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Operator: Good morning, ladies and gentlemen, and welcome to Church & Dwight's Third Quarter 2025 Earnings Conference Call. Before we begin, I have been asked to remind you that on this call, the company's management may make forward-looking statements regarding, among other things, the company's financial objectives and forecasts. These statements are subject to risks and uncertainties and other factors that are described in detail in the company's SEC filings. I would now like to introduce your host for today's call, Mr. Rick Dierker, President and Chief Executive Officer of Church & Dwight. Please go ahead, sir. Richard Dierker: All right. Thank you. Good morning, everyone. Thanks for joining the call. I'll begin with some thoughts on the macro environment and then a review of our great Q3 results. Then I'll turn the call over to Lee McChesney, our CFO. And then when Lee is done, we'll open it up for questions. Starting with the broader environment, conditions remain volatile and the consumer backdrop remains mixed. Promotional intensity is elevated in some categories and household finances are stretched as high borrowing cost and delinquencies weigh on discretionary spending, including big-ticket items like cars and housing. However, there is relatively low unemployment and higher priced personal care categories continue to do well. Against that mixed backdrop, our categories are growing at around 2%, which was pretty consistent with what happened in Q2 as well. We're performing better than that because of our great brands. Our portfolio with its balance of value and premium offerings continue to gain both dollar and volume share. Our innovation is performing well and all in all, our brands are made for environments like this. On to the Q3 results, we had a fantastic quarter in a tough environment. Organic sales grew 3.4%, exceeding our outlook of 1% to 2%. Adjusted gross margin was up 10 basis points, also exceeding our outlook. Adjusted EPS was $0.81, which was $0.09 higher than our $0.72 outlook. Lee will take you through the rest of the numbers shortly. But first, some highlights about our brands. In July, we closed our recent acquisition, TOUCHLAND. TOUCHLAND is the fastest-growing brand in the hand sanitizer category in the U.S. It's the #2 hand sanitizer in the category with household penetration just under 7% and the category at 42%, indicating a lot of runway for growth. TOUCHLAND experienced strong growth in Q3, with consumption growing double digits and results exceeded our initial expectations. I'm even more optimistic about TOUCHLAND today than even a few months ago, a small but mighty team doing great things. Now I'm going to turn my comments to each of the 3 divisions. First up is the U.S. consumer business. Organic sales increased 2.3% with volume growth of 3.7% being partially offset by 1.4% of price mix. Growth was led by THERABREATH mouthwash products, ARM & HAMMER cat Litter and TROJAN condoms, partially offset by declines in the vitamin business and WATERPIK water flossers. We grew share in 4 of our 8 power brands, specifically ARM & HAMMER, THERABREATH, HERