currently focusing on as we close out 2025, I hope you will agree that we've been diligent in pursuing the strategic priorities we laid out for you in early August when we reported the second quarter. Those priorities are to execute with discipline, deliver profitable growth and drive long-term value creation for our shareholders. Operator, we are ready for the Q&A portion of the call. Operator: [Operator Instructions] Our first question comes from Kyle Bauser with ROTH Capital Partners. Kyle Bauser: Carrie and Barry, glad to see the very nice progress around prioritizing profitable growth and sort of improving the processes to lower cost here. It sounds like you've made some nice strides across the business in relation to this, particularly in Wound Care and Oncology. It seems like Oncology is probably much more streamlined than kind of the growing Wound Care business. Can you maybe talk a little bit more, Carrie, about the additional enhancements you want to make in the Wound Care business kind of around AI and automation enhancements? Carrie Lachance: Yes, sure. From an AI perspective or an automation perspective, we have our new system that we implemented for the revenue cycle aspect over the past few months. That's working tremendously well. We have a good portion of our business that we're starting to put into that. Our older system didn't have any AI or automation technology that it allowed for. So we're looking forward to plugging even more of the business in, but we can see some efficiencies starting already in those lines of business. Kyle Bauser: Okay. Got it. And regarding the largest biomedical service contract changes, of course, it sounds like it will be much more profitable moving forward, which is great. Can you speak a little bit more about the level of reduction in this contract from a sales perspective? And then I think you mentioned kind of being able to recoup that in profit. So just any more color there would be appreciated. Barry Steele: I'll jump in on that. So it is a pretty significant adjustment for the amount of revenue we'll see from that contract. It's -- we're estimating between $6 million and $7 million for 2 reasons. One, although we increased our price, there are certain locations in certain areas that we were just not working well for us or for the customer. And so our volume will go down about 40%. And the remaining volume will have a decrease in the service level. So we'll only be doing preventive maintenance services and not doing the stand-ready repairs, although we do have an opportunity to get some of those repairs back into our buildings from a depot perspective, they'll ship them into us. We're not sure exactly how much revenue we'll see in that, but we expect that some of the device we've been repairing in the field, we'll see in our depots. The good thing, though, is that helps us to adjust our cost structure significantly. And the economics on the program will now be -- should be pretty good. So it's unfortunate that we have to get back a little revenue, but we'll definitely start from a very good base to build out from. In fact, we've already won some other business with other customers that allows us to start building it back at a much more favorable margin to us. Kyle Bauser: Got it. Appreciate that. And maybe just lastly, kind of related to that, so the 6% to 8% sales growth rate reiterated, which is great. How should we think about kind of the growth profile of Patient Services versus Device Solutions, either for this year or going forward? I guess I'm trying to get at the Device Solutions, what sort of growth profile can we envision there kind of moving forward with the change in this big contract? Barry Steele: Yes. So obviously, that's a pretty big headwind for us for next year just from that one contract adjustment. As you're aware, we do see our growth continuing where we're focused on is in the Wound Care, the Patient Services side with a bunch of different potential therapies and things that we'll look at bringing online. And so I think that will be a little bit slower on the growth side for the Device Solutions side where you see more growth being driven by the Patient Services side as we proceed through the year. The good thing is that the change that we're talking about don't take effect until December. And so there'll be a small impact on the current year for the adjustment to the large biomedical services contract. Kyle Bauser: Okay. Got it. That makes sense. Appreciate that. A great uptake. I think it's great to be prioritizing the profitable growth. Operator: Our next question comes from Matt Hewitt with Craig-Hallum Capital Group. Tollef Kohrman: This is Tollef on for Matt. Given your focus on profitable growth, how do you balance margin improvement with maintaining revenue momentum across your key segments? Barry Steele: Yes, I'll jump in on that one. So clearly, our businesses has a fairly sizable difference from one revenue source to the other in terms of how much margin we get and more specifically, how much capital we have to spend to grow. So we have been focusing on correcting some of the areas where we're a little bit less cash flow or lower margins and making some improvements, and that's what we saw with the significant shift in the large biomedical services contract and focusing where we can grow with our core competencies in areas that we can be more profitable and specifically where we don't have to spend as much capital to grow. So that's -- in order to be able to balance out those decisions about where we focus, we're thinking about return on invested capital. So we have a smaller requirement to get into a market or to grow an area and we can see a good return and good cash flow from that. That's where we've been prioritizing ourselves. So it's not just about the margins we can see, it's about our ability to actually successfully operate in a particular product segment and the quickness of how fast we get cash flow from it. Tollef Kohrman: Okay. And then are there any additional opportunities in Oncology or other therapeutic areas to replicate the success of the hospital system partnership? Carrie Lachance: Yes. [ Tom, ] I do -- we mentioned the PCDs, which -- we were into PCDs a few years ago, and it was -- we struggled in that area a little bit. I think, again, the back-end systems that we're improving, automating some of those areas being a little bit more streamlined there has allowed us to continue that growth and get back into the PCD area. So that, along with Wound Care are 2 areas that we're focused on, and we see a lot of opportunity there. Operator: Your next question comes from Jim Sidoti with Sidoti & Co. James Sidoti: So Barry, I think I heard you say that the ERP expenses in the quarter was about $733,000. Is that right? Barry Steele: $770,000. James Sidoti: $770,000. Barry Steele: Yes. That's an increase -- last year, it was a couple of hundred thousand. So we're $500,000 higher year-over-year. James Sidoti: Okay. And you think that will be gone by 2026, right? Barry Steele: No, we'll have spend in the first quarter. We'll be going live during the first quarter. So it will taper off after that. Keep in mind, though, our overall maintenance cost on the new system versus the old system is a little bit higher. So it doesn't all completely go away, but a very large portion of it goes away starting in the second quarter of next year. James Sidoti: Okay. And that's more than the gain you got from renegotiating the pricing on the contract then? Barry Steele: Well, I think -- I thought you're talking about the ERP and now that we're talking about the medical... James Sidoti: I'm just trying to figure out if this $0.11 if it's a clean EPS number. But it sounds like the onetime benefit was offset by the onetime expense because of the ERP. Barry Steele: That's a good way to look at it. We also had some adjustments to our short-term compensation incentives. So one thing that I think I said in my remarks, and it's probably true is if you back out the impact of the contract adjustments, so part of the price increase we got to account for prior periods because it related to prior services we already completed. That was about $600,000. If you take that out, we still had growth in our gross margin. We still had growth in our EBITDA margin. So -- but you're correct, there is offset expenses in there that you could -- they're unrelated somewhat. But yes, there will be -- if you took those things out, it would be better. James Sidoti: Okay. All right. And then in terms of the new service agreement, so it sounds like that business went from around $11 million to about $6 million to $7 million in terms of revenue. Is that right? Barry Steele: Well, yes, we think we're giving back somewhere between $6 million and $7 million. We don't know exactly because the volume on the repairs that we do in the building. So that -- the sort of in -- the field biomedical services business was around $10 million to $12 million business. It will be quite a bit lower. But keep in mind that we have won some other business that will make up for some of that. James Sidoti: Okay. And on that -- with the $12 million business, can you give us a sense on what the operating profit or the -- yes, the operating profit was for that and what it will be on the small... Barry Steele: I think the way I want to illustrate that is clearly, we were not making margins that we thought we needed to make under the contract. And with the new structure with a higher price and the different -- we're servicing in a way that we're more able to, there's going to be a distinctive improvement in our margins even at -- and I'm not talking about margin percentage, actual margin dollars under the new structure. So maybe going back to... James Sidoti: The impact of the change -- so the operating dollars under this new agreement, when it's down to maybe a $5 million level, you're saying that you'll have more operating profit than you had when you had a $12 million business. Barry Steele: That's correct. James Sidoti: That's correct. Okay. So... Barry Steele: Our top line will be negatively impacted and yet the bottom line will be positively impacted. James Sidoti: And I assume now that some of that excess capacity, you'll try and use that for new customers? Barry Steele: I don't think that we'll look at it as excess capacity. We won't have regional team members. We'll be sending people out from -- we'll be a little bit more concentrated with far as our footprint where we have team members closer to those devices. So some of our operating costs to get people on site will decrease. The nice thing, though, is that I think that as we build it, we'll probably not have a big concentration in one customer, right, that's kind of got the loss leader kind of contract. We do -- since we're winning other contracts, we think that we're going to be able to continue to build out in a smart way with smaller contracts that are much more favorable to us. James Sidoti: In terms of cash, you bought back a couple of million in stock. You paid off, I think, about $3 million in debt this year. Do you think that's going to be the trend for uses of cash going forward? Barry Steele: Yes. I think so. I mean there's other opportunities that from time to time, we'll consider that are M&A possibilities, but you'll hear about those when -- if we get something going. So we're kind of left with -- since we have positive cash flow and the business is becoming less capital intensive, we're left with excess cash to -- and so we'll have to return that to investors in the way that we have or pay down our debt, which is pretty low. So yes, it'll probably be very similar. In the fourth quarter, we definitely -- we have some new customers in Oncology that we'll need to have pumps for. So we'll be increasing the capital spend in the fourth quarter. James Sidoti: But it sounds like with this new strategy that the operating cash flow is going to go up, not going to go down over the next couple of years. Barry Steele: That's a big problem. James Sidoti: Yes. Operator: Our next question comes from Ben Haynor with Lake Street Capital Markets. Benjamin Haynor: Just a couple for me. First off, on the biomedical services contract, are there going to be any sort of onetime expenses to kind of the transition here, moving team members around? Anything related to that? Or that just kind of they get reallocated relatively easily and not any real expenses associated with the change to the contract? Barry Steele: Yes, there's definitely some costs. They're fairly low, both in some severance conditions and some relocations. But it will be in the fourth quarter, very small, very manageable amount. Benjamin Haynor: Okay. And even with that, you would expect the operating profit dollars to go up? Barry Steele: Yes. Keep in mind, the real impact to the revenue and the adjustment in the cost structure will be in early part of next year because we're still servicing the contract at the current level through the end of November. And so there's just a small -- and in December, we don't usually have as much revenue anyway because of preventive maintenance services that occur in the holiday time frame. So really not a big impact in the current year. A small additional expense for some restructuring [indiscernible] through. But again, it's more of an impact to next year where we see less revenue, but even more -- a bigger number reducing some of those costs. Benjamin Haynor: Okay. Makes sense. And then secondly, and I guess lastly for me, on the multiyear extension within the national insurer, you got the pricing improvement, obviously, good there. Can you maybe characterize how much of a boost you got there? And then on the enhanced service coverage, kind of what goes into that? What's the opportunity on that front? Barry Steele: Yes, the price increase is what we -- we do see price increases in other contracts as well. This one will be good for us. And yes, you must -- most of our contracts are -- there's no real concentration. So we'd have to get price increase on all of our contracts for it to be very extremely visible. But it's important for us to be able to indicate that we don't see price decreases in these contracts. Operator: Our next question comes from Matt Hewitt with Craig-Hallum Capital Group. Matthew Hewitt: Is there any updates on the pricing negotiations with ChemoMouthpiece? Carrie Lachance: So from a ChemoMouthpiece, we do actually have some good news from -- we don't have anything back from CMP as far as their approval for a code, a rate for a code. So that should come by the end of this year. However, we have seen some increased placement in the market. So from a sales perspective, we have started to see the uptake into facilities for placement of the device, which has been a really great start. So again, that approval accreditation kind of code will come up by the end of the year. We're waiting for CMP to announce that. And then the rate for that code should be out midyear next year. Operator: This concludes our question-and-answer session. I would like to turn the conference back over to Carrie Lachance for any closing remarks. Carrie Lachance: Thank you. I want to thank everyone for participating on today's call, and we look forward to our fourth quarter call when we will update on our results and progress. Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Operator: Good day, everyone, and welcome to the Thomson Reuters Third Quarter Earnings Call. Today's conference is being recorded. At this time, I'd like to turn the call over to Gary Bisbee, Head of Investor Relations. Please go ahead. Gary Bisbee: Thanks, Jenny. Good morning, and thank you for joining us today for our third quarter 2025 earnings call. I'm joined today by our CEO, Steve Hasker; and our CFO, Mike Eastwood, each of whom will discuss our results and take your questions following their remarks. [Operator Instructions]. Throughout today's presentation, when we compare performance period-on-period, we discuss revenue growth rates before currency as well as on an organic basis. We believe this provides the best basis to measure the underlying performance of the business. Today's presentation contains forward-looking statements and non-IFRS and other supplemental financial measures, which are discussed on this special note slide. Actual results may differ materially due to a number of risks and uncertainties discussed in reports and filings that we provide to regulatory agencies. You may access these documents on our website or by contacting our Investor Relations department. Let me now turn it over to Steve Hasker. Stephen Hasker: Thank you, Gary, and thanks to all of you for joining us today. Momentum continued in the third quarter with revenue in line and margins modestly ahead of our expectations. Total company organic revenues rose 7% with the Big 3 segments growing by 9%. In addition, healthy revenue flow-through, beneficial revenue mix and good cost discipline boosted margins, driving profit ahead of expectations. We are reaffirming our full year 2025 revenue and profit outlook, including our expectation for approximately 9% organic revenue growth for the Big 3 segments. For the full year, our total and organic revenue growth is trending closer to 3% and 7%, respectively, rather than the higher end of the ranges at 3.5% and 7.5% for 3 reasons that are unrelated to our AI innovation momentum. First, a slower ramp of commercial print volumes; secondly, several recent U.S. federal government cancellations and downgrades; and third, slightly softer bookings trends at corporates following internal sales organizational changes aimed at improving future cross-selling. We see these as temporary factors not related to our growing innovation and AI-driven momentum, which continues to build. This is best illustrated by our Legal Professionals segment accelerating to 9% organic revenue growth in the quarter, up from 8% in the first half of 2025 and 7% last year. And this is driven by continued Westlaw momentum and strong double-digit growth from both CoCounsel and Cocounsel drafting. Outside of legal, we continue to see double-digit growth from a number of key franchises, including SafeSend, Confirmation, Pagero, Indirect Tax and our international businesses to name a few. Looking to next year, we're updating our 2026 financial framework. We continue to expect organic revenue of 7.5% to 8%, including approximately 9.5% for the Big 3. And we now see larger year-over-year margin expansion and higher free cash flow than in our prior outlook. On the product front, customer feedback on the Agentic AI launches over the summer has been very positive and initial sales trends are encouraging, especially for the CoCounsel legal integrated offer, Westlaw advantage and CoCounsel for tax, audit and accounting. The competitive dynamics for our core content-enabled technology offerings for Westlaw, Practical Law and our tax engines remains stable. We see incremental competition in the AI assistant space, which is an exciting white space growth opportunity in which CoCounsel remains a clear market leader. Our capital capacity and liquidity remain an asset that we are focused on deploying to create shareholder value. We recently completed the $1 billion share repurchase program announced in mid-August, and we remain extremely well capitalized with a net leverage of only 0.6x at quarter end. We remain committed to a balanced capital allocation approach, and we continue to assess additional inorganic opportunities. With our estimated $9 billion of capital capacity through 2027 after the completion of the buyback, we are positioned to be both aggressive and opportunistic. Now to the results for the quarter. Third quarter organic revenues grew 7%, in line with our expectations. Organic recurring and transactional revenue grew at 9% and 4%, respectively, while print revenue declined 4%. Adjusted EBITDA increased 10% to $672 million, reflecting a 240 basis point margin increase to 37.7%, higher than anticipated due to healthy operating leverage and good cost discipline. Turning to the third quarter results by segment. The Big 3 segments delivered 9% organic revenue growth. Legal organic revenue grew 9%, improving from 8% in the first half of 2025 and 7% for all of last year. Continued momentum from Westlaw and CoCounsel were key drivers. Organic revenues in corporates grew 7%, driven by offerings in our legal, tax and risk portfolios and the segment's international businesses. Tax & Accounting organic revenues grew 10%, driven by our Latin American and U.S. businesses. Reuters News organic revenues rose 3%, driven by growth in the agency business and our contract with LSEG. And lastly, Global Print organic revenues declined 4% year-on-year. In summary, we're pleased with our Q3 results. I'll now comment briefly on questions that we've heard in recent months about the value of our content, specifically Westlaw in an AI environment and whether it could be replicated by large language models or newer AI competitors. We remain very confident in Westlaw's differentiation, which we believe has increased significantly with the development of Deep Research and Agentic AI and the recent launch of Westlaw Advantage. It is very important to understand that litigation is high stakes work with no room for error and significant consequences for being wrong. As a result, professional-grade legal research and workforce tools -- workflow tools need to deliver comprehensive, accurate and up-to-date outputs through trusted solutions with robust data privacy commitments. This is a very high bar, particularly given the scale, complexity and constant change of the legal ecosystem. In the United States, there are hundreds of court systems and tens of millions of annual rulings. We collect content from more than 3,500 sources in multiple formats, and it is completely unstructured. On an annual basis, we process more than 300 million documents into Westlaw. In addition, we have valuable and proprietary second source content, including practical law. Collection of source content is just step 1. Our more than 1,500 attorney editors armed with cutting-edge technologies turn the massive volume of unstructured data into structured proprietary content and intelligence. This includes linking cases, codifying statutes and regulations, authoring head notes and increasingly creating new content for our AI offerings. In total, our team delivers more than 1.6 million editorial enhancements per year. Primary law content, including case law, statutes and regulations is a significant majority of what users search in Westlaw and 85%, I repeat, 85% of this content has been editorially enhanced. So 85% is editorially enhanced. These enhancements are proprietary to Westlaw and make the source content far more valuable. Let me provide a few brief examples. First, the West Key Number System is our proprietary taxonomy or subject classification of the law. It covers more than 140,000 precise legal topic categories, capturing the law at an extremely granular level. The organization of case law, statutes and regulations against this taxonomy is key to the delivery of comprehensive and accurate results, allowing Westlaw users to zero in on very specific points of law. Second, KeyCite, our proprietary citation network has more than 1.4 billion connections linking legal matter with the taxonomy. KeyCite verifies whether a case, statute or regulation is still good law and finds accurate citing references to support legal arguments. And lastly, Headnotes are summaries of the important issues of law within a case and are indexed against the key number system. This allows users to efficiently and accurately pinpoint the cases that best match their facts and desired outcome. To illustrate how the Westlaw content and editorial capabilities deliver value in an AI world, this slide outlines the key steps in our Agentic approach for Westlaw Advantage. As you can see, our AI agents leverage Westlaw's breadth and depth of content. And critically, the extensive expertise of our editorial teams and the significant editorial enhancements that we create differentiates our agents, the output of which is delivered as professional-grade research that lawyers can trust. This graphic highlights another important differentiator for Westlaw. When doing legal research, validating research results is a key final step in the process. This is doubly important with any AI outputs, which need to be checked for inaccuracies and hallucinations. In Westlaw, we have the leading tool set to deliver these validations, bringing confidence to our users that their citations are accurate and their legal arguments are correctly characterizing the law. The validation process leverages several tools I've already mentioned, including Key Number System, KeyCite and Headnotes. In addition, litigation document analyzer reviews legal briefs before they are submitted to the court, identifying inaccurate citations and misstatements of law. Combined with the industry's most robust editorial curated content set, the Westlaw tools provide lawyers with assurance that their legal arguments are on point, and they have done all that they can to prepare for court. While general purpose models can find cases to potentially make a legal argument, delivering against the industry's need for comprehensive, accurate and current research is an extremely high bar. Our market-leading content, our editorial enhancement and our sophisticated tool set have been built over decades to consistently deliver this standard while meeting the industry's data privacy and security needs. Looking forward, we see the evolution of AI from information retrieval and summarization to more complex Agentic workflows as an opportunity for Thomson Reuters that reinforces the value and critical importance of our content and editorial expertise. In complex multistep work, quality content to ground the outputs and subject matter expertise to train and fine-tune the AI are critical to delivering professional-grade results. Our innovation focus is squarely on leveraging these assets leading content and the deepest bench of domain experts in our end markets to deliver agentic solutions that are difficult, if not impossible, to replicate. I'll now turn it over to Mike to review our financial performance. Michael Eastwood: Thanks, Steve. Thanks again for joining us today. As a reminder, I will talk through revenue growth before currency and on an organic basis. Let me start by discussing the third quarter revenue performance for our Big 3 segments. Organic revenue grew 9% in the third quarter, continuing the strong trend from recent periods. Legal Professionals organic revenue grew 9%, improving from 8% in the first half, driven primarily by Westlaw, CoCounsel, CoCounsel Drafting and our international businesses. Government grew 9% in the quarter. In our Corporate segment, organic revenues grew 9%. Recurring revenue grew 9%, while transactional rose 5%. Direct and Indirect Tax, Pagero, Practical Law and our international businesses were key contributors. Looking forward, the Corporate segment growth rate is likely to moderate in the fourth quarter due to the softer-than-planned bookings growth Steve mentioned. Tax & Accounting delivered another strong quarter with organic growth of 10%. Recurring and transactional revenues grew 9% and 12%, respectively. Our Latin America business, SafeSend, UltraTax and the Cloud Audit family of products were key drivers. Moving to Reuters News. Organic revenue rose 3% for the quarter, driven primarily by growth at the agency business and from the news agreement with the data and analytics business of LSEG. Reuters revenue included approximately $7 million of transactional generative AI content licensing revenue in the quarter compared to $8 million in the prior year quarter. Finally, Global Print revenues decreased 4% on an organic basis. On a consolidated basis, third quarter organic revenues increased 7%. At the end of Q3, the percent of our annualized contract value or ACV from products that are Gen AI-enabled was 24%, up from 22% last quarter. Turning to our profitability. Adjusted EBITDA for the Big 3 segments was $606 million, up 9% from the prior year period, with the margin rising 220 basis points to 41.7%. Moving to Reuters News. Adjusted EBITDA was $42 million with a margin of 19.9%. Global Print's adjusted EBITDA was $46 million with a margin of 37.1%. In aggregate, total company adjusted EBITDA was $672 million, a 10% increase versus Q3 2024, reflecting a 240 basis point margin increase to 37.7%. Turning to earnings per share. Adjusted EPS was $0.85 for the quarter versus $0.80 in the prior year period. Currency had a $0.01 positive impact on adjusted EPS in the quarter. Let me now turn to our free cash flow. For the first 9 months of 2025, our free cash flow was approximately $1.4 billion, down 3% from the prior year. Changes in working capital, which are largely timing related, were the largest driver of the decrease. I will also provide a quick update on our capital allocation. In late October, we completed the $1 billion NCIB or share repurchase program we announced in mid-August, acquiring approximately 6 million of our shares. I will conclude with a discussion of our 2025 outlook and 2026 financial framework. As Steve outlined, we are reaffirming our 2025 outlook across all metrics. Our total and organic revenue growth is trending closer to 3% and 7%, respectively, rather than the higher end of the ranges at 3.5% and 7.5% for 3 reasons unrelated to our AI innovation momentum, as Steve mentioned. I will provide a bit more color. First, our Global Print segment has seen a slower-than-expected ramp in commercial print volumes thus far in 2025, which we believe will impact total organic revenue growth by approximately 25 basis points for the year. As a reminder, 10% of our print revenues from commercial where we print books for third-party publishers. Second, our government business, while holding up well overall, has faced a handful of recent downgrades and losses related to the federal efficiency programs that we believe will be an approximate 20 basis point drag to full year organic revenue growth. Third, as I mentioned earlier, we have seen softer bookings trends at our Corporate segment, reflecting the impact of internal sales organizational changes aimed at supporting an increasingly integrated product proposition and driving improved future cross-selling. While these changes have contributed to a slower sales build in 2025 versus our initial expectations, we remain confident in our corporate product portfolio and the segment's growth potential. Note, these organizational changes were only made at our Corporate segment and do not impact our Legal Professionals or Tax & Accounting segments, which have separate sales organizations. Despite these headwinds, we remain confident in achieving our 9% Big 3 organic revenue growth outlook for the year with strong innovation-led momentum continuing in our Legal Professionals and Tax & Accounting Professionals businesses and from our international markets. Turning to the fourth quarter. We expect organic revenue growth of approximately 7%, including approximately 9% for the Big 3. Legal Professionals is likely to again deliver 9% organic revenue growth, assuming no incremental government headwinds materialize. We expect the Q4 adjusted EBITDA margin to be approximately 39%, which includes select onetime investments we are making to transform and increasingly automate how we work. Looking beyond 2025, we are updating our 2026 financial framework to incorporate a more positive margin expansion and free cash flow outlook. We reiterate our outlook for 7.5% to 8% organic revenue growth, driven by approximately 9.5% growth at the Big 3 segments. We are confident in delivering the revenue acceleration this implies driven by positive underlying momentum, the execution of our innovation road maps and to a lesser extent, easier comparisons in several areas, including at Reuters News and Corporates. We now expect to deliver approximately 100 basis points of adjusted EBITDA margin expansion, up from our prior view of 50 or more basis points. Healthy operating leverage, combined with early benefits from using AI and technology to reengineer how we work, provide confidence in this outlook. We are also raising our free cash flow outlook for 2026 to approximately $2.1 billion, which is the upper end of the prior range of $2 billion to $2.1 billion. Our expectations for capital intensity and tax rate remain unchanged. We are currently in our 2026 planning cycle, and we'll provide more detailed 2026 guidance on our Q4 conference call in February. I will now turn it back to Gary for any questions. Gary Bisbee: Thanks. Jenny, we're ready to start the Q&A. Operator: [Operator Instructions] And our first question is going to come from Drew McReynolds from RBC. Drew McReynolds: Appreciate all the detail as usual. Two questions for me. I guess, first on the government and corporate headwinds. I guess the question is ultimately, what's kind of recurring into next year? And for corporates, I believe the organic revenue growth target is 9% to 11%. Just wondering how comfortable you still are with that? And then secondly, Steve, great kind of rundown essentially of the moat within Westlaw. I know it's early days on Agentic AI. Can you comment on the customer kind of reaction to what Agentic is doing from their perspective? And are they able in these first iterations to notice the difference between what you're offering and maybe some others that don't have the deep content access? Stephen Hasker: Yes. Drew, great questions. Let me start with Corporates, and then I'll ask Mike to supplement that. Then I'll go to government, then I'll go to Westlaw. So please be patient, but we'll work our way through these questions. So look, the Corporates sales softness is a bit frustrating because it's temporary and it's self-inflicted. So 2 points. One, we remain even more confident in the end market opportunity. We've said for a while that the TAM is the biggest opportunity for us in Corporates relative to the other segments. And it's the area in which we have the lowest penetration of our legal, tax and risk products. So we think it's our biggest opportunity. And our product set is, we think, pristine and well received by customers. And so we started to see glimpses of this promise last year, as you'll remember, with 10% growth. And underpinning that, we've seen a really nice escalation in our NPS scores across the segments and including in Corporates. But what we haven't seen is an uptick in cross-sell. So at the start of this year, we expanded our global account footprint, and we asked our salespeople to sell more than one product grouping. And I think in retrospect, we got a little ahead of our sort of commercial systems and our infrastructure in doing that. So we've left some of our salespeople, I think, a little disorganized relative to the opportunities and relative to where they were last year. So not up to our high standards. We're through this. We'll learn from it, and we'll be better for it. We've got no more changes in the pipeline and very confident in the 9% to 11% for next year. So that's on the Corporates side. Mike, what would you add to that before we go to government? Michael Eastwood: Terrific summary, Steve. Stephen Hasker: Okay. All right. So government -- so I'd say a couple of things. Our solutions in government, whether they be related to the legal side or the sort of law enforcement and risk side are very well aligned with the administration's agenda around efficiency and law enforcement. And we've seen good growth in state and local. And on a federal level, I think the teams have done a very good job this year in asserting the must-have status of our solutions. And so I think up until the end of the third quarter was so far so good. We had a couple of downgrades and cancellations at the end of the third quarter, which I think has us watching this one vigilantly. In the medium to long term, Drew, we are very confident in the value proposition, both the federal, state and local because tools like Westlaw Advantage and CoCounsel and our various tax solutions drive efficiencies for the government agencies. And of course, our law enforcement work through CLEAR and TRSS is very well aligned with the agenda of this administration, as I said. So medium to long term, we're confident about government, but it is a turbulent environment, and we just wanted to signal that. Unclear as to what it will look like for the next 12 months. But medium to longer term, we're very confident. So let me turn to Westlaw. So as you know, we put in the marketplace Westlaw Advantage, which is the first Deep Research and Agentic research product. The reaction has been very, very strong from customers as it has been to CoCounsel legal and the integration of those products. I'll give you the example of one customer that I've spent some time with that I think is emblematic of the broader environment. He is the managing partner of a major firm in New York City. He spent his career as a litigator and is well known as such. And he was describing how his career has been spent in conference rooms going back and forth with his colleagues and his partners, refining his arguments. Since he's had access to Westlaw Advantage, he is doing much more of that back and forth with our tool than he is with his partners. And so in the early going, there is a change to his behavior in terms of getting to the best, most refined arguments, anticipating the opponent's rebuttals and arguments and anticipating the likely judge's reaction. So we're very excited by the work that Mike Dane and Omar and others have done in developing this product, and we're going to keep investing behind it so that the verification and validation tools that I alluded to get better and better and the product itself gets richer and deeper. Mike, would you add anything there? Michael Eastwood: Nothing to add, Steve. Stephen Hasker: All right. Thanks, Drew. I hope that addresses the questions. . Operator: And our next question is going to come from Vince Valentini from TD Cowen. Vince Valentini: Can I just go back to the government for a second? I just want to make sure I'm clear on what the driver is. Is the government shutdown having an impact or these cancellations happened before that? And can you clarify, do you do work for ICE? Michael Eastwood: Vince, in regards to the first question, the downgrades, cancellations occurred prior to the shutdown. The shutdown has very minimal impact on our monthly -- quarterly revenue based on what we know today. So this occurred prior to the government shutdown. Steve, do you want to address the ICE question? Stephen Hasker: Yes. I mean we -- Vince, I won't go into the specifics of the work we do with various government agencies because it's subject to confidentiality clauses. But we do work with a number of departments on a range of law enforcement matters, and we do that consistent with our trust principles at all time. Vince Valentini: Can I maybe rephrase it? Maybe I shouldn't have been so specific. Is there any chance that the government spending is being temporarily redirected and that's impacting some of the contracts with you and that will ebb and flow over time, but should come back? . Stephen Hasker: It's a little -- I mean, I definitely think that this administration is putting much more emphasis on some things rather than others. And there is a sort of a process of adjustment to that, Vince. But as I said, in response to Drew's question, our tools achieve 2 things for government agencies. One is efficiency and the other is they are essential tools for law enforcement. So we're confident that our must-have status will be maintained and enhanced over time. But there is a level of turbulence as some programs get cut in this adjustment. Michael Eastwood: Yes, Vince, we're continuing -- we'll continue to work with our federal customers on kind of 3 big areas: Efficiency, national security and fraud prevention. We are confident our tools and offerings will be able to support them midterm, long term. Vince Valentini: I'm going to count that as one, Gary, I apologize, but it was 1a and 1b. Just the second question, you got a nice call out on the Amazon call last week on being one of their key customers for their transform product, they call it, they say Thomson Reuters has been able to manipulate 1.5 million lines of code per month 4x faster than they could with previous systems. I'm wondering, is this part of an initial effort to automate more of your internal cost structure and processes? And is there more of this to come over the next couple of years? And what could that potentially mean for future margins? Stephen Hasker: Yes. Thanks, Vince. So we're determined to be on the forefront of this AI transformation in 2 ways. One, in terms of our product development, particularly in and around Agentic AI and Deep Research. And that's an example in the -- first example in the legal space with the launches back at ILTACON in August. Second example, ready to review and then in December, January, ready to advise in our Tax & Accounting, and we're excited about those. We were pleased to see the reference from Amazon. This relates to the internal application of AI and automation tools. So we are applying our own tools, so CoCounsel Legal and CoCounsel for Tax, Accounting and Audit to Norie Campbell's General Counsel team and also to Mike's finance, audit and accounting teams, and we're seeing really promising results from the application of our own tools. We're also, as Amazon alluded to, working with the best tools available to drive automation. I'll defer to Mike as to the sort of financial implications of this, Vince. But rest assured, we're going to be at the forefront in terms of automating everything we do with a singular goal of being able to scale faster and more efficiently and deliver better products and services to our customers. Michael Eastwood: Yes, Vince, a few thoughts. As noted in my prepared remarks, we do anticipate some onetime investment in Q4 2025 to help us transform and increasingly automate how we work. To Steve's point, as we look into 2026, certainly, we view the example that you questioned and Steve addressed as opportunities to help us expand our EBITDA margin. It's one of the reasons why we were able today to expand our EBITDA margin expectations for 2026 by 100 basis points. We're not discussing guidance today beyond 2026, but I think these developments certainly are encouraging for the long term. Vince, while we have the mic, it might be helpful for everyone if I just clarify, when we say for 2026, increasing margin by 100 basis points, that will be 100 basis points off the actual result for fiscal year 2025. Just wanted to clarify that point. Operator: And our next question is going to come from Jason Haas from Wells Fargo. Jason Haas: In the prepared remarks, you made a comment about seeing some incremental competition in AI assistant space. So I was curious if you could just unpack that comment a little bit more. What was meant by that exactly? Stephen Hasker: Yes. Jason, thanks for the question. So the point that I'm trying to make is that we are not seeing any additional competition in our core franchises. So that's legal research and legal know-how and the tax calculation engines, whether that's UltraTax, GoSystem tax or ONESOURCE. So those core franchises have the same competitive dynamics today as they did 12 months ago or 3 years ago. Where we have seen the entrance of new players is in the AI assistant space. Now that is a greenfield sort of white space opportunity for us. And it was the reason that we went out and acquired Casetext and then added Materia and the fantastic team from Materia on the top of that. So that's a white space opportunity for us around CoCounsel, and that's where we see the entry of new players. We're happy with where we sit in that marketplace. We've got some very aggressive product development plans. And I think most importantly, customers are responding well to CoCounsel and its various offerings. So I hope that clarifies. Jason Haas: That's very helpful. And then I wanted to follow up on the Tax & Accounting business. It looks like the organic constant currency growth decels from 11% to 10%. I know these are rounded numbers. But I was curious if you could comment on that. And then can you just talk about your confidence in that accelerating to the 11% to 13% organic growth that you expect in 2026. Michael Eastwood: Yes, Jason, we do have some fluctuations quarter-by-quarter within the Tax & Accounting professional business. We remain confident in delivering 11% for calendar year 2025. And then for 2026, as a reminder, our guidance is 11% to 13%. We work very closely with Elizabeth Beastrom and her team there. We have very strong confidence in delivering 11% to 13% for 2026. We referenced SafeSend in our prepared remarks, which was the acquisition in January of this year, which is performing incredibly well. We expect that to continue into 2026. Steve mentioned Materia, they're additive, which is the recent acquisitions that we did. So we remain quite confident, Jason, with Tax & Accounting professionals. Stephen Hasker: Yes. I would just supplement that the end market is a very healthy one. We start our synergy customer conferences down in Florida tomorrow. We're very much looking forward to that and getting excited about getting together with thousands of our customers in person. The Tax & Accounting and Audit spaces remain a very robust end market with a critical need, and that's shortages of talent. And so Jason, as we develop Ready to Review and Ready to Advise and continue to refine those propositions, we think that, that is going to meet or even exceed the needs of our customers, and that gives us confidence around the 11% to 13% going forward. Operator: And our next question is going to come from Manav Patnaik from Barclays. Manav Patnaik: Steve, I appreciate the slide with the data and the moats there because I think we've heard that as well. But to your earlier answer on the competition is more on the workflow side, and that's why you acquired Casetext, et cetera. Can you help us with any sense of sizing of workflow for you guys and the growth rates there? Because obviously, a lot of these legal tech companies are raising a lot of money at high valuations, citing higher growth rates. So just trying to get a sense of your business there. Stephen Hasker: Yes. Manav, I mean, it's all a bit squishy at the moment, right? We sort of probably monitor the same source as you in terms of how competitors are performing and what sort of growth rates they're seeing, what their ARR levels are at the moment. And what I would tell you is that CoCounsel is at least on par or outpacing everybody else in terms of its size and its growth rate. So it is a competitive landscape insofar as there are lots of promises being made by lots of different new entrants. Where we differentiate ourselves is in the integration of our content and our expertise. So it's not only the content Westlaw, Practical Law and so forth, Checkpoint on the Tax & Accounting side. It's the expertise that 1,500 reference attorneys bring that are able to train the behaviors of an agent to produce a more accurate, more reliable outcome that is supported by pristine data privacy and protection. So a long way of saying, in the early going, we're at or outpacing the newer competitors. And we're very confident -- I hope not arrogant, but we're very confident about the sort of medium- to longer-term prospects given the assets that we bring to this competition. Mike, what would you add? Michael Eastwood: That's a good summary. Stephen Hasker: Okay. All right. I hope that helps. Manav Patnaik: Yes, that was helpful. And I guess just on -- I just had one question on M&A. So I think we all get a sense of all the tuck-in type of deals that you guys are doing and probably that continues. But in the past, Steve, you've talked about potentially larger ones. So just trying to get an update on where the market is at. Is it valuation, timing, like just some more thoughts there. Stephen Hasker: Yes. We're sort of happy -- we're very happy with the tuck-ins that we've done over the last couple of years. Each and every one of them in different ways has performed and been additive to the experience that we're providing in the Big 3. So we'll continue to look for those opportunities centered around our Big 3 segments. If we were to do something larger, it would be in the areas where we really see great promise. So areas like risk, fraud and compliance, building on CLEAR, the CLEAR data set and areas like IDT, Indirect Tax, and e-invoicing where Pagero is showing really good growth and growth that looks to be pretty considerably above some of the market comparables. And so those are the areas where we'd be prepared to go a bit bigger. I think at the moment, the assets that are of interest are still fully valued in the sort of portfolios in which they sit. So the question is, do we see a bit of an adjustment and some price that would allow us to create value for our shareholders, not just the exiting shareholders. And that's what we'll just continue to monitor and stay rigorous and disciplined around. Michael Eastwood: Steve, in addition to indirect tax, risk, fraud and compliance, I would just add international. Certainly, we'll be very selective there as we've discussed in the past. But Adrian Fognini, who leads our international business, we are looking at a few potential assets internationally. Operator: Our next question is going to come from George Tong from Goldman Sachs. Keen Fai Tong: You're continuing to target 9% to 11% organic growth in Corporates next year. Can you elaborate on how achievable that growth is without any additional changes to the sales organization or the pace of cross-selling? Michael Eastwood: Sure, George. Happy to start there. I think we've discussed with you and others in the past that Q4 is our largest quota period for a given year. That applies to Q4 2025 for Corporates. October net sales and bookings were quite encouraging, George. And if we look at our sales pipeline, coverage ratio for both the remainder of Q4 and also Q1 2026, once again, encouraging. Given that those changes have now been solidified and the focus is on execution, the way I think about it, George, a very simple formula. If you have great products and you have strong customer demand and you have a growing TAM, the likelihood of success is pretty damn good if you execute and have the right talent. I think you can check the boxes on each of those variables in the formula that I just mentioned there. So that gives me quite confidence. But if you look very tangibly, the October net sales and bookings, secondly, again, the November, December pipeline coverage and then also the Q1 pipeline coverage gives us confidence in achieving that 9% to 11% as we go into 2026, George. Keen Fai Tong: Got it. Very helpful. And then can you talk a bit about your pricing strategy in light of the increasing value that you're providing with your AI products? So do you have plans for accelerated pricing increases, for example, in your multiyear contracts? And how overall do you expect pricing to evolve going forward? Stephen Hasker: Yes, George, look, it's a great question, and it's one that we are very focused on, and we have some fairly vigorous debates amongst ourselves, particularly between the product folks and the commercial excellence folks and our salespeople. Our principle is price to value. So the extent to which we're driving significant efficiencies in the practice of law or in the practice of audit, tax & accounting, we want to make sure that our products and services are aligned to that. Just a reminder, we do not price on a per seat basis. So to the extent to which work is able to be done by fewer people, we will be a beneficiary of that, not a victim of that, if you like. And so it's a work in progress. I think in the early going, our pricing has proven to be competitive and is driving growth for us. It is profitable growth. I would say so far, so good. But this is one of those ones where we're just constantly looking for signals from the market and refining our approaches. Michael Eastwood: Yes, George, I would just supplement. As we go into '26, I'm somewhat optimistic that we could have some additional opportunity over the spectrum. Operator: Our next question is going to come from Aravinda Galappatthige from Canaccord Genuity. Aravinda Galappatthige: I wanted to discuss sort of the -- where we are in terms of the rate of innovation and product intensity. Obviously, we've seen a lot of activity from Thomson and even the industry in general. Is it fair to sort of characterize the present sort of position as sort of getting close to peak in terms of new product launches and so forth and sort of the next phase will be more about penetration. I mean, I'm trying to sort of connect that with sort of the underlying tone of margin expansion you're talking about. I know that you've been -- I think last disclosed number was about $200 million in incremental investments to sort of drive these growth opportunities. I'm trying to sort of assess whether we may be at sort of the crest of that. Any thoughts that you care to share on that front? Stephen Hasker: Yes, Aravinda. I'll start, and Mike may want to add. I obviously stay very close to David Wong and Joel Hron's product innovation plans and also our TR Ventures fund, who are looking across the landscape at different start-ups and also the sort of everything that our partners are doing. I would say -- you're going to see our rate of innovation accelerate and improve over the next few quarters and well into '26 and '27 based on that which we've previously invested in and that which is coming through the pipeline. What I think, though, will happen in the broader landscape, and it's hard to tell. So this is looking at a crystal ball, is that the rate of innovation for the highly specialized tools like ours that are trained on reservoirs of content and thousands of expertise will continue to improve. I think where things might flatten out is in the sort of general purpose horizontal tools. And certainly, our customers are starting to understand the difference. And so that, I think, will be one change in the sort of landscape. But again, I think anyone who will tell you they know exactly what's going to happen in this environment is probably slightly deluded. Michael Eastwood: Yes. Aravinda, a couple of points there. Please, please do not correlate our confidence in expanding our margin in 2026 with us investing less. We will invest over $200 million this calendar year '25 in AI, Gen AI. That will continue into 2026. We're able to expand our margins in 2026. One, you're aware of our operating leverage, but we have opportunity back to the prior questions to automate how we work. I think it was Vince who asked the question illustratively about the AWS reference. So we will continue to invest. And to Steve's point, the rate of innovation and intensity will continue. That $200 million plus will continue into 2026. Aravinda Galappatthige: And maybe my follow-up for Mike. I mean, on the last call, Mike, I think you talked about sort of your framework for capital allocation and how that potentially leaves $400 million to $500 million for buybacks. Obviously, given the movement in the stock, you've sort of shown the flexibility to step up beyond that. Should we sort of take that forward even in the -- going into '26 that notwithstanding that framework, you have the ability and the willingness to sort of step up in terms of your repurchase program? Michael Eastwood: Yes. I think, Aravinda, I would maintain the framework when you think about mid- to long term. But I think the key there is when we see the opportunity to step up, we will, which I think -- that was very tangible with our decision in mid-August to announce the $1 billion NCIB share buyback, which we completed at the end of October. We constantly discuss capital strategy, capital allocation with our Board. In our next Board meeting, we'll have the next discussion in regards to capital strategy, capital allocation. Could we step up? Again, possibly, no decision has been made there. So I would maintain the framework of the $400 million to $500 million. But also, I would kind of supplement that framework with our ability and willingness to step up when we deem appropriate. On the topic of capital allocation, I would just remind you, Aravinda, and others that as we go into the January board meeting, we will propose another 10% increase in our common dividend, which would be the fifth year consecutively on that. Operator: And our next question is going to come from Maher Yaghi from Scotiabank. Maher Yaghi: Great. Steve, you have very well articulated why Westlaw has a strong standing to benefit from AI. But can you tackle maybe how you see AI advances affecting your tax business? Do you believe that business has similar defensive capabilities to continue to gain market share as well as you're doing in legal? And the second question is the revenue acceleration you're expecting in 2026 versus 2025. I know it's maybe too early, but can you maybe just let us know which segment of the Big 3 you're expecting to see most of the acceleration coming from? Stephen Hasker: I'll defer the second question to Mike. On the first one, yes, we're sort of equally excited about the application of AI, Agentic AI, Deep Research to our tax business as we are legal for a couple of reasons. So in terms of the end market, the tax & accounting profession does not need to undertake the same sort of magnitude of change management. So for example, many tax & accounting and audit engagements are not priced on a per hour basis and not on a billable hour. They are value-based. And so there's not that same business model hurdle to overcome that the legal profession is currently working its way through, firstly. Secondly, there is, as I said before, a pretty acute talent shortage that technology needs to address. So we actually think our tax & accounting customers are even more receptive to AI and technology in terms of improving their outputs and work and enabling, for example, tax professionals to automate the tax return process and move to more value-added advisory services for their clients and the technology enables that. So that's the first part. As we think about applying AI, particularly Agentic AI to our product set, the sort of narrative up until now is that generative AI doesn't do math. Well, our tax calculation engines do the math. And what the agents enable us to do is automate all of the shoulder activities. So the document ingestion, all of the preparation and then they work with the tax calculation engine, whether it's UltraTax, GoSystem Tax on ONESOURCE. And then they're able to do the follow-up, all of the calculation checks and the e-filing. And so that's really what Ready to Advise is. It's the addition of agents to our pre-existing tax calculation engine. And then Ready to Advise is the use of agents to find all of the opportunities for a tax & accounting professional to provide advisory services on more efficient tax strategies for their clients. And so we think that the AI will enable us to expand the role that we play in the success of the tax & accounting profession, enable them to get into more advisory services and achieve growth on that basis, while at the same time, overcoming this talent shortage. Mike, the question on revenue. Michael Eastwood: Sure. In regards to 2026, just to remind everyone, we do have ranges for 2026 for each of our Big 3 segments. Legal for 2026 is 8% to 9%. Corporates is 9% to 11%. Tax & Accounting, 11% to 13%. Part of your question, Maher, is in regards to which segment would have the largest absolute growth. Tax & Accounting Professional, I believe, will have the largest absolute increase in organic growth rate for 2026 versus 2025. Just to reiterate those reasons; number one, the recent acquisitions of SafeSend, Additive and Materia will continue to scale for us. Next, Steve has mentioned Ready to Advise and Ready to Review, which are new launches for us. We consistently talk about our Latin America business, Domínio, which we remain quite optimistic about. Over the last 11 years, it's grown 20% CAGR over that time horizon. We expect that to continue. And then lastly, kind of underpinning UltraTax continues to perform well. Operator: Our next question is going to come from Kevin McVeigh from UBS. Kevin McVeigh: Great. I think in the slide deck, you talked about AI-driven innovation, the momentum continuing. On the legal side, I guess, just the timing, like the Agentic launches you did over the summer of '25, are they already starting to kind of permeate the base? Or is that something that continues to scale over the back half of '25 and into '26. I guess I'm just trying to understand the sequencing of maybe things that have already been launched as opposed to things that were launched over the summer. Michael Eastwood: Yes, Kevin, really good question. Great timing there. For everyone's benefit, we launched those in mid-late August as part of ILTACON. We're already seeing the benefit, and we'll just see more penetration, Kevin, in Q4 and throughout 2026. I would call out each of our general managers within legal professionals that are really driving hard, which is indicative of the 9%. Aaron Rademacher, who is driving the small law firm; Liz Zimick in Mid-Law, Steve [indiscernible] with our largest firms. And then we have John Shatwell in Europe, which I think each of these segments, we're seeing progression already with the launches. And with the momentum we have with the launches of CoCounsel Legal, Westlaw Advantage, that will continue. October, we had another great month of sales. With these new product launches, we expect that to continue for the remainder of Q4 and then throughout 2026. So we're already reaping the benefits, Kevin. Kevin McVeigh: That's super helpful. And then just the comments on the Tax & Accounting. Is there any way to think about the experiences of maybe the Big 4 as opposed to maybe the top 10 and maybe mid-market as you think about the go-to-market motion with the enhanced product from a Gen AI perspective? Michael Eastwood: Yes. Kevin, just to remind everyone, the Big 4 and the next 3 largest firms, we call it the Global 7, they are included within our Corporates segment, not Tax & Accounting Professionals. But Steve, you may want to comment in regards to the different motion as you think about those G7 versus the remainder of Elizabeth's Tax & Accounting. Stephen Hasker: Yes. I mean what I would say is there's increasing similarity across the G7, as we call them, relative to the big 4. In other words, firms 5, 6 and 7 are very sophisticated, increasingly global and investing heavily in technology, and we think we'll be a beneficiary of that going forward. I think though the mix does change a little bit as you get to the sort of top of the ladder there in that they're more likely to take an API from us and build on the top of it versus take the sort of full end-to-end product. So the kinds of work we do in the go-to-market motion is slightly different, Kevin. But the opportunity, I think, is equally weighted across that customer base. And if you go all the way into the smaller firms, which Brian Wilson serves from a go-to-market perspective, he and his teams. They're ready for turnkey solutions that work, that are reliable and that build upon their existing tax calculation engine. And so there's a lot of receptivity at that end as well. Operator: And our next question is going to come from Andrew Steinerman from JPMorgan. Unknown Analyst: This is [indiscernible] on for Andrew. Most of my questions have been answered. So maybe I'll circle back on the government headwinds just to clarify. Am I correct in saying your updated guidance only contemplates cancellations that you saw at the end of the third quarter? And I guess maybe just to give us a little bit more comfort on the go forward. Could you maybe talk a little bit more about if those cancellations were driven by reductions in spending at certain departments you serve? Or was it layoffs? Just any color there would be great. Michael Eastwood: Certainly, in regards to our forecast, we always contemplate what has occurred, plus we always look at the upcoming pipeline. So we have contemplated within our forecast any other activity that might transpire in Q4. So we believe that has been reflected already. And then in regards to the reasons for it, there's been a reduction in the actual spending levels in these agencies, which was the main driver. Operator: And our next question is going to come from Stephanie Price from CIBC. Stephanie Price: Just a few quick clarifications for me. Mike, I think you've kind of alluded to it for a few times in the call, but can you talk about the drivers that are causing the increase to the fiscal '26 EBITDA guide to 100 basis points versus 50 basis points prior. I think you mentioned some efficiencies, but anything else you wanted to add on there? Michael Eastwood: I would say 2 -- Stephanie, 2 primary drivers. One is the operating leverage at roughly 7%, 7.5%. We generate about 110 basis points of natural operating leverage, which is sustained in our business. The second key factor is our focus on transforming and automate how we work. So if you take those 2, that would be more than 100 basis points, but leads to a third key factor, which relates to a question earlier, is we're continuing to make investments, and we'll continue to make investments wherever we see the returns are sufficient there. But the 2 key drivers of margin expansion, operating leverage and then our internal initiative to transform and automate how we work. Stephanie Price: Perfect. And then for the Legal segment, organic growth accelerating quarter-over-quarter to 9%. I think in the prior question, you mentioned some new product launches. Just curious if there was anything else you wanted to call out there in terms of shifts in demand or adoption rates within Legal. Michael Eastwood: I think the new product launches certainly help us significantly there. Retention rates continue to be very good within that business. Pricing is relatively stable there. Certainly, Stephanie, we always add talent as part of our operating mechanism. So I think those are the key drivers for us. Steve, you may want to add... Stephen Hasker: The only thing I'd add is way back at our Investor Day a couple of years ago, where we started to talk about this AI journey, we did, at that time, speculate that the TAM in Legal would grow, and it would grow on a sustained basis. I think we're starting to see that. What we're starting to see is law firms wrestle with the idea of spending more on technology and potentially less on real estate and still trying to sort of work their way through the headcount implications. I think it's too early to sort of call that one way or another. But we're starting to see that TAM expand. And we think that, that's going to be a multiyear phenomenon and one that we plan to have the products and the propositions to fully benefit from. Operator: Our next question is going to come from Doug Arthur from Huber Research. Douglas Arthur: Yes. I think most things have been covered. Steve, you mentioned the acute talent shortage issues in some of the big accounting firms. Is there a similar narrative in legal or not so much? Stephen Hasker: Not so much, Doug. It's -- as someone who started my career at PW as it was called then, Mike did the same. Kids are just not as enamored of the profession as they were in our day. And so whether it's the big accounting firms or the midsize or even the smaller shops, they're just having a really hard time getting talent in the door at the entry level and then going through the apprenticeship that's required. And it's an acute problem, and it's been growing for a number of years. If you look at the number of people who are getting qualified as CPAs, it has fallen dramatically in recent years. And all the while, the number of audits goes up, the complexity of audits goes up, the number of tax returns goes up, the complexity of those returns go up. And the advice that, that small, medium and large businesses need from their tax & accounting professionals intensifies. So the demand characteristics are really healthy. It's the supply of talent that's the problem. And that's where the technology has a really, I think, exciting and important role to play. And that's why we're investing heavily to meet or exceed those demands. Operator: And our next question is going to come from Toni Kaplan from Morgan Stanley. Toni Kaplan: Your large competitor in legal has talked about one of the benefits of its partnership with Harvey is increasing distribution. I was hoping you could talk about, Steve, how you're thinking about partnerships right now. You have the content, you have the AI capabilities. So it doesn't seem like you need to partner with others. But is there an advantage to doing that because of increasing distribution? Or is there a disadvantage of going that route? Stephen Hasker: Toni, I won't comment on their approach. But what I will say is that we're very confident in our position of having CoCounsel for Legal, which is now fully integrated with our content and editorial expertise. So we don't see the need for partnerships, the likes of which one of our competitors has entered into or 2 of our competitors have entered into together. Where we are partnering is where there are point solutions, AI-driven point solutions, for example, in sort of the debt capital markets and its application to legal profession or in very, very specific area of the law, where we think an innovative team has developed a solution that can work in with CoCounsel. So we're keen to explore that ecosystem. But in terms of distribution, we obviously have the leading distribution in the industry at the moment. So we don't see a need there. But thanks for the question, Toni. Gary Bisbee: All right. I think that brings us to the end of our time. So thanks, everybody. Have a good day. Stephen Hasker: Thank you. Michael Eastwood: Thank you. Operator: And this concludes today's call. We appreciate your participation. You may now disconnect.
Operator: Thank you for standing by, and welcome to the First Watch Restaurant Group, Inc. Third Quarter Earnings Conference Call occurring today, November 4, 2025, at 8:00 AM Eastern Time. [Operator Instructions] This call will be archived and available for replay at investors.firstwatch.com under the News & Events section. I would now like to turn the conference over to Steven Marotta, Vice President of Investor Relations at First Watch. Please go ahead. Steven Marotta: Hello, everyone. I am joined by First Watch's Chief Executive Officer and President, Chris Tomasso; and Chief Financial Officer, Mel Hope. This morning, First Watch issued its earnings release for the third quarter of fiscal 2025 on Globe Newswire and filed its quarterly report on Form 10-Q with the SEC. These documents can be found at investors.firstwatch.com. This conference call will include forward-looking statements that are subject to various risks and uncertainties that could cause the company's actual results to differ materially from these statements. Such statements include, without limitation, statements concerning the conditions of the company's industry and its operations, performance and financial condition, outlook, growth plans and strategies and future expenses. Any such statements should be considered in conjunction with cautionary statements in the company's earnings release and the risk factor disclosure in the company's filings with the SEC, including our Annual Report on Form 10-K and quarterly reports on Form 10-Q. First Watch assumes no obligation to update these forward-looking statements, whether as a result of new information, future developments or otherwise, except as may be required by law. Lastly, management's remarks today will include references to various non-GAAP measures, including restaurant-level operating profit, restaurant level operating profit margin, adjusted EBITDA and adjusted EBITDA margin. Investors should review the reconciliation of these non-GAAP measures to the comparable GAAP results contained in the company's earnings release filed this morning. Any reference to percentage growth when discussing the third quarter performance is a comparison to the third quarter of 2024, unless otherwise indicated. And with that, I will turn the call over to Chris. Christopher Tomasso: Good morning, everyone. We appreciate you joining us to discuss our third quarter performance. We're pleased to report strong financial results with same-restaurant traffic growth and same-restaurant sales growth sequentially higher for the fourth consecutive quarter and restaurant-level operating profit margin materially improving from earlier this year. These results are made possible by our more than 16,000 employees nationwide, and we are truly grateful for their commitment. Total revenue increased 25.6% compared to the third quarter of last year, fueled by three growth drivers: strong new restaurant opening performance, positive same-restaurant sales of 7.1% and accretive strategic franchise acquisitions. Restaurant-level operating profit margins expanded, reflecting solid operational execution across our entire organization. Notably, sales at our newly opened restaurants continue to be very strong across all geographies with some of our newest locations setting first week sales records. Simply put, despite an increasingly difficult environment, First Watch delivered solid top- and bottom-line results, and we continue to strengthen our leadership position in daytime dining, placing us among casual dining's strongest performers. Our third quarter financial results are representative of our long-standing approach to growth. Total revenue increasing more than 25% [ crown's ] nearly 5 years of double-digit percentage quarterly growth. Our aggressive unit expansion, anchored as always, by a very clear set of underwriting standards continues to drive our success with 21 system-wide restaurants opened across 14 states during the third quarter. We are on pace to meet our target of 63 to 64 new restaurant openings for the year, representing nearly 11% system-wide growth in 2025. At First Watch, we are constantly evolving to ensure long-term relevancy and meet the needs of both the consumer and our employees. We are focused on delivering steady, thoughtful enterprise-wide progress built on a solid operational foundation, giving us the confidence in our ability to continue delivering on our high-growth algorithm. We prioritize our long-term market position and traffic growth over short-term margin protection. This is particularly evident in menu pricing. With a volatile commodity environment in early 2025, we quickly evaluated the prospects of short- and long-term commodity inflation and carefully considered our competitive value proposition. As a result, we chose not to implement pricing actions that would have offset what we view as transitory increases in commodity costs. The positive results we reported last quarter and today reinforce our confidence in those pricing decisions. There aren't many metrics where we lag, but we're pleased to be laggard when it comes to pricing. The result of a steadfast pricing strategy is that our long-term margin profile is and always has been secure. We may experience variances from time-to-time or in any given quarter, but we're confident in our ability to deliver annual restaurant level margins of 18% to 20% over the long-term. Our sustained high-return capital investments continue to deliver, and we are opening restaurants that meet or exceed our underwriting targets. This is a compelling way to use our capital with average cash-on-cash returns of approximately 35%. In addition to those superior returns, our aggressive unit growth is increasing our market share by expanding our brand presence and overall awareness, thereby widening our competitive moat. As I mentioned, our new restaurants are opening stronger than ever in both new and existing markets. In fact, 9 of our 10 highest opening week sales in company history were achieved in restaurants opened within the last 12 months. In new markets, too, like Boston, Las Vegas and Memphis, we've opened stronger than anticipated, and it's clear that our brand and our unique offering has enviable broad appeal and proven affordability. One of the many strengths of our business is that unlike some other restaurant concepts, our new restaurant openings in both new and emerging markets are performing exceptionally well. I spoke last quarter about the strategy of converting second-generation sites into highly productive First Watch restaurants. Of the 21 restaurants we opened in Q3, 13 were second-generation sites. Of the 10 highest opening week sales, NROs in 2025, 9 have been second generation. For reference purposes, some of these restaurants are opening at volumes that are more than 190% of our average unit volume, which is a powerful proof point for the benefits of this approach and in our ability to operate higher and higher AUVs, powering the brand forward. I want to highlight one particular NRO that exemplifies the ongoing strength of our brand and our disciplined execution. Our new First Watch location in Dover, Delaware, situated in the state capital and the state's second largest city opened during the final week of the third quarter. This location had opening week sales that exceeded 185% of our comp base average, underscoring the strong demand for our concept and the strategic value of the site. We signed a lease for this restaurant in January of 2025 and advanced it through our standard construction timeline without delay. The fact that we successfully opened a short 8 months after lease signing reflects the operational rigor and efficiency of our entire team and demonstrates one of the many benefits of these second-generation sites. These historic opening week sales performances are a result of the alignment of our real estate, construction, talent and development teams, bolstered by the heightened preopening consumer interest and demand generated by our efficient NRO-related marketing initiatives. In short, our teams collaborate well to ensure that our restaurants are go for launch and that we enter markets, trade areas and neighborhoods in a way that establishes a high baseline that we can build upon for many years to come. Across the organization, our teams are now even more skillful at opening new locations in core emerging and new markets, and we remain highly confident in our expansion strategy for 2026 and beyond. No full-service restaurant company is opening at anything close to our pace, making it daunting for segment competitors to enter markets where we have an established presence. Furthermore, even in markets that we have yet to penetrate, our eventual entry often positions them in short order. We are targeting between 63 to 64 gross new locations for 2025 and the breadth of our new restaurant opening successes can be seen in the first three quarters of 2025, where we opened 51 new restaurants in 30 markets across 21 states. I've shared this before, but I think it bears repeating that our top decile restaurants span 14 states and 22 DMAs with consistent AUVs across all 32 states, giving us confidence in our ability to grow to a total addressable market of 2,200 locations within the continental United States. Our people platform continues to reach new heights as well. Restaurant-level employee turnover, a critical industry metric, has improved for 10 consecutive quarters and continues to outperform industry benchmarks. We recently completed our annual W.H.Y. Tour and the feedback was overwhelmingly positive with employee satisfaction tying directly to our culture, the quality of life offered and the extensive benefits available to them. There's no question that our daytime dining single-shift scheduling model remains a standout feature. Our distinctive benefits such as backup childcare and elder care, complementary personal and professional coaching and free telemedicine services also mean a tremendous amount to our team, and we believe differentiates us from other foodservice employers. Team members consistently share that working at First Watch enhances their mental and physical well-being. Among all of the numerous advantages already cited, the opportunity for career growth most often tops the list. As the fastest-growing full-service restaurant concept in the United States, we believe we provide career paths that are simply unmatched anywhere else in the industry. So where have our efforts led? Well, First Watch was just recently named America's #1 Most Loved Workplace by the Best Practice Institute for 2025, a recognition we also achieved in 2024. Achieving top honors in any year is a significant accomplishment. Earning this distinction two years consecutively is unprecedented. I'd like to extend my gratitude to our entire organization for their efforts in making this possible and modeling our You First culture day in and day out. By prioritizing our employees and creating an environment that attracts the best and brightest in our industry, we are proud to provide a wide array of personal and professional growth opportunities. This is a remarkable achievement of which we are all extremely proud of. The performance of our enhanced marketing investments in 2025 has been highly encouraging. This marks the third consecutive quarter of increased marketing spend versus last year, providing us with three full quarters of compelling evidence. Our integrated campaigns spanning connected TV, paid search, social media and other channels are intentionally coordinated, driving higher aided and unaided brand awareness. Notably, the markets we targeted for investment in 2025 represent less than one-third of our overall restaurant portfolio, providing us an opportunity to significantly expand our reach in the future. Building on the insights gained from this year's activities, we are optimistic about expanding marketing programs in 2026. We're also in the midst of a comprehensive relaunch of our digital platform, encompassing both consumer-facing enhancements and back-of-house improvements. As an example, our newly relaunched app introduced in the second quarter has already garnered thousands of positive ratings and reviews and currently maintains a 5-star ranking, supporting favorable customer response to the new interface. We're in the very early innings of capitalizing on our digital platform. Behind the scenes, we're collecting valuable data on a granular level. We are also making significant upgrades to our customer data platform, geolocation capabilities, order experience and CRM systems. Our database of identified customers now sits at around 7 million, the majority of which are connected to various social media and online presence platforms, enabling us to better execute targeted micro marketing campaigns. Technology advancements across our marketing department contributed to the exceptional performance of a targeted digital campaign launched in September, which, despite hitting less than half of last year's recipients, delivered more than 2x the response rate and engagement to last year's campaign. Depending on where you live or which of our restaurants you may have visited recently, you may have seen our new core menu that's been in test for some time. This new menu has been redesigned and reengineered to improve readability, broaden appeal, optimize mix and streamline operations. It features high-performing previous seasonal menu specials, which replaced some lower mix items. The qualitative and quantitative metrics thus far have been encouraging, and we are expecting to roll this menu out system-wide early next year. We're acutely aware of recent headlines across the restaurant sector regarding a slowdown in consumer activity, specifically tied to discrete demographics. Our brand continues to be over-indexed to a more affluent consumer, and we remain underexposed to current demographic pressures. First Watch's menu innovation, consistency and value proposition provide for an unparalleled customer experience. In short, our platform has supported quarterly double-digit total revenue growth for the better part of the last 5 years. During that same time period we've opened more than 230 restaurants, delivering on our stated goal of low double-digit percentage annual unit growth. Our 3-year NRO AUV targets have risen from $1.6 million to $2.7 million, and we were recognized as America's Most Loved Workplace twice. Our expansion from a little known regional restaurant brand just 10 short years ago to a national chain with dominant segment market share was accomplished by an organization focused on and dedicated to consistent, reliable and quality growth. Considering our proven track record and abilities across the entire enterprise, combined with a total addressable market that is over 3x our current size, we remain committed to that same consistent, reliable and quality growth for years to come. And now I'd like to turn it over to Mel. Mel Hope: Thank you, Chris, and good morning. Total third quarter revenues were $316 million, an increase of 25.6%. Our third quarter revenue growth was driven by positive same-restaurant sales growth of 7.1%, including positive traffic of 2.6% and the contribution of 167 non-comp restaurants, including 66 company-owned new restaurant openings and 19 locations we've acquired since the second quarter of 2024. Our same-restaurant traffic growth and same-restaurant sales growth in the third quarter represent our best quarterly result for both metrics in over two years. Our in-restaurant traffic improved once again, marking the strongest performance in 7 quarters. Traffic growth in the third-party delivery channel increased substantially during the third quarter, a continuation of recent trends and a direct result of the changes we made to that program earlier this year. The month of September represented our highest rate of same-restaurant sales growth of the entire year. Concurrent with the launch of our fall seasonal menu in late August, we instituted a price increase of 1.1%, bringing our full year carry pricing to around 3.5%. We again experienced positive sales mix during the quarter. Food and beverage expense in the third quarter was 22.2%, a decrease of 20 basis points from the third quarter last year, benefiting from carry pricing, partially offset by 3% commodity inflation in the quarter. Bacon and coffee were the primary drivers of commodity inflation. Labor and other related expenses in the third quarter were 32.6% of sales, a 100 basis point decrease from the third quarter of 2024. Restaurant level labor inflation was 3.6%, a combination of carry pricing outstripping labor inflation and marginal labor efficiency contributed to the improvement as a percent of sales. Restaurant level operating profit margin was 19.7% in the third quarter, an 80 basis point improvement from the third quarter last year. General and administrative expenses increased to $33.7 million from $27.7 million in the third quarter of 2024. As a percentage of total revenue, these expenses decreased to 10.7%, representing 30 basis points of leverage when compared to the same quarter last year. The income from operations margin was 3.2%. Adjusted EBITDA was $34.1 million, $8.5 million higher than last year, with adjusted EBITDA margin increasing to 10.8% from 10.2%, a 60 basis point improvement from the third quarter last year. We reported net income of $3 million. We opened 21 new system-wide restaurants during the third quarter of which 18 were company-owned and three were franchise-owned, and we ended the quarter with 620 system-wide restaurants. The effect of our franchise acquisitions, which includes only the impact of purchases made within the last 12 months, increased our third quarter revenue by about $9.1 million and adjusted EBITDA by about $1.6 million. For further details on the third quarter, please review our supplemental materials deck on our Investor Relations website beneath the webcast link. Based on our quarter-to-date trends and plan for the balance of the year, I'd now like to provide our updated outlook for 2025. We are updating our guidance for same-restaurant sales growth to approximately 4% from positive low single digits in our prior guidance. We estimate same-restaurant traffic of approximately 1% from flat to slightly positive in our prior guidance. We expect total revenue growth in the range of 20% to 21% with a net 400 basis point impact from completed acquisitions. We expect 63 to 64 new system-wide restaurants, including 55 new company-owned restaurants and 8 to 9 new franchise-owned restaurants with three planned company-owned restaurant closures. We took advantage of the opportunity to pull forward a few openings into the third quarter and at the same time, push a couple of projects into the new year. We're now guiding fiscal year 2025 commodity cost inflation to be approximately 6% from a range of 5% to 7% in our prior guidance and restaurant level labor cost inflation to be approximately 4% from a prior range of 3% to 4%. Our annual adjusted EBITDA projection is now approximately $123 million, the high end of our prior guidance range of $119 million to $123 million. This includes the expected net contribution of approximately $7 million from acquired restaurants. In an effort to assist you in your near-term modeling of our G&A, our annual leadership conference will be held in the first quarter of 2026 compared to our previous conference, which was held in the fourth quarter of 2024. This is equivalent to just under 100 basis points in quarterly G&A expenses as a percent of sales. Please note, our initial fiscal year 2025 guidance contemplated this timing shift. We expect a blended income tax rate of approximately 45%. We are narrowing our expectations for capital expenditures to approximately $150 million from $148 million to $152 million in our prior guidance. This does not include the capital allocated to franchise acquisitions. Since our initial public offering four years ago, we've expanded the total of system-wide restaurants from 428 locations to 620 at the end of the third quarter. In that same period of time, our adjusted EBITDA has more than doubled. We're proud of the many growth milestones we've surpassed and are similarly excited to close out a strong 2025. Both our real estate and our people pipelines have never been healthier, providing a high degree of confidence in our ability to execute our near-term and long-term growth strategies. And with that, operator, would you please open the line for questions? Operator: [Operator Instructions] Our first question comes from the line of Jim Salera with Stephens Inc. James Salera: I wanted to ask if you guys might help us deconstruct the traffic results given the strength you're seeing relative to the rest of the industry, which has seen pretty muted trends on the traffic side. Can you just give us a sense for how much of the incremental traffic is coming in restaurant versus through the off-prem channel? And then maybe if you could give us some commentary around how much of the traffic is increased frequency with kind of First Watch loyalists versus maybe bringing in some new folks that have a newfound appreciation for your value proposition? Mel Hope: Sure. Okay. So with regard to the second part of the question first, the full-service restaurants generally had a frequency that would suggest that we probably need a longer period of time to really read what the response to marketing has been regarding whether or not we've got repeat visits versus new customers. Our marketing programs have been targeted at increasing occasions without regard to whether or not there are new visits or recurring visits. So I don't have a lot of data on that for you yet. We may over time, but we just need a larger cohort. Christopher Tomasso: And Jim, once again, we did see improvement in in-restaurant dining. It's continued to improve quarter-over-quarter. And obviously, we have the benefit of the third-party traffic increases as well. So I would say both channels contributed to the growth. James Salera: Great. And then as a follow-up, if you could just speak to what's helping bolster the results at some of these new openings. You mentioned Dover significantly ahead of the overall kind of fleet average. Is it just that these are really primo locations that real estate partners are coming to you with? Are you doing some extra work kind of on the front end to make sure there's a lot of fanfare around the restaurant opening? Just anything you can kind of give us there to explain the strength? Christopher Tomasso: Yes. We -- this is -- our new restaurants outperforming the core has been a trend for us for a number of years now. But we talked this quarter about some record-setting locations. And we talk constantly about how we're evolving our real estate site selection process, evolving the facility itself. So yeah, some of these second-generation sites specifically are -- they're larger. They're right upfront on the road. We're really making the patio a significant feature that is inviting from the road. And so we benefited from that. That said, we have some restaurants that aren't bigger and are more maybe end caps that we've done that are achieving high volumes, too. So I think it's also a confluence of our brand recognition expanding, the site themselves acting as billboards. I think our -- the work our marketing team has done on the social and digital channels to create that buzz before we open. I used the term in the prepared remarks of go for launch, like I just feel like in every aspect of these new restaurants, we're set up really well to A, build that preopening demand and then from an operational perspective, really deliver when they come in the restaurant. And it's really important when you're doing those kinds of outsized volumes to Wow people. Those first reviews are really, really important. And our teams have done just an amazing job of all that. So yeah, this is -- this comes from many years of opening a lot of restaurants. We talk about it as being one of our strongest muscles, and we just continue to flex it and it continues to drive value for us. Operator: Our next question comes from the line of Jeff Bernstein with Barclays. Anisha Datt: This is Anisha Datt on for Jeff Bernstein. I wanted to ask a question on marketing. What are your plans to expand marketing efforts in 2026? And can you share specifics on the strategy? Do you need to reach greater scale in some of your newer markets before rolling out broader marketing initiatives given that about 1/3 of stores benefited from your initial efforts this year? Mel Hope: We haven't done any indication about 2026 with regard to the overall plans for the company. So probably need to steer clear of that one for the time being. But the marketing, obviously, the more density you have in markets and in more markets, the marketing can become more efficient in some types of marketing. But our focus has been very much on social and digital type marketing, which is very targeted. And our team is very accomplished at making sure that we're efficient even in markets where we don't have a lot of density. Christopher Tomasso: I think the big takeaway from the -- our marketing efforts and therefore, the results is that it's been successful. We're very pleased with it. We've only deployed it to a minority of our markets. And so the opportunity for us to invest and expand that in 2026 and beyond is very encouraging to us and something we're really excited about. Operator: Our next question comes from the line of Andy Barish with Jefferies. Andrew Barish: Nice results. And I just wanted to go back to that as well. I think September was your toughest lap and you still hurdled that, as you mentioned, with the best quarter. How does the -- and I think the marketing in the 3Q was a little bit lower because of AUVs. Can you just kind of let us know what the fourth quarter plan on that is a little bit more of sort of the near-term look? Christopher Tomasso: Yeah. Actually, that comment about the lower spend really had more to do with Q4 because of the seasonality of our business when we talked about it last quarter. But Q3 was pretty consistent with the first two quarters. So no step-up or step down there. Andrew Barish: Got you. Okay. And then -- on the operations side, I mean, a lot of things were put in place kind of going back over the last few years. What's sort of really showing through that you would highlight as more demand is now generated and you're obviously handling it with one of the best comps in the industry? Christopher Tomasso: Certainly, the KDS, the implementation of the KDS system. But I also don't want to shortchange the consumer-facing investments we made around the app and waitlist management and some operational things we did. So Andy, you've heard us talk about this since we first announced that we were rolling out KDS. We don't look at -- I mean, we look at each one individually from a return standpoint. But as far as what's driving the business, we think it's all of those things, whether it goes back to touches like the complementary coffee, our pricing strategy, the way we've increased portion sizes over this time and that type of thing. So we're really trying to just make it so that everywhere the consumer and specifically our customer looks, our value gets better and better, whether it's the time it takes for their food to get to the table, the visibility they have into the weight process, opening the front door, just efficiency and execution and consistency. And we think in turbulent times like this, those are the things that the consumers really value and then turn to, specifically the consistency part. They just don't want to put their dollars at risk. Mel Hope: And our operators really have focused a great deal on I'd call it, blocking and tackling in terms of the labor management and focusing on execution in the restaurants. And when you see rising transactions, the labor really benefits from that in a growth company like ours where that transaction growth trickles down to more efficient labor. Andrew Barish: Yeah. And just finally, what was actual menu price in the 3Q? And then does that look like about 4% in the 4Q? Mel Hope: So in Q3, the carry pricing of all pricing events carried about 5% overall, and we're 3.5% or roughly for the full year. Christopher Tomasso: And about 5% in the fourth quarter. Mel Hope: And about 5% in the fourth quarter. Okay. Operator: Our next question comes from the line of Todd Brooks with Benchmark StoneX. Todd Brooks: Congrats on some real positive outlier results here in the quarter. I wanted to, Chris, dig in a little bit more on the second-generation sites. If you look at the class of '25, what was the mix of second gen? And then if we start to look out to the pipeline for '26, are we inflecting second-gen openings higher if you look at the mix of total openings? Christopher Tomasso: Yeah. So as I mentioned on the last call, we're looking more and more at the second-generation sites. About 50% of what we opened in '25 were second gen, and we expect that to be a similar percentage for '26. Todd Brooks: Okay. And is the competition -- I'm hearing other concepts try to talk about second generation as well. Does the benefits to the -- that First Watch has as a brand as far as landlord desire for First Watch to be a tenant, are you getting first looks at these type of locations versus kind of new development where they want you in the center or is it more competitive to land these sites in this environment? Mel Hope: I think we're -- as a national credit now in our performance, we're probably on the Rolodex of every commercial developer, if Rolodexes still exist. So I do think we get first calls. Todd Brooks: Okay, great. And then just wanted to loop back on the marketing. I know we're not going to get detailed '26 plans yet but is there a -- you guys are very thoughtful in what you've done to drive the growth of the brand. Is there a thought of this is 1/3, 1/3, 1/3 type of process as far as how much of the base gets touched or how do we iterate out of kind of the -- I think it was Florida plus the Southeastern markets. I guess, tactically, how do we iterate this in '26 if we don't want to talk about how we spend against it in '26? Christopher Tomasso: Yeah. I think we'll take the learnings that we've gotten from this year's efforts and look at next year, look at the markets. Obviously, still efficiency and density is a factor, seasonality and other things. So it's not necessarily 1/3, 1/3, 1/3. We're not approaching it that way. We're really just looking at it from an ROI perspective and where we can make the most impact, get the returns we want and drive the traffic. So it's -- the best thing I can tell you is that it's fluid, but it's going to all be based on the learnings that we've received so far. Todd Brooks: Okay. And just a quick follow-up there, Chris, or I don't know if Matt's there as well. But the biggest kind of surprises out of the first real three quarters of leaning into this effort, if you're looking at where the efficacy of the program has been. Christopher Tomasso: The biggest positive surprises. Matt Eisenacher: The biggest surprise -- this is Matt, Chief Brand Officer. So the biggest surprises, I think we have seen a lot of success in targeting our media within the category and using transactions to identify people that are already active in the category and may have lapsed or has not been to a First Watch in a while. So when you ask about kind of the momentum, I think we've built a playbook on not trying to convince people to necessarily build a new occasion within this daypart. But I think there's a lot of low-hanging fruit by being the leader in the category and simply being top of mind for those that are already going out to full service and especially full-service breakfast. So it's very database and gives us a lot of confidence. I think as you thought about strategies to go into next year, I think we think we've built a playbook over the last three quarters, and that's given us confidence. So we don't see a lot of derivation in the short-term on changing those strategies. The opportunity is really taking it into more geographies. And I think we'll talk about that over the next few quarters. Mel Hope: And Todd, you might remember that we piloted these last year. So in terms of surprises, I think the reason we piloted them was to -- so that we could select those things that would perform predictably. And I think they've been predictably positive. Operator: Our next question comes from the line of Brian M. Vaccaro with Raymond James. Brian Vaccaro: Just on the third quarter comps, can you elaborate a little bit on the impact? You talked a lot about the new marketing efforts, but just elaborate a little bit more on the impact you think the marketing is having on your sales trends. And I heard you say that it covered about 1/3 of your footprint, if I heard correctly. So I was thinking maybe some more color on sort of the regional trends that you're seeing or what that scatter plot might look like kind of mapped against the new advertising initiatives. Matt Eisenacher: So this is Matt again. We haven't really seen much variation. I think the results have been very consistent across geographies. I mean we've talked in the past how important the state of Florida is for us. And our results have been pretty consistent. And that's, frankly, why it gives us confidence. It's not like we're seeing particular markets succeed and others not respond. I think for us we know our awareness is low. And so simply by being top of mind, being consistently top of mind for category users, we've seen very consistent results, and that will inform how we think ahead in 2026. Brian Vaccaro: All right. That's helpful. And I want to ask on commodity inflation as well. I think it was around 3% you said in the third quarter, and the guidance implies that that kind of steps back up maybe into the mid-single-digit range in 4Q. Am I reading that right? And maybe you could just walk through some of the puts and takes within your basket moving through the rest of the year? Mel Hope: So it does step up a little bit in the fourth quarter. Kind of the general trend, Brian, this year has been that we started with our four largest commodities all being at historic highs, and we've seen some moderation in most of those, less so in bacon and coffee, but a great deal in terms of the cost we were paying for our [ shell in ] eggs and for our avocados. And that trend has held pretty steady through the year. The moderating commodities that continue to moderate and then coffee and the bacon have continued to be high. Operator: Our next question comes from the line of Jon Tower with Citi. Jon Tower: I'm going to go back to the marketing because why not. I'm just curious, in terms of what you're seeing with these new customers that are coming in, in response to the marketing so far, are they using the brand differently than how you've seen other customers come in, say, the first time when they are introduced to the brand? So for example, are they coming in and say you're marketing in these over social channels a certain piece of the menu, whether it's value-centric or a seasonal piece, are they coming in response to that and ordering that immediately when they come in first time or are they choosing different pieces of the menu versus what you normally see? So I'm curious to see if it's kind of you're pushing one thing and they're going after that or they're just getting introduced to the brand and coming because they're seeing the brand for the first time and utilizing it differently than what you normally see in the past from other consumers that aren't getting -- haven't been marketed to? Christopher Tomasso: Yeah. I'd say it's more of the latter, but with a clarification that we're not seeing any difference in behavior. It's more of a reminder of top-of-mind brand awareness, getting them in the door. But our mix hasn't changed much at all. As a matter of fact, we're still seeing positive mix like we have for a while now, no signs of check management, all healthy signs for us. It's just that we're raising our awareness and getting more customers in the door. Matt, I don't know if you want to add something there. Matt Eisenacher: Yeah, Jon. So Chris is right. We don't see much of a difference in mix. But what I'll go back to the strategy of we're tracking people and staying top of mind for category users. So if you're someone who hasn't been the First Watch in a while, we're not necessarily speaking to you about our seasonal menu. We're establishing that we are breakfast. We try to communicate breakfast. And then as we see you transact and you moved into our owned audiences, then we start to talk to you about our seasonal menus. So I just wanted to make sure it was clear. It's not necessarily that we're trying to drive new users in behind the seasonal menu, and that might be why we're not seeing a large fluctuation in mix. Jon Tower: Okay. I appreciate that. And -- then maybe on the new stores, and I appreciate all the color around the second-gen locations. Are you guys doing anything differently as you're moving into these new markets and you're building out, I believe somebody in the past, you've spoken to having slightly bigger footprints on these locations. The back of the house, are you doing anything differently with respect to the kitchen to handle perhaps more capacity with seating in the front of the house or maybe new equipment or anything like that in these new stores, particularly as you maybe move into markets that are slightly denser than what you've had in the past? Christopher Tomasso: I think one of the most encouraging things about these volumes that we're seeing is that our line, which is where the food comes right out of and goes to the customer is and has been the same for a long time, save some adjustments here and there as part of our ongoing evolution. But no. I mean, so the encouraging part is we realize now and know that these lines can do very high volumes, really high sales hours. But when we're taking over these spaces, to be honest with you, most of the time, they have much larger back of houses than we're accustomed to, but we put our standard line in there. But what it does afford us is a larger walk-in cooler, a bigger dish area, more prep area. So just not as congested perhaps as if we were building our 3,800 square foot restaurant. But no, the line itself being able to handle these types of volumes gives us a lot of encouragement about our ability to do these high unit volumes for a long time to come. Jon Tower: Cool. And then just lastly, you've ticked off a bunch of stuff with respect to technology in the past several years, whether it's the KDS, whether it's consumer-facing technology on the wait list or the app. Is there anything else that we should be thinking about in the next several -- maybe in the next 12 months or 24 months that you guys are tackling to either improve the guest experience or the employee experience? Christopher Tomasso: I feel like you're leading me to say AI. So I'm just going to say AI, it's not, okay. Look, we're constantly innovating, looking at every aspect of our business. And some things are big, some things seem small but have great impact. And so we'll just continue to evolve. We don't have anything teed up that we're ready to talk about right now. Our focus, as we teased last time was on a new menu, and we talked about it a little bit here. So optimizing the menu and is a big focus for us for 2026. Operator: Our next question comes from the line of Sara Senatore with Bank of America. Unknown Analyst: This is [ Isaiah Austin ] on for Sarah. Just a broad question about the breakfast daypart. I think earlier, we saw signs that it was stabilizing this year. Is that something that you guys continue to see? And kind of in the same vein, I think previously, we had heard from you all that you guys weren't seeing the same kind of trade-down benefit from dinner to breakfast and brunch that you guys experienced during the Great Financial Crisis. Do you feel like you're starting to see signs of that now? And then I have a quick follow-up after. Christopher Tomasso: Actually for us, weekday breakfast was the standout daypart in our growth in Q3. It was the best traffic of all our -- all three of our dayparts, which, as a reminder, we look at weekday breakfast, weekday lunch and then weekends, we just call brunch. So we've been very encouraged by what we saw at weekday breakfast. Unknown Analyst: Got it. And anything on the trade down just that you guys were experiencing like a couple of decades ago versus now? Do you see similar trends? Mel Hope: I don't think we have evidence of that. Don't really know. I mean some of that -- some of the direct data associated with that, I don't think we see the same thing today. Unknown Analyst: Perfect. And then just in light of the great quarter, is there anything that you all are seeing as far as your customer metrics, like higher frequency or improved value scores? Maybe if you have any measure of awareness, just kind of thinking about the drivers behind this quarter and where it can go from here? Matt Eisenacher: This is Matt Eisenacher again. You asked about awareness. We have encouragingly seen a steady increase in awareness, which is, again, encouraging for us given our known low awareness. So every quarter, we've seen sequential improvement in awareness and moderation and improvement in our value scores as well. I mean, Mel mentioned it earlier, we are a little more cautious in reporting on frequency in full service I think if you want a longer time horizon. But we have been able to test the post period in a variety of the channels and tactics we've been employing, and we've seen some indications of positive lift following those, which would tell us that there's likely a resulting in improved frequencies. But again, I think it takes more time to be definitive in that. But we've seen a lot of encouraging signs across all those metrics. Operator: Our next question comes from the line of Greg Francfort with Guggenheim. Arian Razai: This is Ari Razai for Greg. Congrats on a great quarter. I think delivery contributed just over 3% to the same-store sales in the quarter. And it looks like it accelerated from the last quarter. Can you talk about how demand has grown in that channel since you made that pricing adjustment, maybe like any other changes in promotional activity in that channel? Christopher Tomasso: Sure. Just to clarify, did you say how demand is affected in that channel? Arian Razai: Correct. Christopher Tomasso: Yes. We've seen demand increase significantly over the past, call it, [indiscernible] three quarters, and that trend has held. So we keep -- we talk about the positive impact of the changes we made to that program. And again, that's continued. Matt Eisenacher: This is Matt. Chris has made a good point that we did see improvement once we made the changes to the program earlier in the year, but the results have been fairly consistent. There wasn't a meaningful increase in that channel in the third quarter that might have outsized driven the rest of the comp. Arian Razai: Got it. Understood. Super helpful. And a quick follow-up. I know it's too early to talk about guidance in 2026, but maybe if you can touch directionally on labor and commodity inflation, that would be super helpful. Mel Hope: I can tell you that at present, we're talking with suppliers about our costing for some key commodities for next year. And so we'll probably have more information on that later in terms of labor inflation, I expect it to be -- or I'm hoping that it's a little bit more normal than maybe we've seen in the last few years. We have some built-in inflation as the regulatory minimum wages are increasing in some of our large markets by another $1 or so. So there'll be -- there's certainly some labor inflation, but I'm not ready to really guide to what we're building into our models for 2026 yet. Operator: [Operator Instructions] Our next question comes from the line of Andrew Charles with TD Cowen. Andrew Charles: Typically, you guys visit pricing around January, around July, give or take. But I guess I'm curious, what drove the decision to take that incremental 1.1% price increase that you mentioned in August following the 2.8% in July? Christopher Tomasso: Yeah, Andrew, that 1% was contemplated in our pricing strategy early in the year. However, it affected some items that had a relation to the seasonal menu that we were rolling out. So we needed to time it with that so that we maintain those relationships if that makes sense. There were some items. We look for certain spreads between a seasonal item and a core menu item. And we had that particular situation here. So we just held back 1% so that we could time it with the launch of the seasonal menu. Andrew Charles: Okay. I got you. And then separately, Mel, the third-party delivery AUV, if we look at the Q, looked to be up about 40% in the quarter. Can you speak to the flow-through that you're seeing on that profitability and the impact that's having in driving profitability as well? Mel Hope: So the profitability on third-party delivery would be -- we generally view it as a transaction just like any other transaction with a different top line. And so as a result of the fact that oftentimes we have fewer beverage deliveries than we do in the restaurants. I think the profitability, at least [indiscernible] level probably runs pretty close to the standard. If you're fully loaded, maybe it's a little bit more, little bit profitable, a little less. Okay. A little bit less. Christopher Tomasso: But in that it's -- we view it as an incremental occasion. I think it's important to keep that in perspective that majority of those transactions we consider to be incremental. Mel Hope: The truth is I don't know that we've ever publicly talked about the RLOP on the different types of different sales channels. Christopher Tomasso: But it is a big contributor to our adjusted EBITDA. Operator: This now concludes our question-and-answer session. I would like to turn the floor back over to Chris Tomasso for closing comments. Christopher Tomasso: Great. Thank you. Thanks, everybody, for joining us on the call this morning. We really appreciate it. We're looking forward to connecting with most of you in the coming days and weeks. And as always, we are grateful for the dedication shown by our entire team, many of whom I know are listening today. So a sincere thank you from all of us here. We look forward to building on our strong foundation throughout the balance of this year and are excited about our prospects for 2026. Have a great day, everyone. Thank you. Operator: Ladies and gentlemen, thank you for your participation. This does conclude today's teleconference. You may disconnect your lines and have a wonderful day.
Operator: Hello, and thank you for standing by. My name is Mark, and I will be your conference operator today. At this time, I would like to welcome everyone to the ADT Third Quarter 2025 Earnings Conference Call. [Operator Instructions] Now I would like to turn the call over to Elizabeth Landers, Vice President, Investor Relations. Please go ahead. Elizabeth Landers: Good morning, and thank you for joining us to discuss ADT's third quarter 2025 results. Today's speakers are Jim DeVries, ADT's Chairman, President and CEO; and Jeff Likosar, our CFO. After their prepared remarks, we'll open the call for analyst questions. This morning, we issued a press release and presentation summarizing our financial results. Those are available at investor.adt.com. We'll reference our non-GAAP financial measures today. Reconciliations to the most comparable GAAP measures are included in the earnings presentation on our website. Unless noted otherwise, all financials and metrics discussed reflect continuing operations. Non-GAAP cash flow measures include amounts related to our former solar business through 2Q 2024. Forward-looking statements included in today's remarks are subject to risks and uncertainties. Actual results may differ materially. Please refer to our SEC filings for more details. And now I'm happy to turn it over to Jim. James DeVries: Thank you, Elizabeth, and good morning, everyone. I'm very pleased to report that ADT delivered another quarter of solid revenue growth, robust cash flow and very strong earnings per share. Collectively reflecting the resilience of our business model and our team's continued execution of our 2025 strategy. Let me start with a few key financial highlights. Total revenue grew 4% to $1.3 billion. Adjusted EBITDA grew 3% to $676 million with adjusted earnings per diluted share of $0.23, up a strong 15% year-over-year. Cash flow continues to be a highlight with adjusted free cash flow, including interest rate swaps reaching $709 million year-to-date. Additionally, year-to-date, we have returned $746 million to ADT shareholders through share repurchases and dividends. We ended the third quarter with a recurring monthly revenue balance of $362 million, up 1% year-over-year. Turning to attrition. Earlier this year, ADT achieved record levels, and this quarter, we ticked up to 13%. While above our budget, our teams are focused on plans to continue improving customer retention and those actions are underway. As we've executed in prior quarters, during Q3, we completed a small bulk account purchase of 15,000 accounts for $24 million. Overall, consumer sentiment remains cautious and relocations continue at low levels. We have remained disciplined in our SAC spending which resulted in lower new subscriber and RMR adds. Jeff will provide more specific details about our results and full year outlook later in our call. I'd like to spend the next few minutes updating you on ADT's 2025 progress and strategic focus areas, which continue to build on the priorities we've shared throughout this year. ADT's commitment remains unchanged, delivering safety and peace of mind to our residential and small business customers. Our strategy is anchored in 3 core pillars unrivaled safety, innovative offerings and a premium best-in-class customer experience. Unrivaled safety is at the heart of everything we do at ADT. As it has been throughout our entire 150-year history. We are constantly strengthening the ways we protect ADT customers and provide them with confidence in their security delivering peace of mind. As we execute on our near-term financial goals, we're also investing in our product and experience ecosystem, expanding and enhancing our differentiated offerings. These efforts give customers even more reasons to choose ADT and to remain loyal to our brand. Our ADT+ platform continues to gain traction, enhancing the safety, convenience and experience we deliver to our customers. Our product and engineering teams are firing on all cylinders, in coordination with our strategic partners to drive a continued pipeline of innovative releases. Our product road map is robust, and we expect to continue expanding our suite of unrivaled offering every quarter to continue to gain share within the smart home. An increasing percentage of our new customers are now enjoying ADT+, and many of these customers are opting for larger, more comprehensive ADT systems, leading to increased installation revenue, and we anticipate contributing to even stronger retention over time. During 2025, approximately 25% of our new customer additions have been installed with the ADT+ platform, and we are continuing to expand to more categories of customers and channels. This quarter, we launched the ADT+ Alarm Range Extender further enhancing the capabilities, performance and dependability of the ADT+ platform. This device expands coverage between the ADT+ base and other connected devices in larger or more complex homes with a 24-hour battery backup and tamper alerts. We also introduced new automation and AI-driven testing capabilities to streamline app development, reduce the need for manual testing and deliver faster, high-quality releases. These innovations help ensure a smoother, more reliable experience for our ADT + customers. We are actively evaluating new features, use cases and economic models and we'll continue to share additional information as these come to market. I also have a few updates regarding our efforts to optimize our hardware portfolio. While we don't expect hardware savings to be material in 2025, we view this as a meaningful source of savings going into 2026. Beginning October 15, ADT refreshed our smart home security portfolio, and we now offer 5 new Google Nest camera models, reflecting the continued expansion of our partnership with Google. And we are working closely with our suppliers to mitigate our tariff exposure, which we do not expect to be material during 2025. On the customer service front, we remain pleased with our progress with ADT's remote assistance program, which has eliminated approximately half of our in-home service calls reducing truck rolls and field service costs. Our current AI efforts remain focused on our customer care operations with an emphasis on improving the customer service experience for both our customers and our employee agents while also improving overall efficiency. These AI initiatives continued to deliver positive results with an increasing number of customer service chats processed by AI agents, with nearly half of those successfully resolved without live agent intervention. We're also continuing to expand the rollout of AI agents for voice calls and early results are promising for both customer satisfaction and cost efficiency. AI-driven cost savings are beginning to materialize, particularly in our call center operations and we expect to provide more quantitative detail as these benefits scale. Turning for a moment to State Farm. As mentioned during our last call, we have pivoted away from the past selling program, and we're exploring new opportunities for a digital relocation focused approach to jointly pursue new customers. Despite some ongoing macroeconomic uncertainty, including tariff pressures and elevated interest rates, ADT's business model remains resilient and very well positioned for the future. In closing, we remain focused on execution, operational excellence and positioning ADT for long-term value creation. I remain confident in ADT's outlook and our ability to deliver on our commitments for 2025. I want to thank our employees, partners and customers for their dedication and trust in ADT I'm proud of our team's performance and excited for the opportunities ahead. With that, I'll turn the call over to Jeff. Jeffrey Likosar: Thanks, Jim, and good morning, everyone. I will take the next few minutes to share some additional details on our third quarter and year-to-date results and our outlook for the rest of the year. As Jim mentioned, cash flow remains a significant highlight. In the third quarter, we generated $208 million of adjusted free cash flow, including swaps, up 32%, and we have generated $709 million year-to-date, up 36%. Adjusted net income for the quarter was also very strong at $187 million or $0.23 per share. Year-to-date, we have generated adjusted earnings per share of $0.67, up 20%. Adjusted EBITDA for the quarter was $676 million, up 3% in the quarter and up 4% on a year-to-date basis. This strong performance is driven by revenue growth, the associated margins and our overall efficiency, enabling continued investments for the future while delivering these results. Adjusted earnings per share also benefited from our repurchases enabled by our strong cash generation and our efficient capital structure. On the top line, we delivered total revenue of $1.3 billion in the quarter, up 4%. Monitoring and services revenue was up 2% with an ending RMR balance of $362 million. Installation revenue was $200 million, up 21% and reflecting our continued mix shift to outright sales at higher average prices as more customers choose our ADT+ offerings. Gross subscriber additions were $210,000 in the quarter, adding $12.5 million in RMR. Our adds were down year-over-year, driven mainly by fewer bulk account purchases, approximately 49,000 accounts last year versus approximately 15,000 this year. I will note that our third quarter results still include the multifamily business, which we divested on October 1. This business is comprised of customers who own or operate residential rental housing facilities such as apartment complexes. Its characteristics are akin to the commercial business we divested in late 2023, generating meaningfully lower EBITDA and cash flow margins than our core residential subscriber base. We are consequently pleased with the $56 million sale price for this relatively small portfolio of approximately 200,000 subscribers and $2.6 million in RMR. We have also continued to return significant capital to shareholders while strengthening our balance sheet. As Jim mentioned, we have returned $746 million so far this year from the repurchase of 78 million shares and our quarterly dividend distribution. We remain very comfortable with our leverage at 2.8x adjusted EBITDA with net debt of $7.5 billion at the end of the third quarter. In October, we closed on a new 8-year $1 billion bond and a $300 million add-on to our 2032 Term Loan B. We used the proceeds to fully repay our $1.3 billion 2025 Second Lien Notes, which was our most expensive debt. We also closed on a new $325 million term loan A last week with those proceeds designated to repay some of our 2030 Term Loan B and our April 2026 notes. In all cases, we were able to price the new facilities below the rates of the debt they replaced. Together with transactions from earlier in the year, we have extended almost $2.5 billion of upcoming maturities and lowered our borrowing cost to 4.3%. We also enjoy a continued strong liquidity position with an undrawn $800 million revolving facility and $63 million of cash on hand at the end of the quarter. I'll close with a couple of comments on our outlook. With 2 months to go, we remain on track to deliver results consistent with the guidance we shared early this year. Reflecting this confidence, we have tightened and adjusted our guidance ranges, largely maintaining prior midpoint. We now expect total revenue of between $5.075 billion and $5.175 billion, with the midpoint consistent with our original guidance. Our refreshed ranges include slightly higher adjusted EPS midpoint with an offset to the adjusted EBITDA midpoint. This is in consideration of the mix between expense and capitalized SAC and other factors, including a delayed planned legal recovery. We now expect adjusted EPS in the range of $0.85 to $0.89, and we expect adjusted EBITDA to be in the range of $2.665 billion to $2.715 billion. Finally, we are maintaining our $800 million to $900 million range for adjusted free cash flow, including swaps, as we evaluate a handful of fourth quarter opportunities, including bulk account purchases. In summary, we are very pleased with our progress during the first 3 quarters of 2025. As we look towards the remainder of the year, we are confident in our ability to deliver on our commitments. We remain focused on driving operational efficiency, investing in innovation and generating long-term value for our stakeholders. Thank you for your continued support. Operator, please open the line for questions. Operator: [Operator Instructions] And your first question comes from the line of Peter Christiansen with Citigroup. Peter Christiansen: Great to see free cash flow growth really materialize this year, pretty impressive. Jeff, really 1 question for me, Jeff. I was just wondering, we obviously know next year, a full cash taxpayer, but on the other hand, you've been able to lower the borrowing cost for the company. So I mean, those are pretty important key inputs as we think about 2026 free cash flow. Are there any other areas that we should think about when -- in our modeling, as we look to 2026, any components to free cash flow growth that stand out in your view? Jeffrey Likosar: Yes, you hit on the ones that have some dynamics that could cause them to change. So we've had some success managing our cash taxes will end up a little bit better on cash taxes, a couple of benefits from the recent legislation. We've done a really good job with a series of debt transactions, reducing our borrowing cost which makes that less of a challenge next year compared to what we once thought it would be. So we feel really good about our progress. In 2025, we're on track to achieve our original guidance because of our improvements, we have a lot more flexibility in capital deployment. So while we're not sharing any specific guidance beyond '25 today. This is, of course, the time of the year where we're working on strategic planning and budgeting for next year, ongoing conversation. With our Board evaluating several really interesting initiatives and opportunities for long-term growth. We continue to believe our stock is undervalued. So we've deployed capital there this year. And we plan to share more in the first part of next year in terms of a broader strategy and longer-range outlook along with our 2026 guidance. But I feel really, really good about where we are in 2025. Operator: And your next question comes from the line of Ashish Sabadra with RBC. Ashish Sabadra: So you mentioned efforts underway to improve retention, I believe, ADT+ and some of the AI initiatives are part of it. But I was just wondering if you could elaborate further on how should we think about some of these initiatives helping retentions going forward? James DeVries: Sure. Thanks for the question. It's Jim. I'll give a little bit of color on attrition overall and then talk about a couple of the improvement areas that we're focused on. As I said on the call, we ended the quarter rounding to 13%, up about 13 basis points from last quarter. As a reminder, we achieved record levels earlier this year and expect to drive attrition lower over time. Largely due to tailwinds on customer service and new offerings like ADT+, which should drive -- continue to drive more customer engagement and more usage. On the quarter itself, the pressure on the quarter came from a couple of areas nonpayment cancels were higher than last year. Voluntary losses were worse than last year and relocation losses were modestly lower than last year. A couple of areas to -- more specifically to your question, where I think there's cause for optimism. The team stability continues to improve, and more tenured employees perform at higher productivity rates, our customer experience metrics virtually across the board. NPS, customer sat, digital self-service, are all improving and going in the right direction. There's been some excellent improvement on life cycle management, which the team is advancing. And then from a hardware perspective, ADT+ things like Trusted Neighbor, increased penetration with video, all drive improved usage of our services. And to the extent that usage increases, we know historically that retention improves, the more a customer uses the system, the higher they value it, and the higher retention. So the quarter ended at 13%, we ticked up, but there's a number of initiatives underway that I think long term, bode well for us. Ashish Sabadra: That's great color. And maybe just on the RMR front, we saw some softness there from a growth perspective. How should we think about the puts and takes going forward? James DeVries: Sure. So at the intersection of attrition being 13 basis points higher and gross adds not being quite where we'd like them to be. RMR ended the quarter less than what we had anticipated. Our direct organic residential adds were actually up 1% year-over-year, dealer adds were down modestly. DIY, it's a small number, but DIY for us was up 13% year-over-year. The most significant impact on ending RMR for us this quarter from a comparison perspective is that we did a bulk of 15,000 this quarter comparing to 49,000 last year. So RMR -- ending RMR ended a little lower than anticipated. We have some bulk in the pipeline. We'll be disciplined about pursuing that bulk but that should continue to be a source of growth for us going forward. Thanks for the question. Jeffrey Likosar: And one thing I'd add to or just to emphasize is our continued focus on returns and discipline in capital deployment, SAC deployment, especially It's, of course, a very important measure, but we're also focused on profitability, SAC efficiency, cash generation. So really pleased to be still affirming our guidance that would have our adjusted free cash flow up 14% or 15% at the midpoint after 40%, I think it was a little bit above 40% last year. So as we're balancing all of these objectives, I want to emphasize the progress we made on cash generation. Ashish Sabadra: That's great color. And congrats on good solid top line. Operator: And your next question comes from the line of Manav Patnaik with Barclays. John Ronan Kennedy: This is Ronan Kennedy on for Manav. Can you talk about the portfolio hardware optimization efforts? I believe you indicated not material savings in '25, but a potentially meaningful source of savings into '26. If you could please provide some color of that on that and also the benefits of the remote assistance program and your early AI initiatives, please? James DeVries: Sure. Ronan, there's a lot packed into that question. I'll go tree tops on each of the 3, and we can go deeper in the after call, if you like. On the product side, we're working with our ODMs, essentially leveraging our scale and their expertise to drive lower cost manufacturing. And we've had some good progress with ADT+. That now represents something in the neighborhood of 25% of our new sales, we'll continue to expand that to new order types, new channels, but all of the work that our engineering teams are doing with the ODMs are focused on driving down prices. We'll have a little bit of tailwind. We've had a little bit of tailwind on that front this year. It's not material. But as we continue to expand ADT+ to more and more of our new installations, we'll see more progress on the savings front. AI continue to focus on customer service. We're now expanding into some sales applications, employee productivity. There, too, we've had savings in 2025 and expect that to begin to accelerate in '26 as well. Chat volumes now 100% AI containments right around 50%. Voice is we're probably in the neighborhood of half of our calls have virtual agent of our voice calls containments flat at just below 20%, but I feel good about what we're doing on the AI front as well. And then on remote servicing, that's maintained about -- at a level of about 50% of our service calls. And we've plateaued right about there for the last handful of quarters. I think there might be a little bit more improvement there, Ronan, but it's not -- shouldn't be meaningful. We're happy with where we are. The NPS and customer sat scores are very good with remote service. And I would expect that it will maintain right around half of our service costs. John Ronan Kennedy: Another, if I may, kind of multifaceted question, but more so on the macro and the strength of the consumer as you see it. I think you said our voluntary disconnects were up. I don't think you commented on nonpay. You also alluded to potential impacts of tariffs and a still higher interest rate environment. So could we just have your characterization of the macro and the strength of the consumer? And if and how those could potentially impact you achieving your guidance for 4Q are going into '26, please? James DeVries: Yes. We -- so absolutely. We -- so we reiterated on the guide. So I'd say overall, macro factors included -- we are confident with a couple of months to go that will be in the guide and therefore, reiterated. . I'll make -- I'll share a couple of comments on attrition and macro overall and then ask Jeff to touch on your question with regard to tariffs. I think generally, Ronan, we're seeing a cautious consumer delinquency is up a bit. Our nonpay cancels, as I mentioned, were higher than last year. it's not meaningfully higher, but it's a number we're paying a lot of attention to. I think that some of the process changes and collections that our team is making while early bode well for us, and we're definitely not seeing a continued erosion, those elevated nonpay cancels and delinquencies have stayed steady -- elevated but steady. Another thing worth mentioning, you're pretty familiar with our business when we have relocations down -- the downside is we get fewer bites at the apple from a gross adds perspective, but it is a tailwind for us on attrition. And relocation losses were a bit less Q3 this year than Q3 last year. So overall, taking macro all the macro variables into consideration, I continue to feel good. Jeff continues to feel good about Q4. Jeffrey Likosar: Yes. And I'd add on tariffs. The environment has come into a little bit sharper focus, but still not perfect focus, so we continue to work with our vendors to mitigate cost. In some cases, it's negotiations, it's consideration of country of origin shifts, in some cases, nearer term, some cases, longer term, places where we make may make pricing adjustments to our customers. And then I want to reiterate at the risk of repeating the point that we just feel really good about our ability to deliver our guidance from the beginning of the year. I recall in -- I think it was our first quarter call, noting that we expect the tariffs would put pressure on the midpoint of some of our guidance ranges, but we still would deliver the ranges and you're sitting here today in November, the tariffs have a bit of an effect on EBITDA. There's a couple of EBITDA things between hitting the P&L and hitting the balance sheet, but we're able to overcome those in a couple offset in EPS. So you took our EPS up a couple of points and -- or a couple of cents, I mean. And then already made the point that we feel really good about our cash generation. So despite some of these uncertainties, our teams have done a really good job managing the puts and takes this year. Operator: And your next question comes from the line of Toni Kaplan with Morgan Stanley. Toni Kaplan: I first wanted to ask about the lower SAC spend. Was that a deliberate strategy? It makes sense that you wanted to be more disciplined, but I guess, is there anything that sort of drove you to spend less this quarter? Or it just was that the customers that you saw weren't as high quality? Or was it sort of a deliberate you wanted to spend less? Jeffrey Likosar: Yes. I would say it's the combination of those things. Navigation of the point I was alluding to earlier, a variety of factors and offsetting directions and our commitment to deliver the guidance we put forth at the beginning of the year. And the point I mentioned about disciplined and returns oriented in our approach and then maybe worth also mentioning that we do still have a range around our adjusted free cash flow outlook for the full year, even with a couple of months left and part of that is a continued evaluation of SAC and the largest chunks of SAC tend to be bulk account purchases that we will evaluate in the last handful of weeks here. Toni Kaplan: Great. And then on State Farm, I know you had talked about sort of changing course on the program that was originally rolled out because of this low pace. This one seems more targeted but also sort of more limited. So I guess, like maybe just talk about how did you sort of pick this new target customer base? Were they seeing higher adoption of like higher take rate of the ADT product during the initial phase? Or was there something else? And I guess in terms of like your cost of this program, I imagine it's probably not that big, but I guess like how do you think about like what you're hoping to get for returns or things like that? And when do you sort of reevaluate on the new pilot. James DeVries: Thanks for the question, Toni. It's Jim. I'll give a little bit of context on State Farm and then speak to -- speak more directly to your question about the digital program that we're contemplating. . Our original agreement with State Farm was for a 3-year term. That concluded just this past October. As you know, and as I've mentioned on a few calls, volume has been below what we expected from the partnership. We didn't build meaningful adds into our 2025 budget program to date. We're at around 33,000 subscribers -- 32,000, 33,000 subscribers. And so we have pivoted to explore a digital solution. This is effectively directed at relocating consumers. We're in the very early days of design. It's not necessarily the last effort trying the traditional distribution with State Farm, but it's a fresh tactic, and we're going to lean in here and see if we can get some traction. An advantage is that it's in the potential buy flow. And so there's not a reliance on agent execution as there is in the traditional path. This is a digital process directed at relocating customers. I should also mention we're continuing our data sharing program with State Farm, where with customer consent, we share alarm activity at the customer's home with State Farm. And so we continue to kick tires on that front to see if there's a source of value. But back again on your original question about the advantage of the digital program, I would say, is that it's included in the buy flow, a more natural process and one we hope we get better traction with. Operator: And your next question comes from the line of George Tong with Goldman Sachs. Keen Fai Tong: You outlined various drivers to improve your attrition rates. Can you talk about how long you think it might take for those improvements to materialize and drive year-over-year improvements in attrition? James DeVries: Thanks for the question, George. I think that it's probably Q1, Q2 of next year. The -- It takes a little bit of time to bake on the NPS improvements. The digital self-service continues to get really good traction. We're better than ever at meeting customers where they choose to interact with us. So we're expanding the digital platforms. There are some really interesting work that we're doing, leveraging AI to drive satisfaction. But I think it's a quarter or 2 before we start to see some improvement. I think the voluntary losses -- I anticipate voluntary losses will be the first to improve. And I'd mentioned earlier on our nonpayment cancels, there's been some process improvement on collections, where we essentially are dialing up our contact rates with delinquent customers and having some success there. And I'd expect some nonpay improvement as well. That, of course, is pretty significantly influenced by the macro environment, so a little more difficult to predict. But I think our internal processes and the improvement we're making bode well for us, say, Q1, Q2. Jeffrey Likosar: And one other thing I'd add too is we made some adjustments and fine-tuning to our underwriting processes to whom we extend how much credit earlier in the year that we expect will have some benefit, but it also takes a few months to work its way through the system. Keen Fai Tong: Got it. That's helpful. And you mentioned earlier, continuing to opportunistically pursue bulk account purchases. Can you remind us what's embedded in the guide in the full year with respect to future bulk account purchases? And what current economics look like with purchases? James DeVries: Let's tag team on this one, Jeff. So I'll give you a little bit of color and Jeff will as well, George. So we've got some bulk in the pipeline now. We -- as you know, we'll stay disciplined. We won't chase these bulks. We don't want ads just for the sake of ads. So if we can't get to the economics that we target. We won't pursue them. But there's 2 or 3 sizable bulk opportunities available to us. We're evaluating those. We may end up executing one in the fourth quarter. And that, I think Jeff mentioned earlier, is largely the reason why we left the free cash flow guide wide. We tightened revenue, EBITDA and EPS, but left adjusted free cash flow at the $800 million to $900 million to in to -- principally to have the flexibility to pursue 1 of these bulks in Q4 if the economics work out. Jeffrey Likosar: Yes, I don't have a whole lot to add. Similar to Toni's question and even in the third quarter, as Jim had noted, one of the drivers that I noted also in the prepared remarks, that one of the drivers year-on-year was less bulk in the third quarter. So of course, that led to less SACs spanning on those bulks. We're evaluating these in the fourth quarter. I'll just be echoing Jim's point about that. That's why the range is a bit wider than some of the other ranges. Operator: And your next question comes from the line of Ashish Sabadra. Ashish Sabadra: Just 1 quick question on capital allocation. You've been very opportunistic with the share repurchases. Can you just remind us how much more authorization do you have in place? And also from a liquidity perspective, can you talk about your opportunity to continue to do more opportunistic share repurchases going forward? Jeffrey Likosar: Yes, sure. So the authorization from the beginning of this year, we have fully consumed. So that was $500 million authorization. We also had another a little bit more than $100 million of repurchases in January under the prior year's authorization. In terms of capacity, we have access to our revolving facility. As I noted, we feel really good about the debt transactions we've been able to undertake, including refinancing our most expensive debt just in the last couple of weeks. We also recently issued a term loan A. We used $200 million of those proceeds to repay our older, more expensive term loan B -- the 2030 Term Loan B. But we do have some of that cash still available. It's earmarked for debt repayment. But from a liquidity perspective, as we sit here today, we have liquidity available. And as I already alluded to, significant flexibility. Our next upcoming maturity is $300 million on our April 2026 notes and we feel very confident we can manage that maturity and have some capital available for share repurchases, if there's a good opportunity or M&A or SAC or any of the other capital allocation priorities we've talked about. Operator: There's no further questions at this time. I will now turn the call back over to Jim DeVries for closing remarks. Jim? James DeVries: Thank you, Mark, and thanks, everyone, for taking the time to join us today. We look forward to finishing the year strong. We remain confident in achieving our financial commitments for 2025. I'd like to extend my appreciation to our employees and our dealer partners. Thanks again, everyone, and have a great day. Operator: This concludes today's call. You may now disconnect.
Operator: Good day, and thank you for standing by. Welcome to Vital Farms Third Quarter 2025 Earnings Conference Call and Webcast. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand it over to your host, Brian Shipman, Vice President of Investor Relations. Please go ahead. Brian S. Shipman: Good morning, and welcome to Vital Farms Third Quarter 2025 Earnings Conference Call and Webcast. Joining me today are Russell Diez-Canseco, Vital Farms' President and Chief Executive Officer; and Thilo Wrede, the company's Chief Financial Officer. By now, everyone should have access to the company's third quarter 2025 earnings press release issued this morning. During today's call, management may make forward-looking statements within the meaning of the federal securities laws. These statements are based on management's current expectations and beliefs and do involve risks and uncertainties that could cause actual results to differ materially from those described in these forward-looking statements. Please refer to today's press release, the company's quarterly report on Form 10-Q for the fiscal quarter ended September 28, 2025, that was filed with the SEC today as well as the company's other SEC filings for a detailed discussion of the risks that could cause actual results to differ materially from those expressed or implied in any forward-looking statements made today. Note that on today's call, management will refer to certain non-GAAP financial measures. Please refer to the appendix in today's press release [indiscernible] presentation for a reconciliation of our non-GAAP measures to the most directly comparable GAAP measures. That presentation and today's press release are both available on the Investor Relations section of our website. After our prepared remarks, we'll open the line for questions. [Operator Instructions] Now I'll turn the call over to Russell. Russell Diez-Canseco: Thank you, Brian, and good morning, everyone. Before we get into results, I want to officially welcome you as our new Vice President of Investor Relations. We're excited to have you on the team. For those of you joining us today, I know you will all enjoy working with Brian. I'd also like to thank the entire Vital Farms crew. Over the past 3 months, we've delivered a very strong quarter with record financial results, advanced our supply chain and set the company up for continued growth in 2026 and beyond. All of these great accomplishments took every one of our crew to make happen from the team at Egg Central Station in Springfield to our farm support and remote workforce. I just came back from an all-hands meeting with our remote crew and the energy and commitment in that room was truly inspirational. Our crew is energized to drive strong growth into the future in service of our purpose to improve the lives of people, animals and the planet through food. And I'm honored to have the opportunity to lead this great organization. As we entered the back half of 2025, we told you our focus would be on rebuilding supply, meeting strong retail demand and positioning the business for sustainable growth into 2026. We've delivered on all 3. Let's start with this quarter's results. Net revenue was $198.9 million, a new record for any quarter and was up 37.2% from the prior-year period on the back of the incredible ramp-up in the supply of eggs our crew has been able to deliver. Gross margin came in at 37.7%, which remains above our long-term target of 35%. And adjusted EBITDA was $27.4 million, and increased 81.3% compared to the prior-year period as we benefited from price mix and scale efficiencies. Next, we made meaningful progress expanding supply, adding processing capacity at Egg Central Station and completing a major systems upgrade. We added approximately 75 new family farms during the last quarter, bringing our total to 575 family farms. That's approximately 150 new farms year-to-date. We now have more than 10 million hens under contract, which is a reflection of the trust and partnership we've built with farmers in the pasture belt. Our third production line at Egg Central Station in Springfield came online in October, expanding capacity to about $1.2 billion in annual egg revenue and positioning us to meet growing consumer demand. Our Seymour facility remains on track to open in early 2027. With 2 production lines, we estimate the Seymour facility will add $900 million in annual revenue capacity. Also, at the beginning of the fourth quarter, we went live with our digital transformation project, a critical milestone that enhances our operational capabilities and underpins our ability to scale efficiently. More on that from Thilo in a few minutes. Finally, we continue building our trusted brand and making progress on our long-term aspiration to grow Vital Farms into America's most trusted food company. This increases our confidence that we have positioned the business well for long-term growth. We added another 2 percentage points of aided brand awareness, which now stands at 33%. Brand awareness is now up 8 percentage points since the third quarter of last year, demonstrating that our message is clearly winning with consumers. Through compelling authentic work like our Good Eggs. No Shortcuts brand campaign and our ads that aired alongside FX's award-winning series, The Bear, our stories continue to attract strong interest from the media and the public. We also launched limited edition dog treats made with Vital Farms eggs in August. This fun brand moment was featured in top-tier media outlets like Good Morning America and generated over 550 million impressions across press, paid media and social media. In summary, this was another great quarter for Vital Farms. We're executing well in the near term while laying the foundation for long-term growth. The investments we're making will continue to set Vital Farms up for long-term success. Given the strong execution across our operations, our farm network and our brand, we're raising full year guidance for fiscal 2025, which Thilo will cover in detail. Thilo, over to you. Thilo Wrede: Thanks, Russell, and hello, everyone. I'll review our third quarter financial results and then discuss our updated full year outlook. Let me start, though, by also welcoming Brian to Vital Farms. Brian, it's great to have you here, and I'm excited about what you are bringing to the company. Now for the results. Net revenue for the third quarter of 2025 rose to $198.9 million, an increase of more than 37% compared to the prior-year period. Revenue growth was driven by continued volume growth and favorable price mix. Gross profit rose to $75.0 million or 37.7% of net revenue from $53.5 million or 36.9% of net revenue last year. The increase in gross profit dollars was primarily driven by revenue growth from higher volume and increased pricing across our shell egg portfolio and favorable mix benefits. Gross profit margin increased year-over-year primarily due to favorable price mix, partially offset by increased overhead costs. SG&A increased to $44.4 million or 22.3% of net revenue compared with $36.1 million or 24.9% of net revenue last year. Shipping and distribution expenses were $9.2 million or 4.6% of net revenue compared to $8.1 million or 5.6% of net revenue last year. The dollar increase was driven by higher ship volume. Net income for the third quarter of 2025 increased 121% to $16.4 million or $0.36 per diluted share compared to $7.4 million or $0.16 per diluted share for the third quarter of 2024. The increase in net income was driven by operating profit growth, partially offset by year-over-year increases in tax provisions. Adjusted EBITDA for the third quarter of 2025 was $27.4 million or 13.8% of net revenue compared to $15.2 million or 10.5% of net revenue for the third quarter of 2024. Turning now to our balance sheet. As of September 28, 2025, we had total cash, cash equivalents and marketable securities of $145.1 million with no debt outstanding. The sequential decline in cash, cash equivalents and marketable securities reflects ongoing growth investments, including the new ERP system, the third production line at ECS in Springfield, Missouri, the construction of our new egg processing facility in Seymour, Indiana and our investment in accelerator farms. This was partially offset by strong operating cash flow of $27.9 million for the quarter. Our balance sheet remains strong and provides significant flexibility as we execute our growth investments. Before discussing guidance, I'll provide a brief update on our internal control remediation. We continue to make good progress addressing the material weakness in our revenue recognition process identified in our 2024 annual report. Importantly, this was a design efficiency only with no impact on our financial statements, and we remain on track to complete remediation by year-end, subject to the ongoing enhancements of controls in the recently implemented ERP system. On to guidance. Given our strong performance in the third quarter, we are raising our full year 2025 net revenue guidance to at least $775 million, representing growth of at least 28% versus 2024. I would like to point out that we did see a small amount of revenue pull forward into the third quarter from the fourth quarter ahead of our planned ERP go-live date. We had announced the go-live date to the trade so that they could plan ahead for it. We're also raising our adjusted EBITDA guidance to at least $115 million for the full year 2025, an increase from our previous guidance of at least $110 million. As we move into the fourth quarter and have good visibility for the remainder of the year, we now expect a bit less margin pressure in the second half of the year from tariffs and promotion. While the tariff situation remains fluid, we are seeing more modest impacts than we had originally expected. Additionally, our increased promotional activity is going as planned now that supply constraints have largely been resolved. Finally, we now expect fiscal 2025 capital expenditures of $80 million to $100 million. We continue to construct both production lines at our Seymour facility simultaneously, along with on-site cold storage. The $10 million reduction versus previous guidance reflects some timing updates for the Seymour facility and some postponed projects at ECS in Springfield in order to focus on the digital transformation go-live. As previously indicated, we will have elevated CapEx spend in 2025 and 2026 because of construction of our new facility in Seymour, Indiana, the newly installed production line at ECS, Springfield, the construction of accelerator farms and our digital transformation project. We expect to fund our current plans with existing cash and operating cash flow and continue to project that every dollar of CapEx investment in the Seymour facility will generate $5 of annual revenue capacity. Let me also touch a bit more on the ERP implementation. We turned on our new ERP system at the beginning of the fourth quarter on September 29. As planned, the new system is working very well. We put a great internal team in place at a realistic time line with multiple test iterations and partner with the right implementation vendor. As is common with any system implementation of this complexity, we are now in a planned hypercare period in the fourth quarter. During this hypercare period, we budgeted additional resources to support operations at ECS and address any issues as they arise. That said, given that ECS had to learn to operate using new processes and software tools, the ERP start-up slowed down production for the first 2 weeks of the fourth quarter, but that was always part of our plan and therefore, has had no impact on our guidance for the full year. However, you can see the impact in the most recent scanner data. Following this expected temporary slowdown, the business has quickly bounced back, and we are now operating at pre-go-live shipment levels. Before I hand the call back to Russell, I would like to mention that we will hold an Investor Day on December 16 in Springfield, Missouri. In addition to an update from management, we will tour ECS, including the third production line and showcase the new cold storage facility. We hope that you can join us. And if you're interested in attending, please reach out to Brian Shipman. Now let me turn the call back to Russell. Russell Diez-Canseco: Thank you, Thilo. With strong fundamentals, a resilient supply chain and expanding brand reach, we're confident in our trajectory into 2026. As I mentioned at the start of the call, I just returned from an all-hands meeting, and I'm always so energized by being with the entire crew in person. The organization's values are as strong as ever, and our crew continues to raise the standards for the Vital Farms brand and to drive the organization forward. Looking ahead, we believe we remain structurally advantaged with significant long-term opportunity. Our brand of eggs still represent a small fraction of the total egg market, giving us substantial runway for growth. Consumer awareness of animal welfare and food sourcing continues to increase, and Vital Farms has established itself as the trusted leader in this space. The capacity investments we're making, the operational excellence we're demonstrating and the brand strength we're building create a powerful combination. We're building a durable, scalable business model that can deliver consistent results for the long term. Every decision we make and every investment we prioritize is in service of our mission to become America's most trusted food company. The progress we're making in 2025 represents meaningful steps toward that goal. Once again, we thank you for your time and your interest in Vital Farms and for the confidence you've placed in us with your investment. We look forward to seeing many of you at our Investor Day in December. With that, we're happy to take your questions. Operator: [Operator Instructions] Your first question comes from the line of Robert Moskow from TD Cowen. Robert Moskow: Welcome to Brian. I wanted to know if you could get -- dive a little deeper, Thilo, into the volume in the quarter, up 19%. How much of that is from like filling up inventory at customers? And how much of that would you consider like sustainable demand growth from a consumer standpoint? And then also on the price/mix, which was a lot higher than I thought. Is there a mix component to that, that's unusual that you might want to dig into? Thilo Wrede: Yes. Rob, thanks for the question. So on the volume, I would argue this is all sustainable volume growth. This is not about filling retailer inventory. There might have been maybe a bit at the beginning of the quarter. But keep in mind that first half of the year, our volume growth was constrained just by our limited supply of eggs. And the demand was always there. Now we are in a much better position to fill the demand. And the way we've talked about growth progression sequentially throughout the year that every quarter, we would have higher growth in the previous quarter, higher volume than the previous quarter. We continue to see that. And so with that, this is all sustainable growth and driven by demand and not filling retailer channels. On the price/mix question, yes, it was slightly better than what we had initially planned for the quarter. It was really a function of channel mix, SKU mix for us. We dialed back promotions a bit in September. We didn't want to have a lot of promotions out in the market as we went into the ERP implementation at the end of September. We knew ECS would start up slowly afterwards. And so we were dialing back promotions that helped a bit. And so for -- looking forward next quarter, price/mix should probably play a slightly smaller role than it did this quarter, but volume growth will continue to improve. Robert Moskow: Okay. But just to clarify, volume up 19%. The retail tracking data doesn't show it quite so high. So as we look forward to 2026, is -- that's the reason I'm asking is like is high teens volume growth still conceivable in '26 based on what you see? Thilo Wrede: Yes. I don't want to get into guiding '26 already. But the growth algorithm that we have built for ourselves, it assumes continued healthy volume growth. Keep in mind, we are less than 3% of the volume of the entire egg industry in the U.S. I think we have plenty of room to continue to grow. We are putting the capacity in place. Russell talked about the number of farms that we recruited in the quarter, approximately 75 farms that we added. And so with that, we're putting all the pieces in place to continue volume growth at a very healthy level. I don't want to commit yet to a number, but I would argue third quarter was not an outlier. Operator: Your next question comes from the line of Jon Andersen, William Blair. Jon Andersen: Congratulations and welcome, Brian. I guess I wanted to ask about the additions in the -- farmer additions in the quarter. You kind of stepped up farmer adds sequentially through the year from 25 to 50 last quarter to 75. And I'm just trying to kind of get a sense for to what extent that is just kind of serendipity in terms of farmer availability versus deliberate as you kind of now have the third line installed in ECS and are looking to kind of enter '26 with increased supply capabilities? Russell Diez-Canseco: Jon, great question. So yes, we had a really strong quarter in terms of adding new farmers. And I think it speaks to the success that our network of farmers is having working with us, the strong reputation we have in the marketplace. And as we described earlier this year, sort of our increased capacity to vet and add great new farmers. The number is going to -- the number of farms we add each quarter will see some fluctuation quarter-to-quarter based on timing, various inputs to timing. But in general, we continue to scale over a long period of time relative to the growth that we anticipate in the months and years to come. Jon Andersen: Okay. And as a follow-up, we noticed that your TDP growth distribution growth picked up nicely in the September quarter. I'm assuming there are multiple factors, obviously, that go into that, your supply situation, ability to sell in more items to your retail customers. But it still looks like there's a long way for you to go to, let's say, establish an assortment at your big retail customers that's maybe comparable to some other brands in the category. Could you just talk a little bit about your selling efforts, what you experienced with resets this fall and how you're thinking about distribution opportunities in '26 as well given the better supply situation? Russell Diez-Canseco: Thanks, Jon. Yes, I think very consistent with our approach to so many things, we're really intentional and transparent in our relationship with our retail partners. And so as you mentioned, we have, for the last year or so, planned on this expanded level of egg production and processing capacity that we're now seeing come to fruition. And so that's enabled us to work with our retail partners about expanding distribution where it makes sense for them based on our increased availability of the products that they want for their sets. So it is gratifying to see that show up in expanding points of distribution. And we'll continue to be, I think, very measured in our approach so that we continue to do our best to match growing supply with growing placements and growing velocities. And as we continue to invest in the brand, there's strong pull-through, as you can see in our velocities, which continues to ensure that this is an important part of a retail exit. Operator: Your next question comes from the line of Megan Clapp at Morgan Stanley. Megan Christine Alexander: I wanted to follow up on Rob's question on the fourth quarter. So based on the guide and your comments, it does seem to imply that you're expecting just a bit of an underlying acceleration in volumes if we account for that pull forward, Thilo, you mentioned and your comments that price/mix maybe decelerate a bit. Obviously, the scanner data was helpful commentary in terms of what we've seen more recently. But could you just help us frame your expectations for volumes and what's driving that underlying acceleration implied in the fourth quarter? Thilo Wrede: Yes. Fair question, Megan. It really is a function of what Russell just talked about, right, great [indiscernible], great partnership with retailers, continued strong demand from consumers. And then on top of that, we just have better supply, the farm recruiting that we did last year at the beginning of this year that is now -- those eggs are now available to us to sell. The third line that came online at the beginning of October that increases the capacity that we have at ECS. And so we are now getting to a point where we have the egg supply, we have the processing capacity and the demand is there. So now we can fulfill more of that demand. And those are the conversations that we have with our retail partners that we see demand out there that we want to fulfill that demand, and that allows us to then have very constructive conversations about selling. Megan Christine Alexander: Awesome. Helpful. And then just a follow-up on pricing. I wondered if you could comment on what you're seeing in terms of price gaps and elasticity. I think last quarter, you said that price gaps had widened, but were within an acceptable range. It does seem like there's been some reports of avian flu, though it seems more contained and maybe gaps are widening a bit as that's kind of playing out. But as we look at the scanner data, your volume share gains are also accelerating. So just wondered if you could just talk about the dynamic and kind of what it's telling you about elasticity and consumer behavior. Thilo Wrede: Yes. We keep watching price gaps and this answer won't be very different from what we've said in the past, right? We keep watching price gaps. We want to make sure that we know where other players in the industry are. But ultimately, consumers who buy our products, they probably don't make much of a price decision. It's about the values that the brand stands for and that those consumers identify with. And so price gaps, yes, they have widened a bit probably even since we last talked a quarter ago. Yes, we are seeing signs of avian flu, especially in the northern parts of the country. I don't think so far, it has really impacted retail prices. We'll keep watching them. But ultimately, what drives our growth is not price gaps, but it is -- I think a big part of it is like the tailwinds with consumers caring more where their food comes from and how it's being produced. And that ultimately is a tailwind that benefits us, and it's not really driven by price gaps widening or narrowing. Operator: Your next question comes from the line of Scott Marks from Jefferies. Scott Marks: Congrats on a nice quarter. I wanted to just come back to the question of distribution that's been discussed already. I know in the past, you've talked about how the business is already in so many doors and you kind of see more of the growth from here coming from getting that extra item, that extra SKU on shelf. So just wondering if you can give us an update on how you're thinking about that as we head into '26 in terms of the split between new doors versus new items on shelf. Russell Diez-Canseco: Thanks. Great to be with you today. I think our stance is very consistent with where we've been throughout the year, which is we are in about 24,000 doors and are largely in some of the highest-performing retailers in the U.S. And our path to growing is largely with them, partnering with them and continuing to help them meet their goals for their consumers and for their brands. And you're right, there's still a lot of room to continue to add products to their doors, which we do at a judicious pace based on our expectations for the ability to service that business. So I wouldn't expect new doors to be the primary driver. I think it's additional items in each door that will be our growth opportunity as well as just general pull-through, the velocity from existing items. Scott Marks: Appreciate that. And then next question would be your shipping and distribution expense, although it came in a little bit higher year-over-year, I think still came in below what some folks were looking for. So just wondering if you can help us understand maybe what was the driver of that and how we should be thinking about that expense item moving forward? Russell Diez-Canseco: Yes. I think the biggest driver there is rates. So as we are all watching the macro environment and backdrop, and we're seeing some slowdown in some parts of the economy, that is creating a surplus of trucking availability, which is working to our benefit at least for the moment. Thilo Wrede: And Scott, let me just add to that, just a heads up that fourth quarter tends to be the highest unit cost for us for shipping and distribution simply because freight rates go up in the fourth quarter around the holidays. So sequentially, I would assume that there is an increase in distribution expenses. This year might be a bit of an outlier to what I just said that fourth quarter is the highest unit rate because of first quarter volume being unusually low for us. Shipping was a bit less efficient back then. So fourth quarter might come in higher than where we were Q3 on a per unit basis, but still better than what we had first quarter. Operator: Your next question comes from the line of John Baumgartner from Mizuho Securities. John Baumgartner: Russ, you noted in the past a very long conceivable runway for growth from the pool of potential new farmers that's out there. And I'm curious, given the volatility and uncertainty in the farming community year-to-date between tariffs, exports, low prices for row crops, I'm curious what you're seeing in terms of these conditions maybe enhancing the interest among farmers or accelerating the adoption of pasture raised production given better visibility into a domestic market, higher returns versus current operations. I mean has that been a factor at all in the year-to-date farmer pickups you're seeing? Or could it be a factor in 2026? Russell Diez-Canseco: Yes. It's always been important to us that we're creating meaningful economic opportunities for small family farmers in this country. And as you're alluding to, they often lose at the end of the movie. It's not -- it's definitely not easy to work and the economics of farming seem to be getting tougher every year. So we are really, I think, centered on that value proposition. It's really important to us that our farmers win when they work with us and they do their part. It continues to be an important part of the value proposition for them. I can't say that I'm seeing an acceleration of interest. We've talked in past about there being plenty of interest and a strong pipeline of prospective small family farmers, and that continues to be true. And our job is just to make sure that we have a pipeline of really great farmers in the right part of the country who really believe in what we're doing and want to be a part of it, and we continue to see strong interest. John Baumgartner: And then to follow up on the distribution growth and the velocities. The TDP growth has accelerated nicely throughout the year with the increase in supply. But I think more recently, the volume velocity has inflected positive since maybe like the middle of the summer. And I'm wondering if you could delve into that a bit more, this inflection in velocity. Is that largely reflective of a shift favoring more medium or heavy buyers? Is it more reflective of a change in business mix between retailers and channels? Just any thoughts there. Russell Diez-Canseco: Yes. The first thing I'd call out is, as we've been discussing, we've been bringing on meaningful expansion of both egg supply from farms and processing capacity at Egg Central Station. In Q3, we didn't just go live with our new ERP system as part of the broader digital transformation effort. We added a significant number of new farms, and we added and brought online the third production line at Egg Central Station. And so a lot of what you're seeing in the data is our increased ability to meet the existing needs of our consumers and retail partners. And that's an exciting place to be. Operator: Your next question comes from the line of Matt Smith from Stifel. Matthew Smith: Thilo, the fourth quarter guide or the implied fourth quarter guidance suggests margins still nicely above the 2027 target despite some hypercare spending as you called it. Is the level of promotional support and marketing at appropriate levels as you exit this year? Is there an opportunity to flex that higher as you see strong household penetration and awareness gains? And one other consideration, as you fill the new production line at Springfield, should that be a headwind to margin exiting the year? Or is that going to achieve a throughput that mitigates that? Thilo Wrede: Yes. Great questions, Matt. So on promotional and marketing spending, we have said, I think, for a few quarters now that promotional spend, meaning trade spend would be highest in Q4. That continues to be the case. That continues how we plan the year. And it's simply a function of fourth quarter, we don't worry about the ERP implementation anymore. The third line is online and so on. We have the supply to support promotions. And with that, we're really focusing promotions in Q4. Marketing spend, we're probably year-to-date at a very appropriate level for us. Year-to-date, marketing spend was about 5% of net sales. Maybe Q4 will take it up a little bit. But we have talked about that marketing spend for the full year will be roughly comparable to last year, where it was 5.3% for the full year. So that would imply that maybe marketing spend in Q4 is going to increase a bit compared to the first 3 quarters of the year, but not by any dramatic amount. And then the question on third production line, is it going to put pressure on margins or not? I would argue, Matt, that we have been staffing up for that line throughout Q2 and Q3. We wanted to bring people in early in order to make sure that by the time the line comes online, they're trained and they know what they are doing. So now we have the crew in place and now we can actually get the volume off the line. And so if anything, the third production line should be margin enhancing for us in the fourth quarter compared to what we have seen in the third quarter. Matthew Smith: And as a follow-up to your comments about incremental items in existing doors. In the past, you've talked about some of these incremental items being a mix tailwind as you get more premium items on the shelf. Is that still the case today? Or has the assortment changed as we think about some of the 6 counts of medium eggs and other items that you've introduced in the past? Russell Diez-Canseco: Yes. I think the biggest trend that continues to be true is that our organic products are growing faster. And that's, I think, largely driven by the fact that they are a more recent addition and therefore, earlier in the growth curve in so many of our mainstream retail partner shelves. So that's a nice tailwind, I think, from a mix perspective. It also increases our average item price, which is supportive of the revenue capacity from our infrastructure. Operator: Your next question comes from the line of Eric Des Lauriers from Craig-Hallum. Eric Des Lauriers: Congrats on another very impressive quarter here. Just one question for me, looking to drill down a bit more into consumer behavior these widening price gaps. So great to see the continued strength in demand. It's clear your existing customers are very loyal. The journey from trial to repeat to heavy user is consistent. But I'm wondering if you're seeing any impact on trial as a result of the widening price gaps? Russell Diez-Canseco: Thank you. At this point, no, although as we've said, we continue to bring on more capacity and more supply. And so I think that only enables more trial and enables us to kind of catch up to that continued increase in awareness that we're driving with our marketing efforts. But in general, what we've learned is that consumers don't just buy our eggs, they buy into what we stand for. And yes, there's some uncertainty in the broader environment and maybe with price gaps on the shelf, but our business is growing because people want to know where their food comes from and that trust and loyalty has kept our demand incredibly steady. Thilo Wrede: And Eric, I would add to that, we've always talked about that we use marketing dollars to drive brand awareness, and we have obviously seen some very great results there over the last 12 months with brand awareness improving by 8 points. And then we use promotional dollars to drive trial, right? We like that promotion on the shelf because we get that big yellow sticker on the shelf that then catches the consumer's eye. And that's often when the consumer tries us for the first time. So when I earlier talked about that we will increase promotional spend in the fourth quarter, that is really to drive trial. We now have the supply to Russell's point, we have the brand awareness. And now we want to use promotions to drive trial to get new households into the brand. So if over the next 3 months, you see an increase in our promotional spend, it's not a reaction to price gaps moving one way or the other. It really is a function of us having the supply and now the ability to get new consumers to try the brand for the first time and then turn them into repeat customers. Operator: Your next question comes from the line of Ben Mayhew from BMO Capital Markets. Benjamin Mayhew: Welcome, Brian. I guess I'll start with, can you talk about the impact of high competing protein prices? And do you see that driving more demand into eggs, which are relatively more affordable on a per serving basis? Russell Diez-Canseco: Yes. I think that's an open question, and we've certainly seen some reports that as consumers are looking for -- to stretch their grocery dollar, they're looking at more affordable sources of nutritious food. And eggs have always been a very affordable whole food that's packed with protein and the things that consumers want. That said, we don't have any unique insights into trade down, and we're not seeing strong evidence of that being an important driver of our growth at this moment. Benjamin Mayhew: Okay. That's fair. And then on Slide 12 in your deck, your average items sold has once again surpassed your average weekly dollars. Can you explain why this may be an important indicator of your volume-led strategy and ability to manage supply versus demand over time? Thilo Wrede: Sorry, Ben, I'm processing the question right now. I think the short answer there is we continue to drive distribution at retail by getting more SKUs on the shelf. And as we do that, we continue to increase the velocity of the items on the shelf, right? So we are not at the point yet where we're adding a marginal SKU that dilutes our velocity on the shelf. It's not a linear expansion on those metrics. There -- you'll see some peaks and bumps there. But over time, I think the statement I just made that we're driving both velocity and average items distributed, I think that holds true. So if you look at the chart in the deck, the page you referred to, third quarter average items sold maybe grew a bit faster than dollars per average items sold. But I would chalk that up to just -- as I said, it's not a linear path that we are on. But over time, both metrics grow at the same time. Sometimes one grows faster than the other. But I think the statement of we can grow both at the same time, we are not adding the marginal product yet, I think that holds true. Russell Diez-Canseco: And what I might add to that is that -- and we've talked about this on prior calls, in many of our retail partners, we are what we would describe as underspaced. We've got terrific high-performing products and often the amount of space we've got in their set is smaller -- we have a smaller share of space than we do share of revenue from their egg set. And so when we add an item, it is also an opportunity to provide more supply and presence of product on the shelf to meet the growing demand for our brand. And there's a lot of runway in that regard. Operator: Your next question comes from the line of Sarang Vora from Telsey Advisory Group. Joseph Feldman: It's actually Joe Feldman on for Sarang today. I had a quick question about CapEx. I think, Thilo, you mentioned that there would be a little bit of a -- I guess, because of timing, there would be a little lower this year. And I'm wondering, does that just get made up next year and how you guys are initially thinking about CapEx for 2026? Thilo Wrede: Yes, Joe, good to have you on the call. Yes, it is just a timing shift from this year into next year. We took the guidance down by $10 million. And what we talked about was that work in Seymour, there's a bit of groundwork that we have to do that is slowing down the construction phase by a few weeks. And then the other part is there's a project at ECS that we put on hold. We didn't want to overtax ECS with changes around the ERP go-live and the third line coming online. So we wanted to reduce the amount of change that we're doing at a single point of time at ECS. And so with that, we delayed this project at ECS into next year. In other words, the CapEx spend that we have planned over a 2-year period for '25 and '26 is unchanged. We're just moving a little bit more into next year. But it's not any reflection other than that. It's no reflection on how we think about projects or importance of projects. Joseph Feldman: Got it. That's helpful. And then this might be a little bit more of a technical question. But with the ECS, and I guess we may see it at the analyst event. But I'm just curious, how does the division of the work or the labor happen among the 3 lines? Like is one line dedicated to just, I don't know, regular eggs versus organic eggs? Or like how does -- I guess, how do you run the different lines? And how -- I understand how it increases capacity, but how does that all kind of happen, I guess, is my question? Russell Diez-Canseco: That's a great question, and we look forward to showing you it live at our Analyst Day. But the thing that's exciting about this third machine, it is a slightly smaller machine than the first 2, which is why our reported revenue capacity doesn't grow by 50%. And what that means is that, that machine is great for a shorter run time product. Essentially, it allows us to dedicate the first 2 machines to longer run time product lines, our main top 4 SKUs. And then we can use the new machine to focus primarily on our specialty SKUs, which have lower volumes. That really increases our efficiency, and we're excited to see that sort of productivity improvement over time as we work our way into having all 3 up and running. Operator: That concludes the question-and-answer session. I'd now like to turn the call back over to Brian Shipman for closing remarks. Brian S. Shipman: Thank you, and thanks again, everyone, for joining us today and for your continued support. Please reach out directly with any follow-ups or if you'd like to attend our Investor Day in December. With that, have a great day.
Operator: Good day, and welcome to the Solaris Energy Infrastructure's Third Quarter 2025 Earnings Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Yvonne Fletcher, Senior Vice President of Finance and Investor Relations. Please go ahead. Yvonne Fletcher: Thank you, operator. Good morning, and welcome to the Solaris Third Quarter 2025 Earnings Conference Call. Joining us today are our Chairman and Co-CEO, Bill Zartler; and our Co-CEO and Director, Amanda Brock; and our President and CFO, Kyle Ramachandran. Before we begin, I'd like to remind you of our standard cautionary remarks regarding the forward-looking nature of some of the statements that we will make today. Such forward-looking statements may include comments regarding future financial results and reflect a number of known and unknown risks. Please refer to our press release issued yesterday, along with other recent public filings with the Securities and Exchange Commission that outline those risks. We also encourage you to refer to our earnings supplement slide deck, which was published last night on the Investor Relations section of our website under Events and Presentations. I would like to point out that our earnings release and today's conference call will contain discussion of non-GAAP financial measures, which we believe can be useful in evaluating our performance. The presentation of this additional information should not be considered in isolation or as a substitute for results prepared in accordance with GAAP. Reconciliations to comparable GAAP measures are available in our earnings release, which is posted in the News section on our website. For more details on the company's earnings guidance, please refer to the earnings supplement slide deck published on our website. I'll now turn the call over to our Chairman and Co-CEO, Bill Zartler. William Zartler: Thank you, Yvonne, and thank you, everyone, for joining us this morning. Solaris had a great third quarter, achieving record levels of quarterly revenue and profit. Our strong results demonstrate that we are executing well and are also showing significant progress on our growth. Solaris is at the center of what appears to be a massive and growing market opportunity. Demand for reliable and efficient power generation is accelerating as data center investment and associated power demand continues to grow at a scale and pace that is providing significant attractive growth opportunities for Solaris. Many data centers now require more than 1 gigawatt of electricity demand per site, which, in some cases, represents only the initial phase of what is likely to evolve into a multi-gigawatt facility. Many of these key artificial intelligence players are now planning numerous locations of this size with multiyear development plans. Power is a key bottleneck for many of these projects. Grid delays, extended equipment lead times, regulatory mandates and surging demand are leading data center developers and hyperscalers to select locations where they can quickly secure significant power for multiple years. Over the course of the last 18 months, Solaris has positioned itself to provide critical infrastructure and services to support this massive investment cycle. In that short time, Solaris has quickly become recognized as a leading power solutions company. This is attributable to our successful track record of delivering a scalable, reliable and flexible power solutions offering. In order to continue our growth trajectory, we must execute well on all aspects of the business. This includes growing a capable team, while maintaining our culture, developing a strong balance sheet and creating power offerings that optimize capacity, timing, capital and flexibility. The optimal power solutions for our customers will likely vary based on the application, scale, location, capital efficiency and importantly, the timing needs of each unique project. Solaris is in a position to provide our customers with the most appropriate solution or solutions for their range of needs at any particular site. We can provide multiple generation sources to our customers as well as gas supply infrastructure, power distribution equipment and resiliency equipment such as battery energy storage systems or BESS. Our solutions can include a combination of natural gas turbines, natural gas reciprocating engines, grid power, BESS, fuel cells and other renewable technologies. It is quickly becoming apparent that an all-of-the-above generation approach could be necessary to meet the rapidly growing power demand. Since we updated you last in July, Solaris has achieved many strategic milestones that have positioned us for substantial growth. First, we continue to demonstrate strong execution. We operated approximately 760 megawatts during the third quarter, up from approximately 150 megawatts only a year ago. Our growing proprietary operational know-how and strong track record of uptime position us as a reliable provider of power. We began successfully providing primary power to a second data center during the third quarter, highlighting our ability to again rapidly deploy power solutions supported by effective collaboration between our employees, our supply chain partners and our customers. Second, we secured additional capacity to position our business to enable us to react swiftly and comprehensively to the numerous meaningful commercial opportunities we are pursuing. With the order of 80 megawatts announced a few weeks ago and an additional order of just over 400 megawatts, we now expect to have pro forma generation capacity of approximately 2,200 megawatts by early 2028, compared to our prior plan for 1,700 megawatts by the first half of 2027. Third, we raised significant capital in the form of a new convertible notes to pay off our existing term loan, providing us the financial and operational flexibility to continue our growth. Kyle will share more detail on this shortly. Fourth, our commercial pipeline is deep and growing, as we are currently evaluating a number of potential long-term opportunities. The combination of growing project size, tenor, timing and reliability has resulted in an increasing interest in solutions like ours. Our recognized track record of execution and investments we've made in capacity has positioned us at the forefront for many of these opportunities, and we are confident that the additional capacity we have on order will convert into long-term contracts. Fifth, we have expanded our capabilities and customer base through M&A. In the third quarter, we acquired and welcomed HVMVLV, provider of specialty voltage distribution and regulation equipment and engineering services. HVMVLV stands for high voltage, medium voltage, low voltage, just so you know. Bringing these capabilities in-house further strengthens our power solutions offering by giving us exposure to new high-growth end markets. Importantly, these balance-of-plant solutions are essential across all electricity use cases regardless of generation source. Our acquisition strategy demonstrates how we are strategically both vertically integrating and expanding our technology offering, further enabling us to offer a truly power-agnostic approach to meet our customers' power needs. Finally, we have welcomed additional talent to complement our existing team and drive further commercial and operational success. We've added high-impact team members to our engineering, operations, commercial and support functions. We've also enhanced our executive leadership team with the addition of Amanda Brock as my co-CEO. Amanda has been a trusted partner of mine for the last decade and brings a proven complementary skill set to the office of the CEO. She has an extensive background in building and managing infrastructure, including both water and power and in leading teams to success. These capabilities come to us at a critical time, as we rapidly scale our operations for the significant growth ahead. As I've been asked many times, I would like to make it clear that I have no current plans to retire. This co-CEO appointment is about covering more ground and accelerating our growth. Moving now to a discussion of our Logistics Solutions segment. I've often referred to our Logistics Solutions business as the engine that could. While less than 1/3 of our business today, we would not have the success we've had in Power Solutions without the stable cash flow provided by this business segment. This business also is a critical piece of the natural gas value chain required for the Power Solutions segment. We also continue to earn the operational and financial returns on the investments we've made in our logistics systems, which continue to help drive efficiencies for our customers. For example, we've increased our deployment of multiple Solaris systems on customer locations, which enables more efficient throughput of raw materials, and in turn, helps our customers accelerate their development schedules. Year-to-date, we've deployed multiple Solaris systems on 90% of our customers' locations, which compares to approximately 60% a year ago and 40% the year before that. We believe that our technology portfolio positions Solaris as the partner of choice for operators and service companies pursuing the industry's leading-edge completions designs. During the third quarter, Lower-48 oil and gas industry activity contracted to what we believe reflects a near-term trough as evidenced by early fourth quarter activity levels. We believe this segment will continue to generate significant free cash flow, while providing a highly reliable and efficient system for our customers. In summary, we are pleased with both the operational and commercial advancements achieved during the quarter. We are confident that the growing demand for our power services will continue, and we are demonstrating that confidence through our incremental generation orders as well as our continued inorganic investment. We're also taking deliberate steps to ensure that we have the right balance sheet and the right people in place to position Solaris for continued growth. As has been emphasized by our country's leaders, winning the AI race is an imperative strategic objective for the U.S. Solaris can play an important role in advancing this objective by using its technology to efficiently generate and deliver large-scale, reliable, clean energy. With that, I'll turn it over to Kyle. Kyle Ramachandran: Thanks, Bill, and good morning, everyone. Solaris' third quarter demonstrated another quarter of significant growth and solid execution in our Power Solutions segment as well as continued execution and strong free cash flow generation in our Logistics Solutions segment. This growth and execution were driven by the dedication and skills of our team, the continued support of our customers and the dependability and flexibility of our suppliers. During the third quarter, Power Solutions contributed more than 60% of our revenue and over 3/4 of our segment-level adjusted EBITDA. These results are attributable not only to a robust industry backdrop, but also to the value of the Solaris offering and the team's execution. As Bill highlighted, in addition to the previously announced 80 megawatts we recently ordered, we have also secured additional generation capacity for a total of approximately 500 megawatts. This brings our pro forma expected generation capacity to approximately 2.2 gigawatts by early 2028, which compares to our prior order book of approximately 1.7 gigawatts. As previously announced, concurrent with our recent convertible financing, we expect the first 80 megawatts of our new orders to be delivered by year-end. The remaining delivery schedule is concentrated around the second half of 2026 and the second half of 2027, with final deliveries of this most recent order occurring in early 2028. Capital expenditures associated with the 500 megawatts total approximately $450 million, consisting mostly of turbines and associated emissions control equipment. Once equipment is contracted at a particular site, we expect to add additional project scope to accommodate the unique specifications of any given location and customer need. This increased content would be expected to generate returns on invested capital comparable to the economics of our current Power Solutions offering. As a result of our recent financing and the ongoing cash flow generation ahead of these deliveries, we have sufficient cash to fund these incremental generation orders. In early October, Solaris raised approximately $748 million in the form of senior convertible notes due 2031 with a 0.25% coupon. The proceeds from this offering were used to repay our existing term loan and will be used to fund the 500-megawatt order. This financing also unlocks significant flexibility for Solaris, given the removal of restrictive covenants as well as the meaningful incremental near-term cash flow it unlocks. Over the next 4 quarters, we now expect to save approximately $45 million in the form of interest and amortization savings as compared to our prior capital structure. Turning now to a review of our third quarter results and our outlook for the next 2 quarters. During the third quarter, Solaris generated revenue of $167 million and adjusted EBITDA of $68 million on a consolidated basis. Our adjusted EBITDA grew 12% from the prior quarter and increased more than 3x as compared to the same quarter last year, driven by the acceleration of our Power Solutions segment. The primary driver of growth versus the prior quarter was continued activity growth in Power Solutions, which more than offset a modest decline in Logistics Solutions activity. We generated revenue from approximately 760 megawatts of capacity during the third quarter, which reflects an increase of more than 27% from the prior quarter. This increase in activity was driven by increased and accelerated demand from our customers, which we are meeting using a combination of new turbine deliveries as well as selective short-term sourcing of third-party generation capacity. Segment adjusted EBITDA for the Power Solutions segment was $58 million, a 27% increase from the second quarter. We expect segment adjusted EBITDA next quarter to be relatively flat as a full quarter's benefit from the ramp in operated megawatts and the HVMVLV acquisition is offset by a mix impact from lower spot utilization and commissioning work. While we expect the recent order of 80 megawatts to have a limited impact on fourth quarter results given the expected timing of deliveries, we expect this incremental capacity to drive first quarter 2026 segment adjusted EBITDA for Power Solutions higher sequentially relative to the fourth quarter of this year. In our Logistics Solutions segment, we averaged 84 fully utilized systems, a decline of 11% from the second quarter. We believe the third quarter represents a near-term bottom in drilling and completion activity and expect our segment adjusted EBITDA to improve slightly in the fourth quarter. Netting these factors and considering corporate and other expenses, total adjusted EBITDA guidance for the fourth quarter is now $65 million to $70 million, up from the prior guidance of $58 million to $63 million and relatively flat from the third quarter. We are also introducing our first quarter 2026 total adjusted EBITDA guidance of $70 million to $75 million. Accounting for expected longer-term tenor on our fully delivered 2,200 megawatt generation capacity and our recent acquisition, our new estimate of pro forma earnings of the company could be over $600 million before considering any additional scope or growth with our existing customers or new opportunities. We are excited about the accelerating growth of the industry and about the significant strategic steps we've taken to maximize our opportunity to continue to grow. Our priority remains to deliver strong returns on invested capital, as we continue to develop our Power Solutions business, while sustaining leading market share and strong cash flow generation from our Logistics Solutions operations. With that, we'd be happy to take your questions. Operator: [Operator Instructions] The first question is from Dave Anderson of Barclays. John Anderson: I was wondering if you could talk a little bit about how you see the supply chain today. You're placing orders now for 2028 deliveries. Is this going to get stretched out a bit more than, say, a year ago? And I would imagine the competition for OEM slots has become substantially tighter in the last few months. I was wondering if you could talk about some of those challenges that you're facing as you look to build out the power business. William Zartler: I think you surmised it well, David. The supply chain is growing out. We are lucky to get the slots we have with our relationships, and we're exploring other avenues for getting power. Hence, I think what we referred to as multiple sources of generation to power these things, especially in timing-wise. And we're spending a lot of time on the distribution side and the equipment side. We had a team over in Asia last week looking at a couple of OEM flexibility options around how we get ahead of transformers and switchgear and breakers and those kind of things on a portable basis as well as for permanent equipment. So I think that's a very important part. As I said, we need to execute on all phases of the business and supply chain is clearly one of those phases that's really driving a lot of things today. Kyle Ramachandran: And I think that's also coming at a time where the customers are recognizing the sort of opportunity of speed here to build behind-the-meter solutions in a way that provides the right levels of reliability, the right levels of generation in a way that really aligns well with their strategic goals. And I think that's informed in terms of how we're thinking about expanding the fleet at this stage. The size of the prize appears to be growing at a rate where the sort of cost of poker, i.e., how much capacity you have available is needing to go up. And so what we're sort of -- what we're indicating here is the size of each of these opportunities is growing. And so we've added capacity here sort of second half of '27. And as we look at making further orders beyond this, you're spot on, the delivery dates are extended, but we've got a tremendous track record, I think, of finding unique ways to find capacity. We continue to benefit from a team that's got tremendous experience and legacy in looking at generation over decades all over the world. And I think that really positions us somewhat differently than maybe others in the market that are kind of just getting into it. So we've got literally decades of experience, both on the generation side as well as on all the distribution side within the company now that we're really able to benefit from. John Anderson: So I think there's actually a big distinction about how you're actually already managing the megawatts today. And you've talked about the balance of plant and how kind of the challenge is to actually manage this power is more than just owning it. You made that acquisition over the summer -- the HVMVLV, I did it, of the acquisition in terms of the balance of plant. I also noticed this quarter, the megawatts or revenue per megawatts increased about 10% this quarter. Are we starting to already see the impact on the balance of plant? Or is that more about efficiency and utilization of the equipment? And could you tell me how we should be thinking about modeling that going forward? Is that a number we should be kind of steadily increasing over time? Kyle Ramachandran: It's -- there's a lot of puts and takes in that. And I think if we specifically look at the third quarter, what we were able to do was to deploy a significant amount of additional generation that was sort of beyond what we initially guided to. And so we are benefiting in the third quarter with some level of contribution from some of our commissioning efforts. I think the fundamental returns on the equipment are still sort of in line with where we've indicated in the past. The other kind of puts and takes on it align with duration. And as we think about different customer mix and different duration mix, there could be some different ways of looking at, at returns. Operator: The next question is from Derrick Whitfield, Texas Capital. Derrick Whitfield: Congrats on your update. And Amanda, congrats on your appointment. For my first question, I wanted to focus more on the competitive landscape. With this announcement, it's clear that you feel confident in your ability to place your power generation capacity. With that said, to what degree did the recent announcements from Halliburton and Liberty change your view on the size of the growth opportunity for Solaris? William Zartler: We're having our own discussions and what others do don't necessarily impact it. I don't think that -- this is a very, very large market, if you look at the numbers, and it's going to require multiple companies to perform to satisfy the needs of the growing power demand. So I think it's -- that has not changed our outlook at all in any way. Kyle Ramachandran: Yes. And I'd say just to put it in context, so the 2,200 megawatts we're talking about here, to satisfy the leading-edge sort of incremental data center. I'm not sure that satisfies even 2 at this stage. So the sizes of these infrastructure projects continue to grow, to Bill's point, such that it's just a large market. Derrick Whitfield: Yes, fair point. And maybe just to build on that, based on the flurry of recent power AI development announcements across West Texas and the amount of BTC miners that are converting to data centers, do you guys see an opportunity to co-bid these developments with those operators to meet reliability needs of the end client? William Zartler: I think that's one of the points on the flexible generation here is that the distribution equipment and the packaging up of multiple sources and the way that gets run is something that I think we're developing a pretty good expertise on. And I think that will be -- the way some of this gets executed is a combination of multiple sources, whether it's excess grid power that a Bitcoin miner may have been using, whether they've got some on-site backup generation that flexes or -- and we put some new kind of permanent power or bridge to backup kind of power on site. I think it's going to really be what the ultimate solution looks like to the size of this activity and the timing needs that the industry has. Kyle Ramachandran: And our fleet, if you think about just max flexibility with respect to in general, the mobility of the actual equipment, also the size. These are medium-sized gas turbines that are able to be moved and rigged up quite quickly relative to some of the other larger equipment that may be more permanent in nature. And so to your point, as the opportunities shift around in terms of geography, we really benefit from that. And that also ties into our legacy business. One of the real keys to success of the 10-plus years track record of the legacy Solaris business has been the fact that we've had equipment that can go anywhere at a moments times notice. And so that's allowed us to be very nimble. And I think that will continue to be a paramount sort of culture tenet to our business. William Zartler: And I would add to the engineering team that is associated with the legacy business and our ability to take a look at this power generation business and modify equipment to make it more mobile. I think the oilfield led the way in developing and partnering to make the mobile turbines to start with and then the addition of mobility around the catalytic reforming technology, we've modified and built our own -- with our own in-house engineering mobile SCRs that pair up quite quickly, quite easily and minimize downtime for the emission control system. So I think that combination of engineering know-how and the focus on mobility and quick execution has been paramount to the continued success in both businesses. Operator: The next question is from Don Crist of Johnson Rice. Donald Crist: Given that I'm one of the only analysts that covered both Aris and Solaris, I have kind of unique impact or relation to Amanda. Just a quick question on the co-CEO role. Is it expected to be kind of the Biden conquer? Or are you all going to make kind of decisions together? And kind of second part of that question, Amanda, I know you've only been there a week or so, but your initial impressions on kind of how the team has put together and your initial impressions as you kind of get to work? William Zartler: I'll let you start there. Amanda Brock: Certainly, and thanks, Don. So look, I'm very happy to be here with this team. I've known Kyle since, I think, 2017, and it's great to still be side-by-side with Bill. And anybody who knows Bill and I and knows that we are different, but have very sort of complementary skill sets. So some of it is, and Bill will talk about it, divide and conquer so we can cover more ground and of course, not getting each other's way and make decisions that are going to enhance the effectiveness and to use Kyle's word nimbleness of the company. In terms of observations, actually, this is the beginning of week 3 because there was no downtime, and it is really drinking from proverbial fire hose. The speed at which this market is moving is unprecedented. And there are huge tailwinds and opportunities for us, as we focus on delivering these power solutions into a market where power is emerging as a critical bottleneck. The deals we are engaging on and the deals that I've gone straight into work on are real and tangible with very credible counterparties. We have a distinct advantage to have already demonstrated our ability to deliver. I mean we've been out there. We've been operating, and that just gives you a real perspective. And as Bill has repeatedly emphasized, we've got this track record of executing on large scale and getting larger data center projects and have developed know-how, software, proprietary processes that we can apply on new projects, and that is an advantage. So high-quality opportunities for continued growth. I'm very optimistic. I'm happy to be here, and there's one incredible road ahead of us. So Bill? William Zartler: As a divide and conquer, you just covered it all. So no need to double up. Donald Crist: I appreciate that color. And a big question coming into this earnings cycle is going to be whether or not you announced a new contract or not. But I think you have said in past calls and whatnot that you wouldn't order any additional equipment if you weren't close on another contract signing for a data center or a large project. Is that still the case? And I know you don't want to give specific timing, but should we assume something in the next 90 to 180 days that could kind of soak up all that equipment you have on order today? William Zartler: That is still the case, and your assumptions are pretty good. Operator: The next question is from Derek Podhaizer at Piper Sandler. Derek Podhaizer: Maybe just a bigger picture question. I want to discuss the type of advantage HVMVLV gives you when you're bidding on these large data center projects, and we're talking a gigawatt plus here. So obviously, there's a lot of companies out there going for this behind-the-meter power market. It creates a lot of confusion for investors, who's best positioned and what's a differentiating factor. Maybe you could just help us understand your differentiating factor versus your peers, I mean, including this integrated solution, which has been bolstered by HVMVLV. Just help us and investors how we should really think about that. William Zartler: I think you think about it from actual operations and skill sets and then when we add on power -- what comes out of the generator isn't what feeds the data center or any other utility. You have to regulate that power. You have to convert it to the right voltage level. You have to get it to what the building needs. You have to control lots of elements of that with switchgears and you got to protect it with breakers and switchgears. So the notion that the rest of that stuff really does drive the generation source. And as we mentioned, there's going to be multiple sources of generation to supply this demand because it's too fast and too quick. And as that happens, it's more and more imperative that you pair up the right set of electrical distribution equipment downstream of that. And so as an edge and the ability to engineer, design and operate those systems, I think we have a pretty unique advantage with that with respect to the turbines. It's the modeling of these businesses, and I think we set a little bit of a trap up on megawatts times dollar equals this times the multiples of value. But there's a lot more to this around protecting that business, building the moat around the operating processes and technology and the pieces of electrical equipment that blew it all together. So a house -- a set of bricks doesn't really work without the mortar, and that's the mortar in this business. Derek Podhaizer: Got it. That's helpful. And then maybe back to your comments about your all of the above power approach. Historically, you've been heavy on the turbines, obviously, the 5.7, 16.5, 38. But it sounds like you'll be exploring battery systems, potentially recips. Just could you help us understand kind of that all of the above approach and then maybe just your latest, the additional 400 megawatts, was that all turbines? Was that a mix of a different type of kit? Just maybe a little bit more color around that. William Zartler: Yes. And I think we will -- the view forward is the turbine is going to be the workhorse of the power generation industry. It's no different than the way the utilities work. The gas turbine is driving our system in this country of power. So that will be our workhorse. As we complement things for timing and flexibility, the turbines have unique curves with heat and altitude that change their output. And so pairing that up with an engine that doesn't have quite the turndown in the heat like a large reciprocating generation -- generator, and we're running them as part of the kit today. So it's not unique. It's a small piece. Does it grow slightly? I think we'll see it growing as part of the generation piece slightly going forward. Batteries are an important part of this. It comes down to what is the reliability that you're looking for in data centers. There's an element of this that they have to have virtually 100% reliability when it hits the cooling system to keep the buildings cool and the chips for melting down. The investment is enormous. So thinking about how batteries both provide protection against the volatile loads coming out of the chips as well as very short-term bridges as you flex with your redundancy built into the power grid. And not every data center is the same. And so there's a -- not a standard design gigawatt data center. They're built in multiple data halls. The data halls can be powered independently. They can be powered together. They can power the cooling systems different from the chip systems. And so the notion that it's just kind of one size fits all is there, and that's why -- one of the other reasons why the distribution part of this is so important, so you can match up what the actual data center power needs look like with the generation equipment. Operator: The next question is from Scott Gruber, Citigroup. Scott Gruber: You know some growth CapEx in your '27 outlook. Curious about the Stateline JV, once the 900 megawatts is deployed. Is the JV expected to send cash back up to Solaris? Or do you pay down the term loan? Or does that cash get recycled back into expanding the JV? Just some thoughts on how to think about the JV and the JV cash flow once the 900 megawatts is deployed. Kyle Ramachandran: Yes. Good question, Scott. I think there is a -- there's debt down at the JV, and so that does need to be serviced with respect to interest and amortization. But there's a fair amount of flexibility within the constructs of that debt instrument that do allow us to send cash up to both ourselves as well as our partner in that JV. Options with respect to what to do with that cash, the Board of the JV, which is composed of both Solaris and our customer can choose to distribute the cash or to your point, we can make a choice of keeping cash there and continue to invest at that level to provide additional power to that customer, which obviously has ongoing and growing power needs and demands. So a lot of flexibility in that structure, and we were able to obviously finance that at a pretty attractive rate with respect to the advance rate on the equipment. So that structure, we feel is going to provide a lot of flexibility and ability to drive returns for us. Scott Gruber: And then just some color on how you see megawatts deployed over the next several quarters and how you see the transition from your third-party re-rents to wholly owned capacity based upon the delivery schedule and what seems to be greater -- obviously, greater demand from the customer. When do you see kind of fully -- getting to kind of fully owned capacity in the field? Kyle Ramachandran: Good question. Obviously, that's continued to change and extend as we've added capacity into the order book. As we look at next year, there's really 2 legs of growth as far as operated capacity. The first is the JV getting stood up with respect to its permanent generation. And we are supporting the power needs of our customers that will ultimately be funded with the JV vis-a-vis some of the re-rented assets today as well as some of our own assets. So next year, we'll see the construction of roughly 900 megawatts of permanent power for the JV. And then we'll also see delivery of about 400 megawatts that was placed back in March of this year. So those are the 2 avenues of growth for '26. And then as we look into '27, it's primarily the order that we just placed. One small additional note, we did pick up some capacity in the fourth quarter of this year, which will have a full impact beginning in the first quarter of next year. So as we look at the full stood-up fleet, it's sort of a second half of '28, is sort of how I would look at it. Operator: Next question is from Jeff LeBlanc, TPH. Jeffrey LeBlanc: Bill, in the prepared remarks, you mentioned locations evolving to multiple gigawatt sites over the next several years. Given this opportunity set, could you help frame the size of your customer pipeline? And is it safe to assume that by the end of the decade, your operating fleet will be larger than 2.2 gigawatts? William Zartler: I think that the pipeline is enormous, and that's a technical term. It's -- there's just so much activity. It's frightening. I've never seen anything like it in my life. It's probably fair to say that we'll be beyond what we have on order today operating in a couple of years. Operator: The next question is from Michael Dudas of Vertical Research. Michael Dudas: Two questions. One, Bill, could you maybe share some of the circumstances surrounding the second data center order that you cited in the press release? And secondly, as you are negotiating regarding contract tenor, any further confidence thoughts on length? Is that still a sticking point given where people are expecting grid connections out to the future or other BTM solutions? Just want to get a sense if that's still part of the negotiations. William Zartler: I think the second data center that we stood up during the second quarter was known and predicted and it's rolling into our joint venture, Stateline Power LLC. So we have it running on a temporary power with full emissions control. And then it's -- we're constructing the gigawatt plus power plant starting really in the next quarter, rolling into next year as we ramp up the deliveries of equipment to roll into the permanent site for that facility. So that's up and running. We got it up and running very quickly over the course of the quarter, and it's stable, and we'll be rolling it into the permanent site really beginning 1st of January or so thereafter. What was the second question? Kyle Ramachandran: Contract tenor... William Zartler: Contract tenor. It's clearly morphing to longer term. I think the grid delays -- the announcement of grid delays, the magnitude of the power, the SB6 approach from the government coming up, the recognition that these guys are going to need this power for a while is really morphing average contract tenors out significantly from where the thought was maybe a year ago about what this business needed to be. So it's morphing into more of a behind-the-meter permanent power or permanent power to a portion of it becomes back up if the grid gets there at a lower cost. But I think there's a heightened sensitivity within the regulatory framework and the public about power prices going up and the notion that the behind-the-meter helps defray some of that, I think, is an important element that our customers are evaluating. Michael Dudas: I appreciate it. Just a quick follow-up. When you talk about behind-the-meter and the -- all the above approach that you've talked about throughout this call, could you maybe rank where other approaches are in solutions relative to what Solaris on the gas -- on your core gas turbine side is and how that may incorporate your lead time or your ability to kind of secure these projects relative to other solutions in the market behind you? William Zartler: Well, the other solutions are finding a specific grid location where there may be excess power and pulling that down. Most of that at this point, with the size of the data centers need some element of either backup or complementary prime power. And so as those sites or nodes that have -- may have excess power on the grid, they're getting filled up and that is getting scarcer and scarcer. And those are now being complemented by power solutions like ours. I think the others in the market that are doing this, I think the Williams team is a very professional organization. They run a lot of equipment and assets around the country, and they're doing it similar to, I think, the approach we're taking with equipment and long-term tenor contracts. And I think the market is recognizing that it will be powered on the increment by natural gas, whether that's actually over the next 10 years, whether that's a backup behind-the-meter or whether that's an additional utility-based big turbine running on the grid. So it will all be fired by natural gas on the increment for the stable power that's needed to run these data centers. Kyle Ramachandran: And I think just one small piece to add. When we allude to other sources of generation to complement our turbine workhorse, as Bill referred to it as, that allows us to extend the turbine capacity that we have today. In other words, if we're able to complement with a larger size or amount of gas recips as well as potentially fuel cells, that allows us to extend the turbine capacity that we have today on balance sheet to a broader amount of megawatts from a total demand -- from a data center perspective. So in other words, we've got, I would say, the critical piece that's got the longest lead time associated with it secured with the gas turbines. And if we're able to complement that with additional sources of generation, whether it be combined cycle plant that's getting stood up either interconnected to the grid or in an islanded mode or its recips or something like fuel cells, it gives us optionality to continue to extend to grow the 2,200 megawatts with not necessarily adding specific turbines inside of the sort of time frame where we could be bringing on other sources of generation. Operator: The next question is from Bobby Brooks of Northland Capital Markets. Robert Brooks: Congrats Amanda, on the co-CEO role. I just wanted to do -- have a quick follow-up for Kyle, mentioning how adding new power generation can kind of extend the core turbine power that you have on the balance sheet. I'm just curious in your future contract negotiations, is that worked into the contract where it's like, hey, we'll provide you 400 megawatts of power, but it's not specific as to what type of asset is generating that power? Just curious on that. Kyle Ramachandran: Sort of a mix of all, I would say. So I think the key asset we have today to engage with customers is our order book, as it sits today. But as we discuss with them, here's what it is, generally speaking, the needs are greater than that. And so as we're looking at putting together contracts, it's sort of step one, lock in what we've got on balance sheet. And step 2 is their demands ultimately are larger, and we're giving them options and flexibility around different levers to pull to increase the total capacity. So it also could be a combination of other gas turbines that we just -- we haven't secured to date. So I think every opportunity we're discussing, we've got a great somewhat of a starter kit for the customers' needs and additional capacity can be met with additional gas turbines, reciprocating engines or other forms of generation. So we've got the optionality. Robert Brooks: Got it. That makes a lot of sense. And then I was just hoping to get a bit more insight of how you guys have been consistently able to secure more managed megawatts near term in the last few quarters. Obviously, I can appreciate that you want to keep the specifics close to the chest. But could you maybe just walk us through at a high level how these opportunities arise and ultimately how you execute on them? And then the second piece is, is it right to think that the 160-megawatt sequential step-up was -- the majority of that was re-rented capacity? Or were you able to secure any early deliveries? William Zartler: So I think Kyle kind of mentioned earlier, we've got the MER team and the HVMVLV team has decades and decades of experience in the market globally, and we've scoured the market, both in the U.S. and internationally to find equipment that we could put to work mostly on a rental basis. We've evaluated purchasing some of it, and we might, but we have not done that yet. But it is really about our ability to go find those pieces of the puzzle and put them to work and have the distribution equipment ready to go to make it all work together. Operator: This was the last question. I would like to turn the conference back to Mr. Zartler for any closing remarks. William Zartler: Thank you. Thank you, everyone, for joining us today. I'm excited about the continued growth we've achieved to date as well as the growth that's to come. We're excited to see the Solaris family continue to grow both organically and through acquisitions. Our success is a testament to the dedication and hard work of our employees, the trust of our customers and the strong partnerships with our suppliers. Thank you for being part of the Solaris team. We believe we are just getting started and continuing to meet the industry's growing and urgent needs for comprehensive power solutions. We look forward to sharing our progress with you in a few months. Thank you. Operator: Ladies and gentlemen, the conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Operator: Good morning, ladies and gentlemen, and welcome to the Armada Hoffler AHH Third Quarter 2025 Earnings Conference Call. [Operator Instructions] This call is being recorded on November 4, 2025. I would now like to turn the conference over to Chelsea Forrest. Please go ahead. Chelsea Forrest: Good morning, and thank you for joining Armada Hoffler's Third Quarter 2025 Earnings Conference Call and Webcast. On the call this morning, in addition to myself, is Shawn Tibbetts, President and CEO; and Matthew Barnes-Smith. CFO. The press release announcing our third quarter earnings, along with our supplemental package were distributed yesterday afternoon. A replay of this call will be available shortly after the conclusion of the call through December 4, 2025. The numbers to access the replay are provided in the earnings press release. For those who listen to the rebroadcast of this presentation, we remind you that the remarks are made herein as of today, November 4, 2025, and will not be updated subsequent to this initial earnings call. During this call, we may make forward-looking statements, including statements related to the future performance of our portfolio, out development pipeline, the impact of acquisitions and dispositions, our mezzanine program, our construction business, our liquidity position, our portfolio performance and financing activities as well as comments on our outlook. Listeners are cautioned that any forward-looking statements are based upon management's beliefs, assumptions and expectations taking into account information that is currently available. These beliefs, assumptions and expectations may change as a result of possible events or factors, not all of which are known and many of which are difficult to predict and generally beyond our control. These risks and uncertainties can cause actual results to differ materially from our current expectations, and we advise listeners to review the forward-looking statement disclosure in our press release that we distributed this morning and the risk factors disclosed in documents we have filed with or furnished to the SEC. We will also discuss certain non-GAAP financial measures, including, but not limited to, FFO and normalized FFO. Definitions of these non-GAAP measures as well as reconciliations the most comparable GAAP measures are included in the quarterly supplemental package, which is available on our website at armadahoffler.com. I will now turn the call over to Shawn. Shawn Tibbetts: Good morning, and thank you for joining us as we review Armada Hoffler's third quarter results. Before getting into the results, I want to thank our Board of Directors for appointing me Chairman of the Board effective the beginning of the year. I appreciate their confidence in me and our leadership team. We've made meaningful progress this year and have completed much of the hard work required to position the company for a strong performance over the next several years. We are [Technical Difficulty] excellence across the platform. Our teams are laser-focused on strengthening systems, streamlining processes in leveraging technology for data-driven insights to enhance decision-making and portfolio performance. My priority is to ensure the market properly recognizes the unique value of our portfolio as we enter 2026 as a more focused, simpler, stronger REIT, for the balance sheet positioned for growth. Our progress includes aligning the dividend with property level cash flows, refreshing the leadership team, replacing a director and sharpening our focus on core operations. We also aligned our 2025 guidance with the planned reduction in fee income to better highlight the strength and stability of our recurring property earnings. We are confident in the strategic actions completed this year and remain focused on repositioning our model offer for sustained growth and long-term shareholder value creation. Our near-term objective is to demonstrate and unlock the value embedded in our real estate through continued consistent execution and transparent communication with investors. The Armada Hoffler portfolio continues to deliver consistent NOI growth, underscoring the quality of our assets and the consistency of our execution. At the same time, we are making progress enhancing the balance sheet quality and proactively managing our capital base including leveraging capital recycling opportunities that strengthen long-term growth and financial flexibility. Our strategic foundation remains centered on quality, a core value that guides how we operate and allocate capital. We remain focused on maintaining a high-performing portfolio, optimizing property level performance and delivering reliable results quarter after quarter. The third quarter results were solid across our portfolio. As outlined in our earnings release, we delivered normalized FFO of $0.29 per diluted share, supported by consistent outperformance across our commercial asset classes with overall portfolio occupancy averaging 96%, including 96.5% in office, 96% in retail and 94.2% in multifamily. These results underscore steady demand and durable performance across all segments. Property level income continues to outperform our 2025 guidance, which contributed to beating consensus for the quarter. As we outlined in previous quarters, we adjusted our outlook for construction activity this year and remain on track with those revised projections. Higher NOI, offsetting the construction adjustments has allowed us to maintain a 2025 normalized FFO guidance target range, consistent with the original 2025 guidance target range, which we are narrowing to $1.03 to $1.07 per diluted share. This reflects our continued execution of the strategic shift away from reliance on fee income into an earnings stream predominantly reliant on higher-quality recurring property level earnings. Now let me take a few minutes and walk through our key sectors. From a broader market perspective, fundamentals remain supportive for retail. Vacancy remains close to record lows. New supply is constrained and retailers continue to show strong preference for high-traffic, open-air centers and grocery-anchored formats. According to Green Street retail pricing per square foot posted double-digit annual growth in the second quarter, reinforcing our bullish view of this asset class. Our retail portfolio continues to demonstrate strength and resilience, supported by a focused strategy of owning properties located within submarkets where we can leverage or create a competitive advantage. Across these locations, we actively extract value through leasing, tenant reconfiguration and redevelopment initiatives, positioning our centers to benefit from broader national trends in retail. For the third quarter, our retail portfolio continued to exhibit these strong fundamentals. Renewal spreads averaged 6.5% on a cash basis, reflecting continued demand. Foot traffic across our centers, particularly at mixed-use destinations like Harbor Point and Southern Post rose 13% compared to the prior quarter, demonstrating the success of our leasing and place-making initiatives rooted in driving consistent consumer engagement and ultimately supporting rent growth. As we mentioned last quarter, we have filled all of our big box vacancies resulting from recent bankruptcies, including Conn's, Party City and Joann's with higher credit tenants. This includes downsizing Burlington and Southgate and Colonial Heights to make room for a national sporting goods retailer as well as backfilling Party City with Boot Barn and Joann with Burlington at Overlook Village in Asheville, strengthening the merchandising mix alongside anchors such as T.J. Maxx, HomeGoods and Ross. These transactions reflect broader retail market dynamics. Nationally, big box development has been limited with few new entrants targeting infill market. This constraint has elevated demand for existing well-located retail space. High-credit tenants are seeking locations with strong demographic, nearby residential density and complementary tenants that drive traffic. Our centers are meeting the criteria, allowing us to capture top of market rents on repositioned or retenanted space. At Columbus Village in Virginia Beach, we are nearing completion on reformatting the former Bed Bath & Beyond box to enhance the center with Trader Joe's and Golf Galaxy, both expected to open before the end of the year. This reconfiguration will increase rents by over 50% while enhancing the overall tenant mix and further strengthening the appeal of Town Center of Virginia Beach District. Overall, our retail strategy leverages market trends, tenant credit strength and experiential demand to position our portfolio for sustained outperformance. This knowledge-driven approach enables Armada Hoffler to proactively identify opportunities to optimize tenant mix, capture rent growth and maintain our centers as destination locations that attract customers and drive long-term value. On the office side, while the broader sector to navigate structural headwinds, the recovery is clearly bifurcating in favor of high-quality amenitized assets in desirable, well-located markets. Our holdings sit on the right side of that divide. We continue to see occupancy stability, leasing wins and renewal spreads that capture value for premium space. As supply constraints and tenant preferences tilt toward quality rather than square footage growth, we believe our positioning provides a distinct advantage. Our office portfolio is 96.5% occupied and few near-term expirations. Demand continues to favor office properties a walkable, amenity-rich, mixed-use environment where tenants benefit from retail, residential and dining access. We continue to see interest from firms relocating from older suburban parts to dynamic centralized locations, supporting the long-term value of our office assets. The former WeWork floor in One City Center is the largest contiguous vacant space in our portfolio, and we are seeing active interest. We recently announced a 12,000 square foot lease with Atlantic Union Bank at One Columbus and Town Center, bringing overall occupancy in Town Center to 99%. This stands in sharp contrast to the narrative seems in most major U.S. city, as office assets continue to demonstrate strong demand and sustained high occupancy, driven by their location within the region's premier mixed-use environment. Asking rents across Town Center assets now average nearly 30% above the broader Virginia Beach market across office, retail and multifamily, underscoring the effectiveness of our mixed-use strategy and the enduring strength of this district is a true live, work, play destination. Our multifamily portfolio continues to demonstrate resilience, supported by healthy leasing fundamentals and proactive management. During the third quarter, portfolio occupancy held at 94.2% in line with the second quarter. Effective lease trade-outs averaged 2.3% for the quarter with renewals averaging 4.3% trade out and new leases flat. These figures do not include the 22 units at Greenside that were offline during the quarter, up modestly from an average 19.7 units in the first and second quarters. Last quarter's reported occupancy included those units, so the current figures reflect a more accurate representation of stabilized performance. Multifamily projects starts to remain a critical factor in supporting fundamentals with construction lending down significantly compared to the 2020 to 2022 cycles, the market is moving towards improved balance. Elevated residential borrowing rights are also keeping renters in existing units, limiting turnover and maintaining occupancy stability across our portfolio. Year-over-year from September 2024 to September 2025, national average rents increased only 0.6%. Our stabilized multifamily properties outperformed this trend by approximately 50%, achieving 0.9% year-over-year rent growth, demonstrating the strength of our assets and the effectiveness of our proactive management approach. At Allied Harbor Point, leasing continues to progress well, and we are on track to stabilize mid-2026, earlier than projected. Prospects and residents are drawn to the building's premier waterfront location, best-in-market views and modern finishes. As the newest residential property within the Harbor Point District, Allied offers an unmatched living experience, it complements the surrounding retail office and entertainment uses, reinforcing its appeal as one of Baltimore's most desirable addresses. At Greenside in Charlotte, remediation and enhancement work to address water intrusion in several units is progressing in phases as we have previously disclosed. The effective units I mentioned a few minutes ago, are obviously an upside opportunity once we conclude this project. These improvements will further strengthen the property's quality and long-term value, supported by its prime location near major medical and innovation districts in Charlotte. Looking ahead, we see multiple avenues to drive FFO growth across our portfolio, guided by a disciplined capital allocation framework. Strong leasing momentum and a high return redevelopment pipeline allow us to capture rent growth and enhance property value through proactive renewals, backfills and targeted reconfiguration. At the same time, we pursue disciplined acquisitions through intentional capital recycling activity, focusing on projects to combine stabilized income with redevelopment potential where possible. By targeting markets where we can create a competitive advantage, including submarkets that exhibit very positive fundamentals beyond the typical Sunbelt trade areas where pricing is being good up, we leverage our leasing and operating expertise to unlock value, ensuring that each investment is accretive in the near term and drives long-term portfolio growth. On the capital front, we remain focused on enhancing flexibility and mitigating balance sheet growth. Our July debt private placement, raising $115 million reflects continued confidence in the quality of our portfolio, our management team, our strategic approach and the overall strength of the company. The proceeds bolstered our liquidity position, extended our weighted average debt maturity and were used in part to fully repay the construction revolver at Southern Post, further positioning us to navigate evolving market conditions with confidence. We continue to focus on generating an increasingly conservative balance sheet, targeting reduced leverage, ensuring ample liquidity to fund ongoing redevelopment and growth initiatives. This disciplined capital structure provides flexibility to act on attractive opportunities while preserving balance sheet strength and stability. We plan to continue expanding relationships with institutional credit investors, supporting long-term growth and maintaining financial optionality. We remain focused on value creation through disciplined execution and intentional capital allocation. From retail leasing to office occupancy stability and multifamily lease-ups, we are building a stronger, simpler and more resilient Armada Hoffler, capable of generating consistent, predictable earnings growth. I am proud of the momentum we have generated and confident in the team's ability to deliver sustained, reliable earnings growth while enhancing shareholder value. With that, I'll now turn the call over to Matt to provide additional detail on our financial results. Matthew Barnes: Good morning, and thank you, gentlemen. Armada Hoffler delivered a strong financial quarter as expected, underscoring the consistency of our operating platform, the quality of our diversified portfolio and the continued execution of our capital strategy. With our balance sheet repositioning well underway and fundamentals stabilizing across our commercial assets classes, we entered the final quarter of the year from a position of strength and operating flexibility. For the third quarter of 2025 normalized FFO attributable to common shareholders was $29.6 million or $0.29 per diluted share, slightly above our expectations and full year guidance. FFO attributable to common shareholders was $20.2 million or $0.20 per diluted share. AFFO came in at $19 million or $0.19 per diluted share, demonstrated continued alignment between our operating cash flows and the restructured dividend. Same-store NOI for the portfolio increased 1% on a GAAP basis. Our performance this quarter demonstrates the benefits of a simpler, more durable capital structure and disciplined execution by management across our portfolio. As of September 30, 2025, net debt to total adjusted EBITDA stood at 7.9x, stabilized portfolio debt to stabilize portfolio adjusted EBITDA stood at 5.5x. Total liquidity for the quarter is $141 million, including availability under our revolving credit facilities. AFFO payout ratio stands at 74.9%. And after adjusting for noncash interest income, the ratio was 93.9%. Our portfolio weighted average interest rate remained consistent at 4.3%. Our diversified portfolio continues to demonstrate meaningful strength, particularly across our retail and office holdings. Leasing pipelines remain active and collections and occupancy levels have remained resilient in each of our segments, respectively. As expected, our retail segment showed quarterly declines in same-store NOI, reflecting the temporary downtime resulting from tenant bankruptcies such as Conn's, Party City, Joann's and Bed Bath & Beyond. Same-store NOI decreased 0.9% on a GAAP basis and 2.5% on a cash basis. These near-term results are consistent with our strategy to create long-term value through tenant credit enhancements and capital upgrades where returns can be achieved. With over 85% of this space already under lease or LOI, we anticipate realizing initial returns on our backfill efforts beginning in Q4 of 2025, continuing into 2026 with full economics and over 20% rent growth achieved by mid-2027. Releasing spreads on renewed leases remained healthy at 5.7% on a GAAP basis and 6.5% on a cash basis, demonstrating continued tenant demand for retail space in a supply-constrained market. From a broader market advantage, fundamentals remain supportive for retail. In the office segment, we continue to see exceptional occupancy levels at 96.5%, a modest improvement from last quarter, strong renewal spreads at 21.6% on a GAAP basis and 8.9% on a cash basis, albeit on a small amount of space that reflects the value for our premium assets in desirable locations. Our office segment posted positive same-store NOI results at 4.5% on both a GAAP and cash basis. By focusing our capital and operational efforts on retail assets with dominant demographics, proven tendency and strong in-place cash flows combined with office assets to reflect the flight towards quality and the margins for renewal upside, we are well positioned to capture our residual growth as the broader market conditions normalize. In short, the intersection of internal execution that is asset level leasing, cost control and capital reinvestment and the external tailwinds of limited new supply in retail, improving select office fundamentals, investor capital returning to quality real estate gives us confidence in the durability of our cash flows going forward. Corporately, we continue to manage expenses tightly. G&A remains on track to be materially reduced year-over-year, reinforcing our focus on efficiency while maintaining the resources required to execute on managing our assets and redevelopment opportunities. As you all know, we have and are taking the appropriate steps to rightsize the construction entity, aligning its workforce with current backlog levels, making fiscally responsible decisions for shareholder value. Capital markets remain selective, and we are structuring our balance sheet to reflect that reality. With our debt private placement completed in July and our liquidity stabilized through prudent cash management, we have the ability to remain patient and disciplined as the cycle evolves. We are engaged with our lending partners and are looking ahead to the back half of 2026 and our respective pending maturities. Early indications are leading us to expect that once our 2026 outstanding debt has been refinanced, we will be able to achieve a portfolio weighted average interest rate slightly below 500 basis points. Reflecting the stability in our operating results and visibility into year-end performance, we are narrowing our full year normalized FFO guidance range to $1.03 to $1.07 per diluted share, reaffirming our confidence in the trajectory of the business. With that, I'll now turn the call back over to Shawn for his closing remarks. Shawn Tibbetts: Thank you, Matt. I want to thank our team for their continued dedication to our shareholders and for their trust and support. Operator, we are ready for the question-and-answer session. Operator: [Operator Instructions] Your first question comes from Viktor Fediv with Scotiabank. Viktor Fediv: So I'd like to ask about the acquisition of at least 1 real estate financing asset Solis Gainesville. Since the asset is across the street from the Everly, we can already see some negative effects on both occupancy, which is more than 200 basis points down year-over-year and monthly rent, which also declined more than 11% year-over-year. So can you provide some insights into the expected going-in cap rate on this asset and potential synergies for managing 2 assets altogether and as well as your expectation for same-store NOI growth for both assets over the next 2, 3 years? Shawn Tibbetts: Sure. Thank you for the question, Viktor. I think this -- the answer to the question starts about a year ago, we had signaled to the market that we would bring on to the balance sheet, not only Gainesville II but the Allure. So let's touch on Gainesville II first. Our strategy, our thesis there has always been, we want to run this asset combined with the Gainesville I asset, which is called The Everly or rebranded at The Everly. We think there are synergies there. We think it comes in to answer your question at or above our cost of capital, given that we are going to leverage synergies there, think head count reduction and a normal building as a result of running these together. I mean just rough, we think there's about 50 basis points of value there to be gained by us. In addition to that, as we see the new supply burned off, by the way, the new supply is ours. We'll see concessions burn off and therefore, we'll see some uplift, and we expect the positive same store to get there fairly soon after stabilization. So I think it's a good story. It's what we had intended to do for the past 12 months or so, and we're looking forward to it. Slightly different story for the Allure. We have seen some very strong bids in the market -- in that submarket as of late. And so we're in discussions with our partner about what's the best move given the kind of high bids for that type of asset, there could be a case where we either bring it on balance sheet, which we can do and would love to do or is the better opportunity cost equation to sell that in the open market and look for other deals with our partner there. So a little more to come there. That transaction essentially is going to be deferred until next year. So that's why you saw us pull that back from coming on the balance sheet here in the third or fourth quarter of this year. Viktor Fediv: As a quick follow-up, so if let's say, this Allure asset is sold to third-party and loan is repaid before maturity? Will you receive any additional fees on top of that principle and what has already accrued? Shawn Tibbetts: I think it's inappropriate for me to speak on that right now, Viktor. I think let's see what happens. We'll certainly recoup our capital and have a conversation with our partner about how to make the best deal there. But I think given where we are and what we're seeing in the market, we've still again, got an opportunity cost question here. The good news is we are very much in the black on that asset, which is great for both us and our partners. So more to come there. Operator: The next question comes from Rob Stevenson with Janney. Robert Stevenson: Shawn, just while you're talking about the real estate financing portfolio, how should we be thinking about the Kennesaw, Georgia loan in the asset as it gets closer to stabilization? Is that one also more likely to be sold in the loan repaid? Or is that one more likely to be brought in-house? Shawn Tibbetts: Yes, Rob, I think that's an asset that probably doesn't fit our core strategy. So in addition to that, I think you'll see that -- you won't see us pursuing that one, per se. I think that will be sold as the answer to the question. So yes, that's not one we intend to bring into the pulp. Robert Stevenson: Okay. And then beyond the $18 million or so in-progress redevelopments, any of the 10 or so other opportunities in the supplemental expected to start in the next couple of quarters? And how extensive are the costs associated with those opportunities? Shawn Tibbetts: It's interesting. We've seen some attractive kind of projects there. We -- I think let me start by saying this, we are continuing to see development deal flow. It just doesn't fit the risk-adjusted spread. So our thesis is, again, back to the opportunity cost, kind of long-term value creation. We think that the capital is best spent on some of these captive projects. That being said, I don't see anything starting like fourth quarter, probably not first quarter, but our team is doing quite a bit of diligence on a few of these. I mean think outparcel, think older kind of '90s, 2000s vintage assets with large parking lots. We're taking a look at how do we use the real estate kind of under our control and create opportunities there for lift in the short run. So a long way of saying, we're looking at it. Our development team is looking at it hard. We meet about it actually weekly. But I don't think we know enough now to say we're ready to fire off the next one. That said, as you can see with the Trader Joe's, we're very excited about those types of opportunities and the list that they create. Robert Stevenson: And then last one for me. How are you and the Board thinking about recycling assets and using the proceeds to reduce leverage and repurchase common stock. And when might be the right time to explore something with one or more of the Baltimore assets, et cetera? Shawn Tibbetts: Yes. I think the answer is we are constantly or consistently thinking about that. Our job as capital allocators, as you know, is to think about the opportunity cost of that capital. So we -- as you may know, thought about an asset sale in Charlotte. We've got some strong bids, Providence Plaza, the challenge became what is the best opportunity cost like kind of equation for that capital. We saw rent growth climbing down in Charlotte, so we said let's hold on to that asset. But we are thinking about those things. You see us renewing for long-term anchor leases, so on and so forth, to lock in the value in some of these assets. And at the right time, we'll strike on deals that make sense. I don't want to say we're going to get into buyback land, but certainly, there's an attractive accretive opportunity there. I'm not sure that we'll take that versus long-term property -- kind of income-producing property. But yes, that's what we are doing right now, especially given the price of the equity and how that's trading in today's market. So a long way of saying opportunity cost is our main focus, and we are looking at all of the assets that we have to determine where we can create some arbitrage in terms of what the markets valuing our real estate at and what the broader market would potentially buy at. Operator: The next question comes from [ Jamie Wise with CVU Capital ]. Unknown Analyst: First question is, could management discuss the annual cost of its interest rate swaps? And what are your plans going forward with the interest rate swap activity? Also, if you were to change your approach to buying the interest rate swaps and reducing your interest as a result of the swaps, how would that impact AFFO? Matthew Barnes: Jamie, thank you for the question. So interest rate swaps obviously changed the pricing with the market at that time. We look at that essentially as a prepaid interest when you're looking at paying that to essentially come into the total cost of the debt over the long run. We renewed back this quarter some maturing swaps that we had, we renewed them slightly early as we came within our strike rate, the price that we felt would fit in with the interest expense that we wanted, total cost for full guidance. As I've talked about many times before, we are looking over the long term a transition in this balance sheet to long-term fixed rate debt. So we would work through that cycle to reduce the reliance on derivatives as we get those long-term fixed rate debt in place. And that's what we're going to be looking for, as I mentioned in my remarks, for those financings that are maturing in 2020 -- 2026. Unknown Analyst: And one other question. Earlier in the year, you had mentioned that the dividend was stress tested for recessionary scenarios and also that you are expecting net debt to EBITDA to sort of end the year around the 7.4x area. I was curious if you could talk about that. Is this a dividend stress tested for 2026 and different sorts of interest rate scenarios as you look to do less hedging activity? And are those -- does management still hold by what it said earlier in the year? Matthew Barnes: Yes, certainly. So as you can recall, we rightsized the dividend to make sure that our cash flows from the properties covered the distribution, the cash distributed out the door in the dividend. So we did that back earlier in the year and made sure that there was enough buffer there to stress test that dividend through the whole of the year, not just from a cash flow perspective, but also from the REIT compliance tax perspective as well. As you can see, there is a number of charts in our supplemental that show the dividend distribution compared to AFFO and AFFO less noncash interest expense. So as close to a cash number as we can provide and be transparent there. Shawn Tibbetts: Jamie, this is Shawn. I think the answer to your question is yes. What we said in the earlier part of the year holds true. We stress tested that against many different scenarios as it relates to dividend. As it relates to the derivative positions, we are on a journey here. We've committed to the market that we want to continue to get into more pure fixed rate debt, hence, that kind of our placement of $115 million back in the middle of the year, back in the July time frame. And you're going to see us continue to navigate that journey. It won't happen overnight. But yes, I think the answer to the question is we want to move to a more pure fixed balance sheet over time, and we intend to hold that dividend and have the ability to do so plus or minus fluctuations in the market. I appreciate the question. Matthew Barnes: And then, Jamie, to touch on the last bit of the question as it relates to leverage, we still have the full debt from the development pipeline on our books. And as we lease up the Allied and Southern Post leverage will come down over the next or the coming quarters. Operator: The next question comes from Jon Petersen with Jefferies. Jonathan Petersen: Maybe I'll just stick on the dividend. I'm just curious how you think about growing the dividend, right? If we're modeling over the next few years, should dividend growth tie out with AFFO per share growth at these levels? Or -- are you going to kind of pause on raises for a while to give yourself more of a buffer? How do we think about that? Shawn Tibbetts: Jon, thank you for the question. I think -- we think about this in a conservative way, right? We just came off of a dividend restructure. And so we want to be prudent here. AFFO, as you know, for us, given the real estate financing platform is maybe not the best indicator sometimes in terms of dividends. So I think the short answer to the question is we'll raise it when we feel we responsibly can. To Matt's point, we don't want to go over dividend, and we also don't want to trip the taxability concerns on the downside. So we're looking at it. I don't know if we will grow as AFFO per se, depending on how big the real estate financing program is. But yes, we're looking at it. We will raise it responsibly, but certainly don't want to over-raise it too soon, especially given our recent journey. So I think you'll see it moving in the future. I don't think you're going to see us do anything in the next quarter or so just based on where we stand. Jonathan Petersen: That's helpful. And then the $95 million term loan that's coming due next May. Should we think about proceeds from these financings that might be repaid is what will be used to pay down that loan? Or would you refinance it? How should we think about your plans there? Matthew Barnes: Yes, certainly. So we have our primary credit facility, the revolving line of credit that matures the 1st of January '27, and the term loans associated with that primary credit facility the 1st of January 2028. So already engaged with the bank group, and we will look to both our side term loans to wrap them up in that primary credit facility. So we have a number of different options. We can always go back to the market and do another debt private placements, and get some long-term fixed-rate bonds there to replace that. We can wrap that into the primary credit facility or I'm sure our lending partner on that term loan that matures in May may want to reissue at those same levels. So many different options and yes, we've already reengaged with the partners to start working through that. Jonathan Petersen: All right. And then last question for me, just on Allied Harbor Point. You said stabilization by mid-next year. It's already 67.6% lease. So I'm just curious, is it fully built out like could it be 100% occupied today? Or is there still some work to do to be able to lease that up to stabilization? Shawn Tibbetts: So Jon, we're materially there. The challenge for us, and this is what we talked to the market about since -- since bringing this idea to fruition was balancing this equilibrium, not cannibalizing the 2 assets next door. So yes, it can be fully leased up. We're just very -- we're very mindful about not bottoming out our piece of the market there. So we said to the market back in September, we were looking at a roughly 24 months. Stabilization, to your point, we will probably hit that sooner. We just want to be conservative with what we're putting out there in case we need to hold rates, right? The economic equation is much better. We can hold the rates up and fill the building, take a couple of extra months and it would be kind of cannibalizing our own position in the other 2. Operator: Our next question -- there are no further questions at this time. I will now turn the call over to Shawn Tibbetts for closing remarks. Please go ahead, sir. Shawn Tibbetts: Thank you, and thank you all for joining us today. We appreciate our investors' partnership with us, both on the equity and the credit side, our partners who do businesses with us in these submarkets in each of our markets throughout the Southeast United States. Thank you to our team. Thank you to our Board. We appreciate your attention to our story. We look forward to continuing to create value for the long run. Thank you very much, and have a nice day. Operator: Thank you. Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.
Operator: Hi, and welcome to Xometry's Earnings Conference Call. [Operator Instructions] I would now like to hand the call over to VP of Investor Relations, Shawn Milne. Shawn Milne: Good morning, and thank you for joining us on Xometry's Q3 2025 Earnings Call. Joining me are Randy Altschuler, our Chief Executive Officer; Sanjeev Singh Sahni, our President; and James Miln, our Chief Financial Officer. During today's call, we will review our financial results for the third quarter 2025 and discuss our guidance for the fourth quarter and full year 2025. During today's call, we will make forward-looking statements, including statements related to the expected performance of our business, future financial results, strategy, long-term growth and overall future prospects. Such statements may be identified by terms such as believe, expect, intend and may. These statements are subject to risks and uncertainties, which could cause them to differ materially from actual results. Information concerning those risks is available in our earnings press release distributed before the market opened today and in our filings with the U.S. Securities and Exchange Commission, including our Form 10-Q for the quarter ended September 30, 2025. We caution you not to place undue reliance on forward-looking statements and undertake no duty or obligation to update any forward-looking statements as a result of new information, future events or changes in our expectations. We'd also like to point out that on today's call, we will report GAAP and non-GAAP results. We use these non-GAAP financial measures internally for financial and operating decision-making purposes and as a means to evaluate period-to-period comparisons. Non-GAAP financial measures are presented in addition to and not as a substitute or superior to measures of financial performance prepared in accordance with U.S. GAAP. To see the reconciliation of these non-GAAP measures, please refer to our earnings press release distributed today and our investor presentation, both of which are available on the Investors section of our website at investors.xometry.com. A replay of today's call will also be posted on our website. With that, I'd like to turn the call over to Randy. Randolph Altschuler: Thanks, Shawn. Good morning, and thank you for joining our Q3 2025 earnings call. Our Q3 performance powerfully demonstrates the success of our purposely built marketplace model in this massive and highly fragmented custom manufacturing market. We are proving that a superior experience for both buyers and suppliers, fueled by the power of marketplace dynamics is delivering sustainable growth and value. Our marketplace structure is a key differentiator, powering our industry-leading growth and significant adoption amongst our customers and suppliers. Our marketplace sits at the intersection of manufacturing, AI and technology, and we are excited about digitizing custom manufacturing as we accelerate platform innovation. Q3 was a record quarter for Xometry across many fronts, including revenue, gross profit, marketplace gross margin and adjusted EBITDA. Q3 revenue growth accelerated, increasing 28% year-over-year to $181 million. Marketplace growth accelerated, increasing 31% year-over-year, driven by our rapidly expanding networks of buyers and suppliers and deepening enterprise engagement. We are delivering this level of growth in an ongoing manufacturing contraction, underscoring our significant market share gains. We're off to a strong start in Q4, and we're again raising our full year marketplace growth outlook, which James will discuss later in the call. Powered by improving AI pricing and selection algorithms, we drove a 210 basis points increase in marketplace gross margin year-over-year in Q3, driving 40% growth in marketplace gross profit, expanding marketplace gross margin underscores the value we're creating with our AI-powered marketplace. Our efficacy and competitive moat continues to increase as we grow our networks of buyers and suppliers and gain more data to continuously train our algorithms. This has driven significant and steady increases in our marketplace gross margins from the 25% level 4 years ago to 35.7% in Q3 of this year. Each quarter of growth and improvements in our technology helps to incrementally power the quarters that follow. Our results in Q3 and year-to-date marked strong progress on our mission to become the de facto digital rails in custom manufacturing. Alongside strong financial results, we are making investments that will pay off in years to come as we drive innovation across our global marketplaces and supplier networks. Our President, Sanjeev Singh Sahni, has accelerated our product development efforts to embed technology and an expanding suite of AI capabilities across the organization. We continue to win, especially with larger customers as we improve price, speed and selection on the marketplace. In early Q4, we launched auto-quote for injection molding services in the United States, following a launch earlier this year in Europe. Xometry's new auto-quoting capability simplifies the injection molding manufacturing process, providing a seamless digital experience to enable customers to move quickly from design to finished part. The platform enables a spectrum of injection molding options from prototype and low-volume bridge tooling to high-volume multi-cavity production tooling in over 35 different materials, colors and finishes. We advanced our AI-powered design for manufacturing capabilities, expanding our automated extraction engine that interprets technical drawings and CAD files. This enhancement improves the accuracy of our quotes and supplier matching, further reducing friction and improving the buyer experience. For our customers, we're increasing supply chain resilience and agility by offering access to a diverse expanding global manufacturing network of over 4,500 active suppliers. This allows buyers to instantly diversify their supplier base, reducing dependence on a single source or region and enhancing overall resilience. In Q3, we continue to expand our global network and our global sourcing efforts and flexible asset-light model are resonating with customers given the rapidly changing global trade environment. We're delivering a scalable enterprise offering through tools like Teamspace and ERP integrations to become more embedded in customer workflows, reducing buyer friction and expanding wallet share in these large accounts. Our technology initiatives, combined with our enterprise sales efforts are powering our land-and-expand strategy. In Q3, a U.S. aerospace company faced a major production challenge, needing complex tight tolerance components on an aggressive time line with limited supplier options. This company turned to the Xometry marketplace as a trusted partner capable of delivering precision, speed and reliability. Based on the success of this program, Xometry quickly expanded to other divisions within the company, becoming a preferred manufacturing partner for rapid production. In Europe, a medical device manufacturer partnered with Xometry to accelerate production of precision components for its next-generation surgical systems. What began with CNC machined and 3D printed parts evolved into multiple high-volume production programs, including injection molded assemblies for other advanced equipment. By leveraging the Xometry marketplace, the customer was able to innovate faster and drive scale in the competitive medical technology market. These are good examples of enterprise customers we believe can generate $10 million plus in annual revenue. For our suppliers, our marketplace is driving increasing value, enabling them to sell their capacity digitally, unlock access to global demand and increase asset utilization and profitability through our Workcenter platform. In early Q4, we launched the new Workcenter mobile app. The Workcenter platform is Xometry's proprietary all-in-one quote-to-cash solution, enabling its partners to source and consolidate work, manage operations, monitor performance and secure cash flow. This powerful new tool is designed to help suppliers within the Xometry partner network manage job offers, production workflows and shop performance anytime, anywhere. By providing easier access to the job board and job management, we expect to drive increasing supplier engagement. Additionally, the new app provides for better communication flow to ensure that partners are quickly informed of critical updates and job opportunities. The app also enables seamless data capture through photos, certifications and status updates to improve accuracy and get information flowing quickly, delivering greater quality, transparency and responsiveness to customers. We expect that the Workcenter app will deepen supplier engagement and enhance our data to further support marketplace gross margin expansion and improve the buyer and supplier experience. For Thomas, in Q3, we launched our new dynamic ad serving technology and began selling on a new platform for new customers. The new pay-for-performance platform enables advertisers to set budgets, better define their target audience, maximize ad effectiveness and improve ROI tracking. While still early, we are pleased how the platform is functioning, and we're pleased with the initial sales efforts. We expect the new technology will increase advertising penetration and engagement. In Q4, we will further integrate our new natural language search experience to improve buyer engagement as search results are more relevant. There's much more to come in the following months on the innovation front as we focus on further improving buyer and supplier experience and expanding our platforms. Our momentum remains strong in Q4. We're raising our 2025 revenue growth outlook given robust demand in our marketplace and the strong execution of our teams. We expect strong secular growth to continue in 2026 and in coming years as we rapidly scale to $1 billion plus. I will now turn the call over to James for a more detailed review of Q3 and our business outlook. James Miln: Thanks, Randy, and good morning, everyone. Q3 was a great quarter for Xometry, delivering accelerating revenue growth, robust expansion in marketplace gross margin and significant adjusted EBITDA leverage as our marketplace responds to customers' needs in real time. Xometry is becoming their digital rails in this massively fragmented and largely off-line custom manufacturing market. As we scale towards $1 billion of revenue, we expect to deliver improving profitability even as we continue to invest in our growth initiatives. Q3 revenue increased 28% year-over-year to $181 million, driven by strong marketplace growth. Q3 marketplace revenue was $167 million and supplier services revenue was $14.1 million. Q3 marketplace revenue increased 31% year-over-year, a 500 basis points acceleration from Q2, driven by strong execution, expansion of buyer and supplier networks and growth with larger accounts as we continue to capture significant market share. Marketplace growth was robust across many verticals, including semiconductors and energy, aerospace and defense and automotive. Q3 active buyers increased 21% year-over-year to 78,282 with a net addition of 3,505 active buyers. Q3 marketplace revenue per active buyer increased 9% year-over-year, primarily due to strong enterprise growth and efficient corporate marketing initiatives in the U.S. In Q3, the number of accounts with last 12-month spend of at least $50,000 on our platform increased 14% year-over-year to 1,724, an increase of 71 from Q2 of 2025. We view accounts with at least $50,000 spend at the top of the enterprise funnel. We expect to continue to grow this base of accounts over time. Enterprise investments continue to show returns with strong revenue growth in Q3 for marketplace accounts with last 12-month spend of at least $500,000. Our enterprise strategy focuses on our largest accounts, which we believe each have $10 million plus in potential annual account revenue. Supplier services revenue declined approximately 1% quarter-over-quarter as we have largely stabilized the core advertising business. We are focused on improving engagement and monetization on the platform, which remains a leader in industrial sourcing, supplier selection and digital marketing solutions. Q3 gross profit was $72 million, an increase of 29% year-over-year with gross margin of 39.9%. Q3 gross margin for Marketplace was 35.7%, an increase of 210 basis points year-over-year. Q3 gross profit dollars increased a robust 40% year-over-year. We are focused on driving marketplace gross profit dollar growth through the combination of top line growth and gross margin expansion. We continue to adjust our pricing to reflect changing tariffs and our AI cost algorithms update regularly to reflect changes in our supplier network. Moving on to Q3 operating costs. Q3 total non-GAAP operating expenses increased 17% year-over-year to $66.1 million, well below revenue growth. We are applying strong discipline and rigor to our capital and resource allocation across teams while investing in our growth initiatives. In Q3, sales and marketing decreased 140 basis points year-over-year to 15.9% of revenue. This reflects improving enterprise sales execution and disciplined advertising spend. Marketplace advertising spend was 5% of marketplace revenue, which was down 130 basis points year-over-year as we balance growth and profitability. In Q3, operations and support decreased 60 basis points year-over-year to 8.2% of revenue. We are focused on driving increasing automation with AI across operations and support. Q3 adjusted EBITDA was $6.1 million compared with a loss of $0.6 million in Q3 2024. Q3 adjusted EBITDA improved $6.8 million year-over-year, driven by strong growth in revenue, gross profit and operating efficiencies. Year-to-date, we have delivered approximately 21% incremental adjusted EBITDA margin, primarily driven by strong marketplace gross margin expansion. In Q3, our U.S. segment adjusted EBITDA was $10.3 million or 6.8% adjusted EBITDA margin, a $9 million improvement year-over-year, driven by expanding gross profit and strong operating expense leverage, particularly in sales and marketing. Our International segment adjusted EBITDA loss was $4.2 million in Q3 2025 compared with $2 million in Q3 2024, driven in part by our investments to drive further global scale. We expect improved International segment operating leverage in Q4. At the end of the third quarter, cash and cash equivalents and marketable securities were $225 million, decreasing approximately $1 million from Q2 2025. Driven by strong operating leverage and focus on working capital efficiency, we generated $5.8 million in operating cash flow in Q3. We invested $7.4 million in CapEx, primarily software related, reflecting our technology investments in the platform and accelerating product rollouts shared earlier by Randy. We are focused on improving working capital efficiency and cash flow conversion given our asset-light model and limited capital spending. We expect CapEx to be approximately $8 million to $9 million in Q4 2025. Q3 demonstrates the ability of our AI-powered marketplace to deliver strong revenue and gross profit growth and operating leverage as we remain disciplined in our execution. As we scale towards $1 billion of revenue, we expect approximately 20% plus incremental adjusted EBITDA leverage on an annual basis. Given our large market opportunity and low penetration rates, we will continue to balance investing in the future with driving operating leverage. Now moving on to guidance. For the fourth quarter, we expect revenue in the range of $182 million to $184 million or 23% to 24% growth year-over-year. We expect Q4 marketplace growth to be approximately 25% to 27% year-over-year. As Randy mentioned, trends remain strong in Q4 even as we are mindful of the uncertain macro environment. We expect Q4 supplier services revenue to decrease approximately 4% year-over-year as we work through the transition of the recently launched Thomas Ad serving platform. In Q4, we expect adjusted EBITDA of $6 million to $7 million compared to $1 million in Q4 2024. In Q4, we expect stock-based compensation expenses, including related payroll taxes, to be approximately $11 million or approximately 6% of revenue. For the full year 2025, we are raising our marketplace growth outlook from our previous guidance of at least 23% to 24% to 27% to 28% growth. We continue to expect the supplier services to be down approximately 5% year-over-year. This results in our revenue outlook for the full year rising to $676 million to $678 million. For the full year 2025, we are raising our adjusted EBITDA guidance to $16 million to $17 million. As we look ahead, we believe that our growth initiatives can continue to drive at least 20% total revenue growth in 2026, given the large fragmented market opportunity, our initiatives to expand wallet share with strategic accounts and further international expansion, while we remain mindful of the macro environment. I want to close by thanking our dedicated Xometry team members around the world. Their commitment to our buyers and suppliers is instrumental to our continued growth and core to our mission of making the world's manufacturing capacity accessible to all. With that, operator, can you please open up the call for questions? Operator: [Operator Instructions] Our first question comes from the line of Andrew Boone of Citizens. Andrew Boone: You guys just talked about the 20% growth for 2026. Can you help us by unpacking that a little bit? Can you talk about kind of the assumptions that are underlying that, whether there are any macro assumptions that are embedded within kind of the 20% growth overall or whether that's really idiosyncratic drivers that can power growth next year kind of regardless of the situation? James Miln: Andrew, it's James. Thanks for the question. We're really obviously very happy with the performance that we're seeing this year, Marketplace growth of 31% in the third quarter. That's really being driven by the growth initiatives that we've been very consistently driving across enterprise, across scaling our network of buyers and suppliers and improving the technology of the platform as well. So we're seeing it broad-based at the moment across multiple processes across our broad diversity of categories. So as we're working on our plans for 2026, we wanted to give some view as to -- of our confidence in the consistency of that growth at a 20% plus level. We'll clearly come back with the Q4 earnings with more details on guidance for 2026. So we just wanted to give you a bit of a framework of how to think about that for next year. Shawn Milne: Yes. And Andrew, it's Shawn. And if you just think about the underpinnings of your model heading into 2026, we continue to drive strong active buyer growth, and you see strong revenue per buyer growth, too. So those are some of the underpinnings of the model driving the 20% plus into '26. Randolph Altschuler: Yes. And I think also just to jump in, it's Randy. We are always mindful of the macro. So we didn't assume any improvement in that next year. This is really about Xometry continuing to gain market share and control our own faith. And that's what's driving our assumptions here. Andrew Boone: And then the Workcenter mobile app feels like a large unlock as you guys simplify kind of the process for kind of your stakeholders that are clearly the underneath driver of operations to drive the platform. Can you just double-click in terms of what the unlock is in terms of creating that mobile experience and how people are using it and helping to unlock kind of more demand across the platform? Sanjeev Sahni: This is Sanjeev Sahni. Let me start by talking about our AI efforts. As you know, we've been an AI-native company from the beginning. AI has been part of our DNA, whether it's data science, machine learning or deep learning models, we've always had those as core to our way of working and scaling the customer and partner experience. We launched the Workcenter mobile app in the U.S. for our large and expanding partner base truly to drive that customer and supplier experience because we really believe as partners adopt a more friendly way of giving us data about their orders, sharing updates on quality control, sharing updates on dispatch, sharing updates on which job they like, which job they don't. We get deeper into engagement with them and are able to help them manage their business, help them manage time lines and quality for our customers. This is just the beginning of a series of AI-enabled tools that we continue to launch and scale. As you know, our focus has been on deploying that towards pricing, speed and selection as a core theme on where our efforts go. And so this cycle, this was our effort in driving speed and continuing to scale that with our partners. Operator: Our next question comes from the line of Brian Drab of William Blair. Brian Drab: First, I was wondering if you could just talk a little bit more about some of the changes that you're making within the team, some of the additions, Sanjeev, I know you've talked a lot about adding talent and technical capabilities. Can you talk about the importance of that and how that's going to help you get to this $1 billion revenue level and beyond? Sanjeev Sahni: Thank you for the question. Again, I think we are seeing very strong success in attracting top talents from some of the best tech companies in the world. As part of our efforts, we want to make sure that we continue to deliver on the strong pipeline of tech outcomes for our customers and partners, like Randy already mentioned, this cycle, we launched auto-quoting for injection, molding, offering that we think will significantly expand our marketplace menu. Injection molding, as you know, is a very, very large category. And this is one where we've launched auto-quoting by building on our experience in the offline where we've now got a set of buyers, suppliers, we've got models that have been refined and now driving technology behind those models helps us bring it to the customer in an online platform, which they can easily adopt and help us drive significantly higher market share. But again, going back to what I was saying before, our AI efforts are truly around price selection speed. So if you think about price, we've been continuing to test behavior-based models. We've been trying to test various sortations on our site, which you can see when it comes to selection, I just mentioned injection molding and then speed, the Workcenter and mobile app. So across areas, including Thomasnet, where we've launched dynamic ad serving technology, this is becoming a truly product-led, product-driven organization with our CTO, Vaidy and his team now in their 6 months in the organization. Brian Drab: Okay. And then can I ask a much more near-term question. And looking at the guidance and the step function increase that you have from second quarter to third quarter, so you're up almost $20 million in revenue from second quarter to third quarter and then modeling just a couple of million increase sequentially into the fourth quarter. How are you thinking about that guidance? And what have you -- have you seen anything in the first 5 weeks of the quarter? Is there anything beyond kind of typical holiday seasonality that you're thinking about? James Miln: Yes. Thanks, Brian. So again, I think, as you know, really great performance in Q3 here on -- even despite an uneven manufacturing environment, Xometry is executing really well. Across enterprise, we're seeing a lot of strength, broad-based across the accounts. We're seeing, we believe, strong wallet share gains, revenue per buyer being up 9%. We've seen strong growth across processes from CNC to sheet to additive. I think as we look into the guide, as usual, we take into account those trends we're seeing in the business, which we're very pleased about as well as the risks given the uncertain manufacturing environment. And so with overall marketplace revenue growth over the year now at 27% to 28% plus on the basis of that strong active buyer growth as well, really pleased with what we're seeing. And just as I said, that all builds into the guidance that we give. Randolph Altschuler: Yes. And Brian, it's Randy. Just add a couple of things. We were very clear, both in my remarks and James' remarks, Q4 is off to a strong start. So as we talked about when we entered Q3, we had momentum there. We are seeing continued momentum here in Q4. And we -- that's -- I think our strongest guide this year in terms of year-over-year growth is the guide that we're giving for this fourth quarter. So we just continue to be mindful of the macro, but we have a lot of momentum. Operator: Our next question comes from the line of Matt Swanson of RBC Capital Markets. Unknown Analyst: This is Simran on for Matt Swanson. Congrats on a great quarter. To start, could you just double-click on the trends that you've been seeing in enterprise and Teamspace and how we should think about that opportunity continuing to grow throughout 2026? James Miln: Yes. Just to reiterate, enterprise are customers that we think have had more than $500,000 of spend, and that number grew rapidly last year in terms of their year-over-year in 2020. That number grew -- the revenue generated by them grew rapidly. So there's a couple of things. And in this quarter, you're also seeing our revenue per buyers increased 9% year-over-year. And in part, that is as our enterprise customers are leaning more and more in. There's a couple of technology things that are making that happen. First, widespread adoption of Teamspace by those enterprise customers, and we continue to enhance Teamspace, and that's giving us more traction. Our punchouts, so our integration with our enterprise customers' ERP systems that's also accelerating. So accelerating adoption of Teamspace, of our ERP punchouts. And then our enterprise sales motion, we've been talking about that. We've been investing in our enterprise sales team. So when you bring that all in, that's resulting in greater traction with those enterprise customers, which is in part reflected by that 9% growth in buyer spend quarter-over-quarter -- year-over-year, sorry, year-over-year. I would just add, I think we're really -- Xometry is purpose-built for sort of the industry trends that we're seeing now, the move towards supply chain resiliency, importance of getting agility and speed to market and really being able to access technology and supply chain. And I think that, that's what the team has built for many years and is behind our initiatives. And again, it's consistent in terms of how we'll be growing ahead into 2026. Unknown Analyst: That makes sense. That's really helpful. And then with the new product launches in the EU, can you just remind us how you're thinking about international expansion and those investments heading into next year? James Miln: This is James. I mean I'll kick off. I think international, we're very pleased with the performance that we've had there over the years, continuing to see that grow and scale. In the quarter, we're up 23% year-over-year. And we really think there's a lot of opportunity here given the large and highly fragmented markets that there are, not just in the U.S. but in Europe and in Asia. We had the recent launch of Teamspace that's been going well. We've also been expanding that marketplace more materials, more processes, more quoting possibilities. We're very pleased to see the injection molding order quoting coming to the U.S. after we were able to first launch that in Europe. So this combination of the market opportunity, again, with the Xometry solution and product road map gives us a lot of confidence and able to continue to see that grow. And as we said before, we believe that could be 30% to 40% of Xometry over time. Randolph Altschuler: Yes. And just to remind everybody, in 2020, our international revenue was approximately $1 million. We've grown that now to $120 million run rate. So just going back to what James said, we expect that to be eventually 30% to 40% of our marketplace revenue and all the trends are moving nicely in that direction. Operator: Our next comes from the line of Greg Palm of Craig-Hallum. Greg Palm: Just thinking back to Q2 and obviously, more so this quarter, but we're not really used to this sort of level of upside on the revenue line. So I'm just curious, like has your visibility changed at all? I'm just kind of curious, as you think back to when you provided guidance last quarter, what changed where you were basically able to outperform by this magnitude? Randolph Altschuler: We continue to see our customers leaning in more and more and adoption of technology tools that we've been investing now for a while, whether it's Teamspace, whether it's Workcenter, it's the punchout integrations, those adoptions are accelerating. And here's the great news, Greg. As we think about the fourth quarter next year, the injection molding and supporting launched this quarter, just launched. The mobile app for Workcenter is recent. So -- and we've got a product road map chockful of releases that are going to be coming not only in Q4, but also throughout 2026. So I think you'll have seen us continue to gain momentum. And a lot of that is, as we talked about, the investments we've made in AI and technology and that product adoption from our customers is accelerating. Greg Palm: Okay. Awesome. And then just as it relates to Q4, I think it implies an incremental margin for the full year around 20%, which I think is a little bit below what you provided last quarter. Is this just sort of maybe a more near-term expansion in some of these investments that you've alluded to? I mean, any reason why we wouldn't see incrementals sort of climbing back in the 20s and early '26? Or how are you sort of thinking about that cadence of incremental margins as we progress into next year? James Miln: Yes. Thanks, Greg. As we said, we're always about balancing the growth and the profitability. I think when we think about the opportunity ahead for Xometry, it's such a large market that we need to make the right choices to invest in product technology to be able to scale the business. But we also recognize the importance of delivering profitability and improvement on that along the way. And that's why overall, we've given this framework of 20% at least incremental margins to the bottom line. In the last couple of years, you've seen us do that. Year-to-date, we're at 21%. I think you're right, if you put in our guide, then we'd be around 20% for the full year. That is an increase in adjusted EBITDA dollars that we're delivering over what we had in the last update. So we're really pleased with that progression. And I think that that's what we're doing. We're going to continue to balance growth and profitability so that we can grow into this huge opportunity ahead of us. Randolph Altschuler: And here's the great news, Greg, as revenue is accelerating and we've gotten more growth than we've expected, that gives us some optionality to make some investments. We're obviously, as James said, very focused on profitability as well, but greater growth gives us some options, and we're going to make sure we're taking advantage of that and being smart on both sides of it. Operator: Our next question comes from the line of Ron Josey of Citi. Unknown Analyst: This is Robert on for Ron. Great to see the active buyers growth up 21% in the quarter. Question is, I guess, how much of this was driven by international expansion given all the improvements that you made with new materials and faster lead times versus an expansion within existing client base? James Miln: Robert, this is James. So really pleased with the active buyer growth. I think, in particular, what we're seeing is with a lot of the initiatives that we've been driving both with product and with our marketing teams over the last year, we continue to see success in attracting new buyers to the platform. I think U.S. enterprise actually has been very strong for us. You've seen that in -- we've called that out in terms of driving the revenue, but it's also been on the active buyer side. And the proposition that we have, again, with these macro trends going on and looking for supply chain resiliency and agility, Xometry is purpose-built for this. And I think we've been improving our messaging and improving the way that we've been deploying our marketing. So you've actually seen advertising only up modestly year-over-year, and yet we've been continuing to grow our revenue and our active buyers robustly. So it's been strong in U.S. enterprise, but we have a global opportunity as well. Randolph Altschuler: Yes. And just to double-click on what James said, it's Randy. It's really broad-based. So it's our existing accounts, those enterprise customers that are leaning in more and activating more, but it's also attracting new buyers, both here domestically and abroad. Unknown Analyst: And then on marketplace gross margins, they reached a record this quarter, and they're at 35.7%. And this is the second quarter that they're now well within your long-term target range. So should we consider this as the new sustainable baseline for the marketplace going forward, just given benefits from AI, et cetera? James Miln: Yes. I mean I think that what you're seeing is the result, as you said, of the overall continued improvements in our AI price prediction accuracy, the machine learning, the opportunity we have as we scale, we have more data, we have more suppliers, we have more sourcing. I continue to expect gross margin to be up year-over-year in Q4. We are in that range, 35% to 40%. And so it will always be linear every quarter up and to the right. But I think that we feel that the combination of improving our AI of more data and our sourcing keeps us in that 35% to 40% range. Randolph Altschuler: Yes. I think we're pretty excited that this quarter, not only do we have accelerated marketplace growth, but we actually grew our gross profit dollars in marketplace even faster. So that's a signal that our customers are valuing and our suppliers value the service that we're bringing to them.
Operator: Good morning, and welcome to the Vornado Realty Trust Third Quarter of 2025 Earnings Call. My name is Joe, and I will be your operator on today's call. This call is being recorded for replay purposes [Operator Instructions]. I will now turn the call over to Mr. Steve Borenstein, Executive Vice President and Corporation Counsel. Please go ahead. Steven Borenstein: Welcome to Vornado Realty Trust Third Quarter Earnings Call. Yesterday afternoon, we issued our third quarter earnings release and filed our quarterly report on Form 10-Q with the Securities and Exchange Commission. These documents as well as our supplemental financial information package are available on our website, www.vno.com, under the Investor Relations section. In these documents and during today's call, we will discuss certain non-GAAP financial measures. Reconciliations of these measures to the most directly comparable GAAP measures are included in our earnings release, Form 10-Q and financial supplements. Please be aware that statements made during this call may be deemed forward-looking statements, and actual results may differ materially from these statements due to a variety of risks, uncertainties and other factors. Please refer to our filings with the Securities and Exchange Commission, including our annual report on Form 10-K for the year ended December 31, 2024; for more information regarding these risks and uncertainties. The call may include time-sensitive information that may be accurate only as of today's date. The company does not undertake a duty to update any forward-looking statements. On the call today from management for our opening comments are Steven Roth, Chairman and Chief Executive Officer; and Mike Franco, President and Chief Financial Officer. Our senior team is also present and available for questions. I will now turn the call over to Steven Roth. Steven Roth: Thank you, Steve, and good morning, everyone. Today is Election Day in America. The spectacle of our entire population all voting on a single day, the first Tuesday in November, has been somewhat diluted by early voting and voting by mail. Nonetheless, today is election day, a critical symbol of our great American democracy. And we all know elections matter. The election in New York City with the prospect of a Democrat socialist Mayor has attracted enormous attention. We almost admit that affordability has become a critical issue and even a lightning rod as is the cost and availability of housing. I'm an optimist and believe that everything will work out for the best. Importantly, with respect to the prospect of Mamdani mayoralty, we have not seen any pullback or hesitancy in space demand from our customers, in fact, the opposite, nor have we seen any canary in the coal mine indication from the stock market. Enough said. Now to the business. Here at Vornado, our business is good, really good and growing stronger. Our performance continues to lead both the national office pack and our New York peers. The market seems to have recognized this as our stock has doubled in the past 2 years. Why? One, we are in New York; two, our leasing stats and our mark-to-market stats lead the industry; three, as does our balance sheet stats. Our net debt-to-EBITDA ratio is down to 7.3x, and our immediate liquidity is $2.6 billion; four, we are focused. We are a stick to our knitting company; five, we have our PENN District, our city within a city; six, we have the 350 Park Avenue development, and it is in full swing; seven, we have a couple of hundred million dollars in the bag annual growth coming over the next few years; and finally, eight, we have a great portfolio of office and retail assets. We had another excellent quarter. Michael will cover our earnings shortly, and Glen is here to answer questions on our leasing activity. Now let me cover what we're seeing on the ground, along with some of our recent activity and accomplishments. As the noted journalist, Peter Grant, recently wrote, "New York City's office market is enjoying its biggest boom in nearly 2 decades, leaving the rest of the U.S. in the dust." The rotation from a tenant's market to a landlord's market in the 180 million square foot Class A better building submarket in which we compete, that we've been predicting is now happening and has even become accepted by our doubting [ Thomas analysts ] and the critical press. [ Cut off ] the press, [ CRB ] reports that Midtown core better building vacancy is now down to 6.2%. As I said in the past, we are 90% prime pitch Manhattan-centric company. Tenant demand is robust, companies are expanding. Demand is broad-based across all industries, and available space in the better buildings continues to evaporate quickly. Manhattan office leasing activity is on pace to exceed 40 million square feet for the year for the first time since 2019. Office demand is filling out to all submarkets, sublet availability is shrinking rapidly, and we are in the [ foothills ] of strong, maybe even surging rent growth. By foothills, I'm saying all the good stuff is just in the third inning, and the best stuff is yet to come. Obviously, deal activity and values will follow. Here is our industry-leading leasing scorecard. We expect our 2025 leasing volume for Manhattan office to be our highest in over a decade and our second highest year on record. Please take a look at our leasing and mark-to-market statistics. Our performance continues to be industry-leading. During the first 9 months of 2025, Vornado leased 3.7 million square feet overall, of which 2.8 million square feet was Manhattan office, leading the marketplace in not only leasing volume during that period, but also with the highest average starting rents in the city and with impressive mark-to-markets. Excluding the 1.1 million square foot master lease with NYU at 770 Broadway, the remaining 1.7 million square feet of leasing during the first 9 months was at $99 per square foot average starting rents with mark-to-markets of plus 11.9% GAAP and plus 8.3% cash. This includes over 1 million square feet of leasing in PENN 1 and in PENN 2. During the third quarter, we executed 21 New York office deals totaling 594,000 square feet at robust starting rent of $103 per square foot. Mark-to-markets for the quarter were plus 15.7% GAAP and 10.4% cash, and the average lease term was more than 12 years. Michael and Glen will cover specific tenants and deals in a few moments. In the PENN District, at PENN 2, our leasing this quarter included 325,000 square feet at average starting rent of $112 per foot. In October, after quarter end and not included in those leasing statistics, we completed 2 more large leases totaling 188,000 square feet. We have now leased over 1.3 million square feet at PENN 2 since project inception, putting us now at 78% occupancy and easily on track to hit and exceed our year-end guidance of 80%. Based on signed leases and activity that we are seeing for the remaining space, we plan to increase our published projected incremental cash yield of 10.2% at year-end. At PENN 1, we leased 37,000 square feet during the quarter at an average starting rent of $100 a foot. Since the start of physical redevelopment at PENN 1, we have leased 1.6 million square feet there at average starting rents of $94. At PENN, we are handily exceeding both of our initial underwriting and our increased underwriting. It's clear that the tipping point for the PENN District, our 3 block long city within the city, is now behind us. Tenants and brokers are wowed by our transformation, which is reflected in our leasing activity. We sit on top of the nexus of Pennsylvania Station and the New York City subway system, adjacent to our good neighbors to the West -- Manhattan West and Hudson Yards. The three of us combined represent the new booming West side of Manhattan. As I said before, the PENN District will be a growth engine for our company for years to come with rising rents and future development projects. At our PENN 15 site, we are now responding to requests for proposals for substantial blocks of space. We are now well along in the planning process for a 475-unit rental residential building on our own 34th Street site [ caddy-corner ] to Moynihan Train Hall. We plan to begin construction next year. It is time, and we will now transform the entire old, may I even say, junky retail on both sides of Seventh Avenue and along 34th Street that we inherited into attractive, modern and exciting retail offerings. This is the gateway to our PENN District, and a transformation year will have a big impact. We also continue to add to our already impressive food offerings in the district with our newest restaurant, Avra, at the 33rd Street and 9th Avenue corner of the Farley Building, which recently opened to crowds and great reviews. The space is spectacular, sits right in the heart of the new West Side and really ties us all together. Our New York City office leasing pipeline remains strong with more than 1.1 million square feet of leases in negotiation and various stages of proposal. We are growing in Manhattan and growing smartly. In September, we added to our prime fish portfolio with the acquisition of 623 Fifth Avenue. This building originally built to the highest standards by Swiss Bank Corporation sits on top of Saks Fifth Avenue flagship store, [ store ] like a trophy on top of a podium. So our lowest floor is the 11th, 175 feet off the ground with 25 column-free 15,000 square foot floors above. The location is pretty amazing being nearly a block west of both JPMorgan Chase's new heroic headquarters and our 280 Park Avenue. Our 623 Fifth Avenue has unique light and air and views, being setback from Fifth Avenue on the east side of the Saks landmark with the Cathedral to the north and the Channel Gardens and the skating rink of Rockefeller Center to the West. The best and unique part of this deal is that the building is 75% vacant, with the few remaining tenants on relatively short leases. Ironically, the vacant building is a big plus. Let me explain. We will not be penalized by a gaggle of low-rent, longer-term obsolete leases and will not have to wait 5 to 7 to 10 years for them to roll off. We will redevelop this building into the very best, elite boutique office building, sort of the 220 Central Park South of office. We will begin to deliver space by year-end 2027, so in 2 years, well less than half the time it would take for a new build and importantly, at half the cost. Here's the math. We acquired the building for $218 million, so $570 per foot. We will invest another $600 a foot in the development. So call it $1,200 a foot for the finished project, which will be every bit as good as a new build at half the cost. The team is budgeting 9% yield on cost for this project. I am pushing to crack double digits. There is high demand for and a shortage of this product, we couldn't be more excited. Our 1.8 million square foot 350 Park Avenue new build with Citadel as our anchor tenant and Ken Griffin as our 60% partner, continues right on schedule. The City Council unanimously approved the final [ year ], and I did say unanimously. We will commence demolition in March 2026. We remain very excited about the prospects for this new Forrester Partners-designed, best-in-class 1.8 million square foot tower, as is the brokerage and tenant communities. We are already getting incomings for spec space from clients seeking the very best and for whom our delivery date fits their needs. The Manhattan retail market also continues to show growing strength, and the best spaces are in high demand again. Tenants are recognizing that rents are moving up and availability is declining on the best streets and are beginning to approach landlords for early renewals to lock up their spaces. Importantly, we are achieving rents consistent with historical highs at our Times Square properties. We are the largest owner of signage in New York City with our unique cluster of premier [ signs ] in Times Square and in the PENN District, and that business continues to grow. Signage revenue for 2025 is projected to be our highest year ever. You should note that all of our sites are attached to buildings which we own, which gives us perpetual control, a unique competitive advantage and the highest margins in the business. There were some news a couple of weeks ago regarding the loan on 650 Madison Avenue going into default, which I should comment on. We were 20% of a group of institutional investors, who purchased the [ 600,000 ] square foot building in 2013 with an $800 million nonrecourse mortgage. The primary play was to capitalize on the below-market retail rents and upgrade the retail tenancy. What was the retail apocalypse? The fear that e-commerce would obliterate all physical retail and the pandemic just didn't work out. 3 years ago, in 2022, we recognized this asset impairment and wrote the asset off entirely to zero. Bad stuff happens every once in a while, even to us. Three days ago, the court came down with a ruling vacating the arbitration panel's 10/1 ground lease rent reset. We were surprised and disappointed. We are optimistic that this will be reversed on appeal. Lastly, turning to San Francisco. At our 555 California complex, arguably the best building in town, we continue to lead the market. During the quarter, we signed 224,000 square feet of leases at triple-digit average rents and 15% mark-to-market. This includes a lease with UPenn's Wharton School for the Cube. We said 2 or 3 years ago that San Francisco would recover, given that it is the capital city of the world's greatest tech and innovation centers, and that is what's happening. Thank you all. Now over to Michael. Michael Franco: Thank you, Steve, and good morning, everyone. We had a very strong quarter as office demand in New York City remains robust. Third quarter comparable FFO was $0.57 per share. compared to $0.52 per share for last year's third quarter, meeting analyst consensus by $0.02. This increase was primarily due to higher FFO resulting from the NYU master lease at 770 Broadway and higher NOI from our signage business, partially offset by lower NOI due to asset sales and capitalized interest beginning to burn off the PENN 2. We have provided a quarter-over-quarter bridge on Page 2 of our earnings release, and on Page 6 of our financial supplement. Same-store GAAP NOI for our New York business overall was up 9.1% for the quarter while same for cash NOI was down 7.4%. Let me explain. GAAP, which smooths everything, is more relevant to earnings given the cash number is hit by a free rent from a significant amount of leasing in recent quarters as well as the adjustment in cash rent related to the PENN 1 ground lease. Given all our activities to date this year, we now expect 2025 comparable FFO to be slightly higher compared to 2024 accountable FFO. While we are still in the process of finalizing our 2026 budget, as we've previously said, we expect 2026 comparable FFO to be flattish compared to 2025 as we are anticipating some noncore asset sales and taking income offline to effectuate the [ 34 and Seventh ] retail redevelopment. As we indicated on our previous calls, we expect 2027 to be the inflection year, and there will be significant earnings growth in 2027 as the full positive impact of PENN 1 and PENN 2 lease-up takes effect. New York office occupancy increased this quarter to 88.4% from 86.7% last quarter, primarily due to leasing activity at PENN 2, comprised of a 200,000 square foot headquarters leased with Verizon and new leases signed with FGS Global in [ Pernod Ricard ]. If you factor in the additional 188,000 square feet recently signed PENN 2, occupancy increases further. We continue to execute on our leasing pipeline and still anticipate that our occupancy will increase into the low 90s over the next year or so. While our retail occupancy also improved this quarter based on leases we signed, you will note a further jump in occupancy resulting from taking the retail in Manhattan Mall out of service this quarter. Turning to the capital markets. The financing markets for New York City assets are liquid, with CMBS spreads hovering at year-to-date lows, and even the banks are beginning to selectively return to lending on higher-quality assets. The unsecured bond market remains robust and has become much more constructive for office credits, with new issue spreads over 200 basis points tighter and all-in yields over 300 basis points lower than 2023. In the past quarter, we have been active in refinancing our near-term maturities, and we have several other deals in the works. The investment sales market has also heated up significantly in the past few months, as indicated by the many recent deal executions. The market is active for quality product, irrespective of size, and there is ample liquidity in the debt capital markets to facilitate deals getting done. Capital sources of all types are beginning to return to investing in New York City office, given the strong leasing fundamentals. As we have previously discussed, focusing on delevering the balance sheet has been a priority for us. Since the beginning of the year, we have generated $1.5 billion in net proceeds from sales, financings and the NYU deal, paid down $900 million in debt and increased our cash by $500 million. Our cash balances are now $1.15 billion. And together with our undrawn credit lines of $1.44 billion, we have immediate liquidity of $2.6 billion. Our net debt-to-EBITDA metric has improved to 7.3x from 8.6x at the start of the year, and our fixed charge coverage ratio, as expected, is steadily rising. We expect these ratios will continue to improve as income from PENN 1 and PENN 2 comes online. Please see Page 23 of our financial supplement for detail. With that, I'll turn it over to the operator for Q&A. Thank you. Operator: [Operator Instructions] And up first, Stephen Sakwa from Evercore ISI is on the line with the question. Please proceed. Steve Sakwa: I don't know, Glen, maybe you could just start. It obviously sounds very promising, given the activity levels at PENN 2. I guess I'm curious, how are you sort of changing kind of the leasing strategy with, I guess, only 20% of the building left? How are you thinking about tenants kind of in the pipeline? And maybe talk about how rents are maybe changing for the remaining space. Glen Weiss: Hi, Steve. So rents have changed. You heard the script, average rent is quarter over $112 a foot of PENN 2. So the rents keep moving up, up and up. We keep repricing the space almost on a daily basis. In terms of the remaining space, it's a lot of single floors, mainly in the tower. So we feel really good about that, confident in our approach. We have a lot of deals in the works right now. As we've said in the script, we expect to be at or above our 80% goal by the end of the year. And if you look at the tenant roster, the credit profile is excellent, the mix of industry sectors is really good. So we're pleased, and we expect to continue that strategically. Steve Sakwa: Okay. And then maybe as a follow-up, Steve, on your comments around 623, how do you sort of approach the leasing of that building? Is that something that you'd sort of start to pre-lease? Or do you kind of wait until early '27 until there's more of a product to show people? I mean, how do you sort of think about the timing of that and the rents for that building? Steven Roth: Steve, we're going to do that pretty much on the same as we did 220 Central Park South. At 220 Central Park, what we did was we had complete designs and they were spectacular, knockout designs, even as we started construction, and we did an awful amount of selling of 220 from those designs. We're going to do very much the same at 623 Fifth Avenue. So we're going to get it designed. Our objectives are to make it the most interesting, high-end boutique office in the city. And once we get that done, then we'll go into the market with very high aspirations. Operator: Next is Floris Gerbrand Van Dijkum with Ladenburg. Floris Gerbrand Van Dijkum: Michael, maybe this is for you. I was trying to get a sense of what is your current signed, not open pipeline in terms of basis points and then also in terms of dollar value, if you can give us a sense of the scope of rents that are going to come online over the next 2 years? Michael Franco: Floris, I don't know if I follow you on the basis points. I think Steve, in his opening remarks, sort of alluded to a couple of hundred million dollars sort of in the bag over the next couple of years or so. And I think we looked at our signed, not commenced number. That's what that is, right? So -- and we've talked about what the ramp is when the bulk of that comes in, in 2027. There will be a little bit next year. But the bulk is really 2027, and it'll slip over into 2028. But Steve's comment on a couple of hundred million dollars, I think, is a pretty good proxy. Floris Gerbrand Van Dijkum: Just to make sure, a couple of hundred million, is that $200 million? Or is that $300 million? Michael Franco: Floris, we're still finalizing. Let's use more than 200 right now, okay, in terms of the -- over the next 2 years or so. Floris Gerbrand Van Dijkum: Okay. Fair enough. But in terms of percentage, do you have the percent the difference between what's occupied and what's actually leased right now? Michael Franco: You're talking from a physical versus what's on the line, I mean, I think the occupancy numbers, we believe, what's reflective of actually what's been signed, right? So that's -- those are signed leases. Not all those tenants are in place yet. I can't tell you what the physical is relative to that. We have to come back to you on that. That [ GAAP ] rent has not started yet on many of those leases. Floris Gerbrand Van Dijkum: Right, right, right. And that's the more than $200 million that's coming online. My follow-up, if you don't mind, I was just curious on -- you talked a little bit about -- or Steve talked a little bit about the billboards business being at record high. Can you talk a little bit about the opportunity that you have in the PENN District. ?Because I don't -- I believe you own 100% of that as opposed to the Times Square, where you're in a JV. How much room do you see to expand that? Michael Franco: You're right, we do own 100% of all the signs in the PENN District. And I think what's unique about the PENN district relative to Time Square, which Time Square is still probably the most important signage marketplace in the country, maybe the world; is we own the dominant signs there too in that retail joint venture. But at PENN, because we basically control the district, other than I think one sign, we have all the signs, right? And so that allows us to market them in a variety of ways. We can -- we do -- and I think when you were over there recently, we can market one by one, we can market entire takeover where you can take over the district for a period of time, different slice of an hour or something more extended. So it allows us to optimize the income we can drive out of that. Historically, I think if you look over an extended period, the signage business kind of goes up 4% to 5% a year in terms of revenue. Some years are greater, some years are lesser, but I think it's a decent annual run rate. And when you put a new sign in, the payback period is pretty quick. 12, maybe 18 months max. So we continue to see organic growth just coming from revenue naturally going up every year as it's historically done. And there's probably a little bit of signage we can add as we -- there's definitely some signs we can add as we build additional buildings in the district over time, but that will take some time. So there'll be some signage that comes back online next year. And at the same time, we're going to rebuild the different signs, so that sort of cancel each other out. But as you said, very healthy business that tends to have pretty steady growth, if you look at it over a period of time. Steven Roth: What I tried to do in my remarks was to talk about the strategic benefit that we have in that business. So the first thing is that we own [ clusterings ] in exactly the right place for Time Square and the PENN Station area. The fact that we own the buildings and the signs are attached to us, we don't have leases, we don't have the expensive leases, we don't have the renewal risk of leases. So basically, we have perpetual control over this inventory. So that's the first thing. The second thing is that because of that, we have the highest margins. So we have the best signs and the best districts in quantity, and that creates a very important strategic business. At Times Square, we have our -- we have -- obviously, we have the best -- the 2 best blocks the bow tie, we have the best signs. And so that's fine. In PENN Station, I don't think that we scratched the service to the amount and quantity of signs that we can develop there. Operator: John Kim from BMO Capital Markets is up next with the next question. John Kim: I wanted to go on the commentary of flattish earnings in '26, which I think you foreshadowed a little bit last quarter, but it seems like it will be impacted by noncore asset sales. So I was wondering if you could talk about the timing and the dollar amount of the dispositions. And also what you think the trajectory of occupancy will be next year? I know, Steve, you mentioned in the past that it could go to the mid-90% range, and I was wondering, how next year shapes up? Michael Franco: John, hope you're well. Flattish '26 is like, I think we've been consistent last couple of quarters in terms of '26 and '27. In terms of magnitude of noncore sales, I can't be specific on that because there's a number of things that could drive that. But I would say it's at least in the $250 million, $300 million neighborhood, it could be more than that. And timing, just depending on when we execute on those. So I can't give you much more specificity just because you're dealing with counterparties and things take a little time and some things are still on the drawing board. But I think, by middle of the year, my guess is much of that is probably done. But again, we've got a track record of certain things we had it planned, we end up executing on, and that may well happen again. On the trajectory of occupancy, like -- I think as we look at Glen's pipeline, I think there's a reasonably good probability we're going to get to 90% in the next quarter or 2. And then beyond that, we'll continue to build occupancy. And we think over the next couple of years, we'll get that into the -- back to sort of the historical levels, whether that's 94, give or take, if not higher. So I think as we sit here today, that's probably as much specificity as I can give you. John Kim: Okay. And then my follow-up is, any insight you can provide on the PENN Station transformation project? How involved Vornado will be as part of it, if there's any impact to commercial development opportunities going forward? And any views on whether or not MSG will relocate? Steven Roth: So I think that it's highly unlikely to impossible that MSG is going to relocate. So that's that one. So with respect to the PENN Station project, we are absolutely in favor of anything that makes PENN Station and the PENN District better, more user-friendly, more transformational. And that's the -- the best thing for us is constant improvements. And the fact that the government is involved now with a large budget, that's a very good thing. We will be involved in the process with one of the bidding groups, primarily with respect to the retail that we dominate in the station and in the surround. Barry, do you have anything to add to that? Barry Langer: No. Steven Roth: Thank you. But we're on -- this process of improving PENN Station, we are the biggest rooters for that, that there are. Operator: Dylan Burzinski with Green Street is our next question. Dylan Burzinski: I guess just sort of given the significant demand backdrop that you guys are seeing, obviously, continuing to push rents across the PENN District. I know one of your peers, when they reported earnings, talked about, call it, a 20% to 25% cumulative net effective rent growth expectations over the next 4 to 5 years. So just wondering if you can sort of put any of your thoughts around that? I mean, are you guys expecting sort of significant rent spikes as space continues to get tight, especially for the quality of you guys in the portfolio? Michael Franco: I think 20% to 25% over 4 to 5 years, I think we'd be disappointed if it's not quite a bit more than that. You look at all the dynamics... Steven Roth: Agreed, agreed. Michael Franco: Okay, I mean you look at all the dynamics in the marketplace, and I think this is a favorable backdrop as we've had in decades, right? There is scant supply, the demand is broad-based and very strong, companies are expanding here. And there's just -- and the vacancy factor, I mean, it's -- I think Steve referenced in his opening remarks, the better buildings in Midtown, we're now talking about 6% vacancy. That's almost frictional, I think, particularly on large spaces. So I think it's going to result in two things. I think one, you're going to see renewal probabilities start to go up in the next 2, 3 years because there's just no place for a lot of those companies to move to. And then secondly, to rent space, it's become a landlord's market, as Steve said. So when these cycles happen, if you look at history, it can go up 15%, 20% in a year. And I'm not telling you that's going to happen, it could happen, it's not a 0%. But we think that the probability of the numbers you talked about is much higher on the upside than the alternative. Steven Roth: There's another way to look at this also, and that is the elasticity of demand on the part of the marketplace and our customers. So not that long ago, $100 was a top, top, top tick rent. Because of the increase in costs, because of the shrinkage of supply, because of the increase in interest rates, rents like overnight went into the mid hundreds of dollars a foot or something like that. Interestingly, we found that there was no pushback from the marketplace. If a growing, expanding, important client need in the space, they paid what it took to get the space. So what I'm saying is that the marketplace is able to pay for the space. And the dynamics in the marketplace will determine what the rents are. But clearly, the rents are going to go up. And we think they're going to go up. Obviously, we think they're going to go up more than you do. Dylan Burzinski: That's helpful commentary. I really appreciate that. Maybe just one more, if I could. You guys mentioned noncore asset sales. And I know you guys don't necessarily give a number. But as you guys sort of think about redeployment of that proceeds, I mean, is it likely to go into asset acquisitions? Are you going to hold it to delever? Just sort of curious, plans with that capital that you guys expect to come in next year. Michael Franco: Got it. I think it could go into a number of places, Dylan. Like if you look at what we've done to date, whether it's noncore, general asset sale, which has been quite significant; we've delevered the balance sheet meaningfully. At the same time, we made a, we think, a very attractive acquisition. And that's not something that we program, right? We don't sit around here in our counsel room saying we're going to buy x amount for a year. If we find the right opportunity, we'll act on it. If not, we're perfectly content to bide our time until the right thing comes along. So I would tell you that, as we look at capital, we're going to continue to strengthen the balance sheet. And if we find something compelling externally, obviously, we'll look at that. We have some internal capabilities or requirements in terms of we've talked about developing the residential. We've got 350 Park in the [ out ] year. So we have a number of users. And by the way, and I'll let Steve jump in here as well, I mean our stock still, we think, trades at a huge discount. So I think everything is on the table. Operator: And our next question will come from Alexander Goldfarb with Piper Sandler. Alexander Goldfarb: So two questions. You definitely piqued my interest in PENN 15 that their conversations ongoing. Would you say that the tenants that you're speaking to are willing to pay the rents necessary for you guys to go forward on an economic basis? Or are they not quite there at where rents would need to be? Steven Roth: Oh God, I don't know how to answer that. Clearly, there are a significant number of anchor-type tenants who are in the marketplace that are looking for new builds. We're not the only opportunity, there are other opportunities. All of us need approximately similar risks to have an economic new build. And the tenants that we're talking to, they understand the math, their advisers and brokers understand the math. So the rents are available, it's just a matter of making a deal, having the tenant select the site, et cetera. Alexander Goldfarb: Okay. And then the second question is... Steven Roth: What I'm saying is this is not just kicking the tires. This is serious business. Alexander Goldfarb: No, no. That I understand. It's just the size of the building, like these are big rent checks. It's not like at the Saks tower or some of the boutique buildings that are being undertaken. I mean 2 million-plus square feet, those are big rent checks. So that's why it's just impressive that tenants are willing to actually engage because that's a serious rent, as I say. The second question is on the litigation on the PENN, the courts can drag things out forever, people appeal, appeal, and lawyers love to run up the meter. So the two-part question on this is, one, are you guys booking the economic impact based on sort of the most punitive? And second is that when you say that the yields on the PENN District have improved is that at what you think the ground rent should be or at the sort of the worst-case scenario in the ground rent? Steven Roth: Well, the first thing is the PENN 2 yields have clearly increased dramatically. The PENN 1 yield, we're pretty happy with what we projected. With respect to the litigation, what had been a known number is now subject to some uncertainty. In our minds, we have parameters around that. We are booking a number which we think is a realistic number. And we will see. But with respect to this litigation, I don't really have a lot to say about it. Operator: And our next question will come from Jana Galan with Bank of America. Jana Galan: Maybe another one on dispositions. Following up on your prior comments on the willingness to maybe part with 555 California or the mark, anything you can share on the amount of incoming interest and/or valuation? Or given the improvements in San Francisco, are you thinking differently strategically about those assets? Steven Roth: Not really. I thought we were pretty clear in sort of, how would I say it, suddenly advertising those 2 assets last quarter. We don't have very much to talk about in terms of specific pricing or bad news or whatever. I can tell you that we think that the 555 California complex in California is the eighth wonder of the world. As you can see from our remarks and our documents, the leasing there is extraordinary. Even going back a year or 2 in a chaotic declining market, the rents that we were able to get for that unique best in the marketplace building were rising. So we think that, that's a great asset. We're delighted to own it. And for the right price, we're delighted to sell it. And I think I'm pretty well known as not being an easy seller. With respect to Chicago, that's a different story. The market there is not as strong. And opportunistically, we'll see what happens. Jana Galan: And then just in terms of developing future residential, just curious, your thoughts around for-sale versus for-rent components, given kind of different changes going on in New York City. Steven Roth: We have multiple land -- pieces of land that we could build either office or residential. We do the math and the analytics as to which is more favorable constantly. We are putting our big toe. Actually, we're putting our whole foot up to our ankles into doing a 475-unit rental project, rental project, not for-sale project; at the corner of 34th Street and eighth Avenue. We think it's a very good site. It's caddy-corner to the Moynihan Train Hall. And it also benefits for all of the renewal that we're doing in the neighborhood. So we're excited about that. And we'll see how that goes, and we'll make decisions going forward. Operator: And our next question will come from Seth Bergey with Citi. Seth Bergey: You mentioned in the opening script, easily exceed the 80% and the 1.1 million square foot leasing pipeline, I believe. How has that leasing pipeline kind of split between PENN 2 and other leasing? And kind of where do you think that 80% could kind of land by year-end? Glen Weiss: It's Glen. So the 80% is specific to PENN 2, just want to make sure you're clear on that. As it relates to the pipeline, it's generally 50-50 in PENN District versus others in our pipeline right now, which is generally the balance we've and able to achieve quarter-to-quarter as we've been on this big leasing run over the past bunch of quarters, so basically 50-50. Seth Bergey: Okay. And then as a follow-up, you mentioned that's highly unlikely or impossible for MSG to relocate. How do you kind of see the permitting process playing out just with your knowledge of kind of how that process works in New York? And then, do you see that kind of creating any additional opportunities for Vornado kind of outside of the PENN 2 station transformation? Michael Franco: Like -- I think Steve talked about this a bit, right, that the government is -- they've issued an RFP and they're going to run a process to select the group to redevelop and complete the remainder of PENN Station improvements. We expect there'll be a retail component in that, which is our interest. But our main interest is, as Steve said, being a cheerleader for something getting done because that inures to the benefit of our holdings there. So look, they've issued the RFP. We're being told that they'd like to start the project by the end of '27. And from there, I assume it will take a couple of years to get done. But we'll see whether the timeline sticks, but that's generally what we've been told. Operator: And our next question will come from Michael Lewis with Truist. Michael Lewis: So I apologize, I'm going to ask a question that was asked earlier, but ask it a little differently. The New York portfolio is 87.5% occupied. So I take that to mean there's a tenant in there paying rent. How much of the New York portfolio is leased? Is it close to 90% of the space that's leased? Is it less than that? Is it more than that? Michael Franco: No, the occupancy figure we gave you is what is leased. Michael Lewis: Okay. I understand that. So I guess that speaks to -- has there been any change in free rent period? So a lease least that's already signed but not paying rent until 2027 feels a little long to me. But you have -- you sometimes have very long leases, so maybe that's not long at all. Has there been any movement in free rent or other concessions? Glen Weiss: It's Glen. So there's a movement in two ways in that regard. One is downtime is less. So companies are making decisions much more quickly than they were previously, which is important. And then once that happens, the free rent periods are declining. So I would say, downtime is lower and free rent is lower. As it relates to your comment, you're right, a lot of our leasing has been 15 to 20-year deals, which is why you're seeing free rents longer than you might have otherwise on 5 to 10-year leasing. But certainly, on balance, downtime free rents coming down as the market improves. Michael Lewis: Okay. So good to see that moving in the right direction, as you might expect. And then lastly for me, this is a small one. But in going from NAREIT FFO to FFO as adjusted, I saw there was 6.7 million of other, looks like gains that were backed out. I was just curious, it's a few pennies, but I was wondering if there was any anything interesting or notable in that 6.7 million of other that was deducted and get into your core FFO? Steven Roth: Yes. It's made up of several items. I can get you to lift offline if that's something you want me to follow up on. Michael Lewis: No, that's okay. If there was nothing material that stood out. I was just curious. Operator: And our next question will come from Vikram Malhotra with Mizuho. Vikram Malhotra: I guess just maybe, Michael, if you can just remind us, you've talked a lot about the flattish FFO, but do you mind just going over some of the big sort of building blocks you've shared in the latest on those just as we think about kind of the big puts and takes that get you to flat for next year? Michael Franco: Yes, yes. It's -- I think I referenced a couple of things, right? We've got some income we're taking offline. Steve referenced the retail redevelopment on 34th and 7th. We're going to take a little bit of signage off-line to rebuild one of the signs, which we think will produce greater returns once that's back online, but it will probably affect us [ for 4 ] months next year. We've got -- we talked about some asset sales that are producing FFO, but assuming those will get sold in the first half of the year, most likely or certainly for the end of the year. So all that has an impact on FFO. At the same time, we've got other items that are positive, which gets us sort of flattish. And the big growth is in '27 where we've got significant income. I mean like it's signed, right? We know everything that's talked about on PENN 2, that probably everything outside of MSG won't really start to a large extent until back -- or end of '26 and really in 27, right? So you're going to see significant growth in '27, but we don't really get the benefit from that on a GAAP basis in '26. And I think the same goes for a number of the other vacancies. We've had a lot of success back building, the 1290 and 280s and so forth. And some of that's hit, but a lot of that won't hit until the end of the year of '26 or '27. Vikram Malhotra: Okay. And then I just wanted to understand sort of the comment you made about rents, and, you've been happy about a lot more rent growth than was referenced. But we used to talk a decade ago about how many leases signed were $100 rents or more. Now in multiple pockets, we're talking $200 rents. And I want to take like that fifth revenue acquisition maybe as an example, but just your perspective on what are the pockets where you can -- and types of buildings where you can see those $200 rents? And then similar to the Fifth Avenue acquisition, like is there a pipeline of assets you're exploring with similar unique opportunities like that for Vornado? Glen Weiss: It's Glen. I think what Steve was referring to think about what's happening quarter-to-quarter, we have been printing on average $100 average rents across or activity, very strong. In the market, there are deals being printed in the newer stock at 150, 175, 200. So there's a lot of runway for us from here forward in our existing portfolio. So we think those $100 numbers are going to go up, up and up as the market continues to strengthen, which we're very confident it's going to strengthen. And we're already seeing that, as you can see from some of the things we've said this morning about our average rents. 623 is a great example of what we really believe is going to happen. That's a 5-star building. We're going to make it great, there will be nothing like it in the market. It is perfectly located to achieve rents higher into those ranges, for sure. We're already getting great tours, great responses from the marketplace. So that is that an example of where you'll see higher rent in our portfolio. Steven Roth: So the tightening of the market creates multiple benefits, as you can imagine. Rents will rise. And we're about going to greatly push rates, we just follow the market. We don't make the market. We're important in the market, but we don't make the market. So rents will rise, and then inducements will come in. So I don't know and I don't think Glen agrees or is projecting that tenant improvement allowances, which is money they use to build their space, is going to come in because the cost of building the space is not coming in. But for sure, free rent is going to come in. Free rent is very important, and it could come in a lot. So those are all -- very [ concerned ]. I want to spend a minute on 623 Fifth Avenue for a second. Think about the math. So I've already said that we're budgeting at least a 9% return on cost unleveraged on that asset and that we're going to deliver that as in the next 2 years to a waiting and prime marketplace. It's going to be the best asset in the best building, and there's a shortage of supply in that. We're already getting indications from the marketplace, and there's a shortage supply. So if you take $1,200 a foot times almost 400,000-foot building, that gives you the better part of $500 million of cost on that building. If we can achieve what I think, which is 10% returns, you can calculate what the income will be. Now what's the exit, what's the value? I believe an asset of that quality in this market will be -- will have an exit value, let's say, in a 5% cap rate. So if that math turns out to be, we will double our money on that asset in a very short period of time, and this is not that hard. The key to it is, is we have to turn that asset into something that's unique in the marketplace, which is exactly what we did with 220 Central Park South. Operator: And our next question will come from Nicholas Yulico with Scotiabank. Nicholas Yulico: Just I guess going back to the FFO flat commentary for next year, Michael, can you just maybe touch on interest expense and how to think about that trending next year and capitalized interest burn off? I don't that's also something we should be thinking about for next year. Michael Franco: I think a lot of the capitalized interest has -- will have burned off by next year. There might be a little bit left, but not a lot. And Tom, do you want to give specifics on that? Thomas Sanelli: Yes. So on the capitalized interest, as it relates to PENN 2, that's obviously going to burn off. So keep in mind, 623 Fifth Avenue and 350 Park, when that comes offline, both of those will have capitalized interest. So you won't really see '26 as we compare it to '25, but PENN 2 will obviously be burning off. Michael Franco: I don't think it's that meaningful in '26. So it affected 350, there's a difference relative to this year. 623 is obviously a new one. Nick, there was another part of your question? Nicholas Yulico: No. I mean just on a high level, if there's a way to think about capitalized interest as -- is it flat next year? Is it net, it comes down a bit and that weighs on interest expense next year? Michael Franco: Yes. I would say it's probably going to be higher principally because of 623, and that's shifting in the bond -- it's going to be higher because of the items that Tom mentioned. But net-net, I would say the principal difference will be from 623. The interest expense overall, I think we've generally hit, assuming the forward curve is accurate, I think it's peak or close to peak of where we're at. We absorbed some pain over the last couple of years ago, we're now rolling over a lot of debt. Generally, when you sort of blend it all together at same or lower rates, SOFR is coming down. We delevered. So even when there's higher coupons, we've got -- given the fact we've got less aggregate debt, the overall interest expense line item is certainly no worse than flat. So we'll see. It depends on how we deal with some of our upcoming maturities in '26, whether we pay those off, whether we pay them down, whether we just roll them over, all that will factor into what the interest expense is for '26. But I think just in terms of the impact from rates, I think it feels like the worst is behind us on that front. Nicholas Yulico: Okay. That's helpful. And then I just.... Steven Roth: While we're on the topic of balance sheet, I think you have to -- we all have to focus on the fact, first, I am unbelievably proud of what our organization has done over the recent past in terms of getting our debt ratio down from much higher into the 8s and now into the 7s heading into even lower. So that's number one. Number two is the -- I'm also extremely proud that we prefunded all of the massive development that we're doing at PENN and loaded in our balance sheet a couple of years ago, getting all the cash, so that we had the capital already on balance sheet to complete our massive development program. Number 3 is that we did all that keeping the major PENN assets unencumbered, so that we have a huge store of value there in the future. So I think that we -- I think Michael and his team and maybe me a little bit, Glen a little bit, even Barry a little bit; we get a gold star for how we've managed our balance sheet, and we're not done with that yet. Nicholas Yulico: Okay. And then just the second question is maybe any latest thoughts you can share on Farley. As you're thinking about as a source of capital, whether it's putting a loan on the asset or selling an interest in the building for -- to create some funds for some of the future development capital you're talking about? Steven Roth: Well, Farming is a unique, unbelievable interesting asset, It's a double block-wide space. It's one of the very few blocks in Manhattan that is double wide. It's -- we leased it in the middle of COVID to -- all of it, 730,000 feet, I think, to Meta. The feedback that we get from Meta is they think it's like the single best of their real estate installations in the country, probably just second to the Menlo Park headquarters. The lease has probably another 11, 12 years to go -- has 12 years to go. There's an option to renew at the market. So if we were to compare what the incumbent rent is to what we think market is now versus what we think market will be at the expiration of that lease, it's very, very, very significant. So that's a fact. Based upon that fact, we would not consider selling that asset or selling a piece of that asset. Now chronically, it's interesting, we did an analysis of this recently; we basically don't do lots of partner deals based upon capital. We do some partner deals based upon if somebody controls a site or do something together in real -- we do real estate partnerships, we don't really do capital partnerships. Although we think about it. So the -- one hand that you -- the Farley which you're referencing, we think it's substantially under market. We think the future of it is great. We think it's a unique piece of space. We would never -- we were not considered selling it, nor would we consider taking it apart. Financing it is a whole different story because you're basically just borrowing money on the credit and the tenant. Operator: Our next question will come from Ronald Kamdem with Morgan Stanley. Ronald Kamdem: Just two quick ones. Sticking on the 2026, if I can ask about same-store NOI, I mean, I think on the cash basis, it sounds like there was a reset this year, there's some free rent. Presumably, some of that burned off in '26, maybe a lot in '27. So just mechanically same-store NOI, is it somewhat positive next year and then really positive in '27? Or how do we think about that? Michael Franco: So you're talking about the cash front? Ronald Kamdem: On a cash basis, yes. Michael Franco: I think like GAAP, we still think of continuing positive cash, just given the timing of the free rent, whatnot, I think it towards the end of '26 that, that will turn positive and then obviously, significantly so in '27. Ronald Kamdem: Great. And then the -- my second one is just adding to the dispositions questions. Maybe can you talk about sort of the Hotel PENN land site at maybe even sort of more retail monetization? Just what's the interest and how are you guys thinking about those? Michael Franco: Hotel PENN site, we don't have any plans to dispose off that at the development that Steve mentioned in the script and talked about in terms of some of the incoming tenant interest. But that's a long-term hold and well unbelievably well located across from PENN 1 and PENN 2 core holding. On the retail side, we obviously sold UNIQLO, their store. And I would say the interest from retailers to purchase assets remains actually pretty strong. I would say, generally, we're seeing very good activity across the portfolio retail-wise. And Times Square feels like it's picked up quite a bit here recently. So good demand there, good demand Time Square. Obviously, we've been active in PENN. And tenants are really responding to everything we've done at PENN 1, PENN 2, which is going to lead into our redevelopment on 34th and Seventh. But retailers understand the dynamics, the market heartening as well, which is why they're approaching to renew early in many cases and I would say, in some cases, looking to potentially buy is a space they're in or look to buy another space. So I think you'll -- like it's been episodic. You can point to a few things a couple of years ago, you can point to a couple of major transactions recently on the retail side. I think we'll continue to see those. And we're open to being a participant in that to the extent that we get rewarded with the right value. So stay tuned and maybe something will occur there in the future. Steven Roth: While we're on the topic of retail on 34th Street, let me just say a little more color around it. So on 34th Street, both sides of Seventh Avenue and then down Seventh Avenue to 33rd Street is basically now populated with retail that we inherited, which is really, I used the word in my script, lovingly junk. We are in the process of canceling all those leases, and we will basically redevelop all of that space and to modern, exciting, sought-after retail offer, obviously [ trained ] at our office occupiers and the market. Now the 34th Street and Seventh Avenue corner has been historically the second or third most active subway station in the city -- in the whole city. 34th Street, not that many years ago, was the second best shopping street in the city. It has deteriorated over time. We intend to bring it back, and we think bringing it back is not a difficult thing to do. Macy's, which is across the street, fluctuated volume close to $1 billion, and it comes down, it goes up. But it is clearly the highest-volume department store in the United States. So we like the real estate. The real estate has deteriorated. We're going to rejuvenate the real estate. In addition, that's the gateway to our entire PENN district. So we think it's very important, and we think it will have an enormous effect on the PENN District overall values. Pardon me for advertising just a little bit. Operator: Our next question will come from Brendan Lynch with Barclays. Brendan Lynch: Just one question for me. A follow-up on the PENN axis project and bringing Metro North into to PENN specifically, it's been delayed. It seems there is a coordination issue between Amtrak and MTA. To what extent are you involved with the various government agencies? And is there any prospect of getting that project timeline back on track for completion prior to the current 2030 target or even preventing it from slipping further? Steven Roth: Barry and I will take that question. And then Michael and I will add it. Barry Langer: So as you can imagine, we're intimately involved with the MTA through all of the work around PENN Station, a great partnership there. If you speak directly to the MTA, what you'll hear is that they plan on running service on Metro North starting in 2027 utilizing the existing 2 tracks that already connect PENN Station straight up to Westchester to Boston. The part that was delayed is the construction of the 4 new stations in the Bronx and adding 2 new tracks, which allows them to run Express service. So we expect that service will begin in 2027 on the New Haven line in the PENN Station. Operator: At this time, there are no further questions remaining in queue. Steven Roth: Thank you, everybody. We actually are very proud of the results that we delivered this quarter in terms of the scale of our leasing and the price, the rental rates and the value creation. The occupancy is easily going to be over 80% this year in PENN 2, and we think we had a great quarter. We are very proud of our balance sheet activity, and we love the 623 Fifth Avenue acquisition. So with that advertisement, we'll sign off. And we are excited to talk to you again episodically and also in the fourth quarter. Thank you. Operator: Ladies and gentlemen, this concludes today's conference. Thank you for your participation. You may now disconnect your lines.
Operator: Good morning, everyone. Welcome to the Core Molding Technologies Third Quarter 2025 Financial Results Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded. I will turn the call over to Sandy Martin, Three Part Advisors. Please go ahead. Sandra Martin: Thank you, and good morning, everyone. We appreciate you joining us for the Core Molding Technologies' conference call to review our third quarter 2025 results. Joining me on the call today are company's President and CEO, Dave Duvall; as well as COO, Eric Palomaki; and CFO, Alex Panda. This call is being webcast and can be accessed through coremt.com via an audio link on the Investor Relations Events and Presentations page. Today's conference call, including the Q&A session will be recorded. Please be advised that any time-sensitive information may no longer be accurate as of the date of any replay or transcript reading. I would also like to remind you that the statements made in today's discussion that are not historical facts, including statements or expectations or future events or future financial performance are forward-looking statements and are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are uncertain and outside the company's control. Actual results may differ materially from those expressed or implied. Please refer to today's earnings release for our disclosures on forward-looking statements. These factors and other risks and uncertainties are described in detail in the company's filings with the Securities and Exchange Commission. Core Molding Technologies assumes no obligation to update or revise any forward-looking statements publicly. Management will refer to non-GAAP measures, including adjusted EPS, adjusted EBITDA, the debt to trailing 12 months EBITDA ratio, free cash flow and return on capital employed. Reconciliations to the nearest GAAP measures can be found at the end of our earnings release. Our earnings release has been submitted to the SEC on Form 8-K. And now I would like to turn the call over to the company's President and CEO, Dave Duvall. David Duvall: Thank you, Sandy, and thank you all for joining us today. The positive momentum we've highlighted last quarter has continued to build and remains firmly in place. The only change from our Q2 update relates to the timing of our tooling revenue, which has shifted into the fourth quarter. As a reminder, tooling is an iterative process involving fabrication, testing and ultimately, customer final sign-off, making it inherently challenging to predict the exact timing of revenue recognition. Within the trucking industry, several projects remain on hold, pending greater clarity around the administration's policy direction. That said, we have continued to make significant progress this year and this quarter, across our next largest verticals. During the third quarter, sales in our power sports, building products, and industrial and utilities markets grew year-over-year, reflecting the continued traction of our investor growth initiatives and the gradual improvement in market conditions. Power sports, a major sales category for Core achieved its first year-over-year growth in 8 quarters, marking a return to growth after two full years of declines. We believe this momentum is being fueled by a combination of new product introductions and our continual wallet share growth. As an example, we are now in full production for the UTV skid plates. In the third quarter, we successfully launched the UTV skid plate program we've discussed on prior calls. We're seeing signs of recovery in demand for power sports helped by expectations for continued lower interest rates and new launches. That combination is creating a more active demand environment across both water and land power sports as we head into 2026. Regarding the skid plate program specifically, we expect it to generate approximately $8 million in annual run rate revenue once fully ramped. While this category remains somewhat seasonal, we believe power sports is positioned for a stronger rebound in 2026, particularly in a more favorable interest rate environment following recent cuts and new program launches. Last quarter, we highlighted $46.7 million in new business wins this year, 99% of which is incremental. This builds on the $45 million in wins from last year. We are pleased with the momentum and excited about our known future growth and continue to see additional opportunities and a robust sales pipeline of over $250 million. But we know we still have many opportunities to leverage the execution improvements we have made. And therefore, we are continuing to invest and aggressively refine our sales systems. This has always been the last phase of the Core Molding transformation, and it is our current must-win battle, as we drive to leverage all the business execution improvements and unlock the earnings potential of our improved capabilities. To accelerate growth further, we have implemented a value selling program, and we're adding three new business development roles that are focused on and incentivized to expand wallet-share with key partners and drive lead development for our new sheet molding compound opportunities. On last quarter's call, we discussed the completion of a market analysis to determine the total addressable market for SMC in North America. During the third quarter, we partnered with four potential customers who completed molding trials of our material and provided positive feedback. Based on the successful product trials with the initial customers, we are optimistic about our current market potential, as we've stated. Earlier, we see the quote-to-cash cycle for this product in the 6-month range versus our fully designed product being in the 12- to 18-month range. We're pleased with the level of end market diversification represented in these trials, which includes electrical boxes, multifamily commercial doors, buses and roofs and hoods for truck customers. We remain focused on broadening our sales and marketing work to promote Core's proprietary SMC product as raw material for key customers. We estimate the total addressable market for this product exceeds about $200 million. Our focus on operational improvements and key investments in our SMC operations has significantly improved our capacity, consistency and performance, which we are seeing as key value propositions as we engage with customers in this market. We have always viewed our advanced formulations as a deep competitive differentiator for Core and now working directly with SMC customers, we clearly see our product and service advantages versus their current suppliers. Specifically, Core has more consistent material, expertise in modifying SMC formulations to meet specific molded part requirements and Core has significantly shorter lead times. All of these factors create significant value for our customers, particularly for customers whose end products are built around Core's sheet molding compound as is always the case with SMC. Work continues on our strategic $25 million investment and layouts are complete for the Matamoros expansion and the new greenfield build in Monterrey, Mexico. Monterrey has been designed to provide additional capacity for future growth in low pressure injection molding and DCPD processes. Additionally, we are adding topcoat paint capabilities to this facility as customers has specifically asked for this capability, especially in the construction and agricultural machine market. We believe the Monterrey region will continue to grow and has significant long-term potential for us. We have also ordered two new state-of-the-art 4,500-ton compression molding presses, and we have completed the automation design and plant layout for a sleeper roof program in our Matamoros facility. The tooling revenue from these programs is anticipated to be approximately $35 million and is expected to be recognized in 2027. Organic growth remains our top priority in our capital allocation strategy, and this investment not only supports the launch of a major truck program, but also adds DCPD molding and topcoat paint capabilities to our Monterrey business, serving growing industries, including the con ag market. The addition of DCPD molding positions us closer to key customers that highly value this process. Additionally, our new topcoat paint capabilities enables us to deliver final topcoat paint products that are ready to install by our customers. This is a significant value add for our customers, which reduces overall cost and makes the process from order to finish product more efficient. Together, these investments expand our technical capabilities and create new durable revenue streams. We have good visibility into the truck and power sports industry recovery, which gives us confidence in the potential for over $300 million in total revenue in 2027. These long-term programs are expected to generate approximately $150 million in revenue over the next 7 to 10 years. Based on our current projections across truck power sports and other growing end markets, we expect annual product revenue to exceed $325 million within the next 2 years. Turning to our Q3 financial results. Revenue was $58.4 million, which is down 19.9% from the prior year, with over half of the sales decline coming from the known Volvo transition and the remaining due to declines in other truck demand. Gross margin was 17.4%, which is within our targeted range of 17% to 19%. Adjusted EBITDA margin of 11%, that's up 70 basis points from a year ago. Cash flow from operations for the first 9 months of the year of over $14 million, which continues to exceed our year-to-date net earnings. We again delivered stable gross margins this quarter within our projected range and positive year-to-date free cash flow. Sales declines in the third quarter were more than we expected, but the new business wins are there. And we continue to ramp up our investor growth efforts. We expect fourth quarter sales to be up year-over-year primarily due to significant increase in tooling sales. Regarding the ongoing succession plan execution, Eric and I are working closely in all facets of the role as we continue to progress towards the CEO succession plan for May of 2026. As I've discussed in the past, we have robust systems for organizational development and succession planning throughout all levels of our organization. In conjunction with our succession plan for Eric, we have developed a strong bench under Eric, including an Executive President of Mexico Operations, Arnold Alanis, who has worked for Core for over 13 years, and our Executive Vice President of U.S. and Canada Operations, Mike Gayford. Arnold and Mike had been a part of the entire leadership transition over the last year, and I appreciate their increased engagement in our business allowing Eric time to focus on transitioning to CEO. I believe that our culture is a competitive advantage and a key benefit of that strategy is our ability to develop and grow leaders from within Core Molding as demonstrated by our ability to promote new executive leaders from within the organization. I think, it's a testament to the effectiveness of our organizational development and succession process. Now, I'll hand the call over to Eric to share comments on our new production and operational efficiency efforts. Eric Palomaki: Thank you, Dave, and good morning. One of our newest program opportunities is a large Canadian rail infrastructure project. The cable railway containment trough system replaces concrete systems and its installations were labor-intensive, slow and costly. Under the traditional installation process, crews excavate a shallow trench and use a crane to lift and position each concrete section. The benefits of our proprietary polymer and composite troughing are that they are lightweight, non-conductive, easier to install and made from recycled materials, reducing both installation labor and lifetime maintenance costs. I'd also like to share an update on footprint optimization initiative launched at the end of the second quarter, which we expect to be completed by year-end. As part of our ongoing focus on product level profitability, the current softness in the truck demand created an opportunity to consolidate our RTM or Resin Transfer Molding process by purposefully relocating select programs to another one of our facilities. This strategic move will streamline operations at the originating site and is expected to deliver further margin improvement. Lastly, I wanted to call out our operational teams for their 99% on-time deliveries and excellent 62 PPM performance. PPM, which measures the number of defective parts per million produced is used by our customers to measure quality performance. The rate below 0.01% indicates a high level of quality and demonstrates the precision of our quality processes. We have also maintained industry low safety incident rates and employee turnover rates, which we take pride in. These favorably trending metrics reflect well on our culture and commitment to excellence across all our people and our plants. With that, I would like to turn the call over to Alex to run through the financials. Alex Panda: Thank you, Eric, and good morning, everyone. For the third quarter, net sales totaled $58.4 million. As Dave stated, product sales were primarily down due to the known Volvo transition. Excluding the Volvo transition, sales were down 8.7% from prior year due to lower demand primarily in the medium and heavy-duty truck verticals. This was partially offset by new product sales to customers in power sports, building products, and industrial and utilities markets. Despite the operating deleverage experienced in the third quarter, we maintained a gross margin of $10.1 million or 17.4% of sales. Over the past 12 months, we have executed a series of initiatives focused on improving operational efficiency, optimizing raw material costs and enhancing overall margin performance. These efforts have helped offset the fixed cost deleveraging associated with the planned Volvo transition. We continue to expect our gross margin to remain within our targeted range of 17% to 19% for the year. SG&A expenses for the third quarter were $7.6 million or 13% of sales compared to 12% in our prior year period. Excluding the $220,000 in footprint optimization costs, our SG&A rate would have been 12.6% for the quarter. As Eric discussed, our footprint optimization project is underway. We have invested $500,000 so far and plan to invest $1.5 million by the end of 2025. Again, this project involves relocating production to a different plant to generate cost savings of over $1 million each year, beginning in January of 2026. Operating income for the quarter was $2.6 million or 4.4% of sales, down from $3.6 million or 4.9% of sales in the same period in the prior year. The third quarter's interim effective tax rate was 29.3% compared to 18.7% in the prior year quarter. The increase was due to taxable income being generated in higher tax rate jurisdictions this quarter. Net income for the third quarter was $1.9 million or diluted income per share of $0.22 compared to net income of $3.2 million or diluted EPS of $0.36 in the comparable year period. Excluding the impact of footprint optimization costs, our third quarter diluted EPS would have been $0.24. Third quarter adjusted EBITDA was $6.4 million or 11% of sales. We generated $14.2 million in GAAP cash from operations. And after capital expenditures of $9.3 million, our free cash flow was $4.9 million for the first 9 months of 2025. We continue to expect the 2025 capital expenditures to be approximately $18 million to $22 million, including investments for the Mexico expansion. As we previously announced with the award of the Volvo Mexico business, the company will invest approximately $25 million over the next 18 months. As of September 30, our balance sheet was strong with a total liquidity position of $92.4 million, comprising of $42.4 million in cash plus $50 million available under the revolver and capital credit lines. The company's term debt was $20.3 million at the end of the quarter, and our debt-to-EBITDA ratio for the trailing 12 months remains less than 1x. Our return on capital employed was 6.5%. And excluding cash, the rate was 8.7%. As we continue to launch new business, we expect this metric to improve by better leveraging top line performance and driving better asset utilization. Both ROCE metrics are computed using the trailing 12 months of operating income and total capital employed, a pre-tax metric. Please see our earnings release for the GAAP to non-GAAP reconciliation tables. Our capital allocation strategy remains flexible with a significant focus on organic growth as well as disciplined management of debt and working capital and share repurchases. Year-to-date, we have spent $2.5 million on Mexico expansion projects and expect to spend a total of $7.5 million by the end of 2025 and $17.5 million in 2026. For the 3 months ended September 30, no shares were repurchased. And to date this year, we have repurchased 151,584 shares at an average price of $14.80. Our full year sales expectations are down 10% to 12%. However, we have forecasted fourth quarter sales to increase driven by new program launches and significantly higher tooling sales. As a reminder, regarding tariffs, our products in both Canada and Mexico are USMCA compliant and are currently exempt from tariffs. We will continue to closely monitor how changes in trade policies affect our customers and their end markets. And with that, I would like to turn it back to Dave. David Duvall: Thank you, Alex. We are excited about new and existing customers and end markets. As Eric mentioned, we are finalizing negotiations on a large Canadian project for the rail data line transmission troughs, called Trotrof, which is worth about $15 million in annual revenue starting in the second half of 2026. We continue to see a strong pipeline of opportunities with over $250 million in business development potential in our pipeline. We believe we can add over $40 million in new wins that would be awarded in the next 3 to 6 months. We're also excited about this year's wins, because they are in new and emerging markets for Core. These new markets, which we strategically targeted include new pickup box panels for small EV trucks, satellite tracking systems and the truck applications. We plan to expand our DCPD molding process for large OEMs in the areas we already serve and have added topcoat paint to our full-service partner model. We continue to invest in our sales organization, and we're driving like hell to develop new customers who trust us with their long-term business. Eric and I are highly focused on further scaling operations leveraging our fixed cost base and optimizing our portfolio footprint. Our commitment to continuous performance improvement, especially with the lower current demand, positions us to translate top line growth into bottom line results. We are excited about the future and look forward to leveraging all the improvements with the addition of the $65 million in incremental wins we have achieved in the last 20 months. We will continue to strengthen our operations and take the necessary actions to drive long-term business capability and profitability. We are pursuing the most promising opportunities in new markets and growing wallet-share with our current long-term customers. We are confident this is only beginning. New areas are emerging and we will continue to evolve in the construction sector, such as commercial windows and doors market. We focus on large, diverse sectors such as construction, energy, industrial, aerospace and medical markets, and we have proven we will win. We are driving to engage our sales and technical teams earlier in the design cycle to expand wallet-share and educate customers of our full range of value-added capabilities, including SMC formulation, large part molding and topcoat painting. Customers desire a strategic partner like Core Molding to handle design, fabrication and completion with the topcoat paint. Our teams are committed to maintaining our must-win battle excellence by: one, driving incremental sales growth into new markets; two, improving our margin profile through operational excellence and our innovation pipeline; and three, continually investing in growing a business that has proven it can execute well. Although the truck industry forecasts continue to look soft for Q4, ACT and customer forecasts indicate a truck build increase in the second half of 2026. As we discussed last quarter, the great pause as one customer put it, continues with delayed decisions in major markets still serving in a lower-than-expected demand environment. Tariff concerns have caused companies to pause and we've seen delays in demand and even more so in the decisions of launching new programs. However, recently, we have seen signs of stabilization and rebounding demand in several of our key end markets. We are finding ways to attract new customers and increase wallet-share with current customers. Our must-win battle of invest for growth continues, which is reflected in our confidence to make significant investments in future growth. Developing a world-class engineering and manufacturing solutions partner for large and ultra-large molded solutions is our goal. Again, I want to thank our team for their hard work and dedication to excellence which has enabled us to achieve successes throughout our transformation journey. I also want to thank our customers, investors and Board for their belief in what we do every day at Core Molding. Finally, we will present our investment story and host one-to-one meetings at the Southwest IDEAS Conference in Dallas on Wednesday, November 19. Please reach out if you would like to see us there in person or set up an investor call soon. With that, let's open up the line for questions. Operator? Operator: [Operator Instructions] Your first question for today is from Chip Moore with ROTH. Alfred Moore: I wanted to -- a lot of noise around tariffs for trucking specifically. I think, right there were some actions that get pushed October to November. Just your updated thoughts around those tariffs specifically, any potential impacts or what you're seeing from customers in regards to those? Alex Panda: Yes. I mean, all of our products are USMCA compliance. So right now, we still -- our understanding is, we are exempt. Our bigger concern is the impact that it could have on customer demand down the road. But right now, we're not seeing the impact on tariffs just yet. Alfred Moore: Got it. Okay. No, that's helpful. And I guess... David Duvall: I think, overall too -- Chip, I think, overall too from an operational standpoint, we have both operations in U.S. and Canada. And if need be, it's not a short change to move, but it's always possible to move. Alex Panda: Yes. And then, the only other thing I would add is, we have RMA raw material adjusters in our -- all of our contracts. And so, if we do get hit with the tariff and increased costs, we can pass that through to customers. Alfred Moore: Got it. That's helpful. And maybe to follow up on -- as you look out, it sounds like your line of sight to $300 million plus is quite strong. Just if you think about '27, I guess, biggest risks to that or upside to that? And then what do you have built in around trucking as we look out maybe to 2027? David Duvall: That's a great question. So, when I look at it from a high level, as we said, our quote-to-cash cycle time is 12 to 18 months. So, as we know, the Volvo program won't launch until '27, and we have $45 million of wins in prior year and $47 million of incremental wins this year that we see layering in over the next 18 months. So, that's where we're seeing it. As they ramp up, you start out with a ramp and maybe you're ramping for 6 to 7 months until you get into full volume. So, that's where we start seeing the sales coming together. So, we're pretty excited about that. When we talk with truck customers right now, there is -- and looking at ACT, we're seeing that we believe truck would -- or they believe truck would start coming back to the second half of next year, probably the biggest concern. We were talking with one customer yesterday and the rate of increase that they had going into the second half next year was significant. So, I would say after yesterday, our biggest concern was really how fast will the truck market come up because they can come up pretty quick, and being able to hire and meet all those demands on the upswing. As it goes up as fast as it comes down. And the further it goes down, probably more likely the more it's going to go up. Alfred Moore: Perfect. If I could ask another one. Just around, sort of, more near term, the tooling revenues getting bumped to Q4. Any any sense of how to think about tooling revenues maybe for Q4 and even over the next couple of quarters just with all the new programs you've got on the horizon? Alex Panda: Yes. So, for the full year of 2025, we anticipate tooling sales to be roughly 15% of our total sales in 2025. And then keep in mind, Chip, those sales will be at a lower margin than our product sales. And then in the future year, '26, I mean, we're not really giving any guidance from a number perspective for '26, but the Volvo Mexico tooling job will close. It will be closed at the end of '26 maybe slips into '27, but it'd be December of '26, maybe January of '27. Alfred Moore: Got it. Okay. So, a little negative mix impact Q4 on higher tooling revenues. Any way to think about -- yes, sorry. Alex Panda: Yes. So, margins will take a little bit of a hit, but we still are providing guidance that we'll be within that 17% to 19% target that we've put out there each quarter and for the full year. Alfred Moore: Yes. That's what I was going to ask. And I was going to follow up just sort of longer term as the tooling normalizes. Is 17% to 19% still the right way to think about it? Or do you think there's upside potential at some point on higher volumes? Alex Panda: Yes. I think, when we start getting back into the $300 million, there's going to definitely be some upside. I mean, we'll start getting back some fixed leverage will reverse favorably. And so, I think that will be worth anywhere, I would say, right around 200 basis points. If you go back and look at our previous quarters, and see the lost leverage each quarter. I think, if we go back 2 years, we're losing right around 200 basis points. So you could add 200 basis points, I think, is a good way to look at it. David Duvall: Also the part that we beat is that, on the new programs, the systems that we put in place and how we're quoting business, it's definitely incremental on the margin side. Alfred Moore: Excellent. Okay. Alex Panda: I don't want to give you a number on how much yet, though. Operator: [Operator Instructions] You have a follow-up question coming from Chip. Alfred Moore: I just want to make sure I wasn't hogging the line. I guess, just one more for me on the new business opportunities. The Canadian rail project, that's a nice win. Is there opportunity for similar type projects and then SMC, how is the traction there? It sounds like it's going pretty well, but any more detail you can provide? Eric Palomaki: Yes. Two parts to that, Chip. So, the first one on the rail Trojan troughs. We actually had that business in '22, '23. It tends to be a project-based when a city or a municipality does a section of rail. It's a big project for us for a couple of years. So, we've had a couple of years without any, and we have another one of those currently building a test track for next summer and that will turn into that bigger multiyear program. So, we're excited about it. I can't say that we've 100% won it, but we're certainly there in providing the test track and believe that we are in a good position to win the whole installation. Your second question was around SMC. We put some comments in there. We have -- since last quarter, four very specific customers that are trialing, actually molding parts, had some of our engineering teams working with them. And so, we made a lot of progress with 4 of the 10 customers that we had focused on. And so, we believe in the next quarter or so, we'll be having awards or agreements with some of those customers to announce in our next earnings. Alfred Moore: Perfect. Okay. And maybe just last on the buyback. You didn't do any this quarter, but can you just remind us what your authorization is there? Alex Panda: Yes. We have roughly about just over $2 million left in the buyback is -- it's still in place as of today. And so -- but yes, we plan on still utilizing that as a way to use our capital. Operator: Your next question is from Bill Dezellem with Tieton Capital. William Dezellem: A couple of questions. Would you please start by walking us through the tooling business that shifted to Q4 from the Q3, what the dynamics were behind that? Alex Panda: So tooling in general, Dave kind of walked through this on the call. But for us to recognize revenue, the customer has to accept tooling. So, there is all kinds of different tests. You have to do full production run test, you have to do quality tests. There's different specifications. And so working with a customer at times, those tests get delayed for one reason or another. One could be, because the customer decided to do engineering changes. And so, in this case, one of our bigger tooling jobs that we originally thought was going to close in Q3, got delayed into Q4. We are currently in the process of doing those tests. I don't see that job specifically being pushed out any further at this moment. But that -- it's just -- that's kind of the nature of the tooling. We don't have a ton of control. We can push our customers as hard as we can and work with them. But there is still a risk from a job being delayed from a quarter to a quarter. But at the end of the day, it's not lost revenue. It's just a timing issue. David Duvall: Bill, kind of way that we look at it as well. Usually, if it's -- a lot of times, it's not us. It's the entire product level is really what they're dealing with. And they're trying to really put everything together, what the ideal case for them would be every supplier, every validation test, everything works, and then they get full approval. When one of those things doesn't work, the entire supply base is not PPAP approved. So, once we get PPAP approved, we recognize the revenue, which is a signed off document. Now, if that PPAP is going to be pushed for a long period of time, we would certainly be in there talking with the customer saying, "Hey, we can't wait a quarter for this to be done. But if it's weeks, it's probably not worth pushing that hard." William Dezellem: That's helpful. And then, you referenced the footprint optimization that you were doing and that was going to have a nice cost savings. Would you please walk us through physically what's moving from where to where and why that's taking place besides just the money aspect and maybe it's just straightforward as the cost savings. Eric Palomaki: Sure, Bill. If you remember the term resin transfer molding or RTM parts, we used to have a business in Batavia, Ohio a number of years ago, that built almost only resin transfer products. We ultimately closed that plant and moved that product into our Matamoros facility and our Columbus facility. And ultimately, what we've decided is to move what was left in our Columbus facility down to our Matamoros facility. And our facility down there has employees with 20 and 30 years of experience doing resin transfer molding. Over 300 of our employees in Mexico are part of that business unit down there. And so they are just -- they're skilled, capable and engaged, and we've struggled in Ohio to produce those, I'll say, heavy manual labor, difficult parts, very hand working with fiberglass. And so ultimately, we're just leaning into where our strength and skills are, and there's some labor savings associated with it. But really, it's about the technical expertise and the employee base that we have is capable of it. William Dezellem: That is very helpful. And the math behind this, you said was you were going to spend about $1 million on the transfer, and it will save you about $1 million a year. Did I hear that correct earlier? Eric Palomaki: It will be about $1.5 million total investment, so cost side and then $1 million a year annual run rate ongoing. So... Operator: We have reached the end of the question-and-answer session, and I will now turn the call over to Dave Duvall for closing remarks. David Duvall: Thank you for your continued interest in our company. We look forward to providing an update on our progress when we report our fourth quarter results. Have a great day. Thank you. Operator: This concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation.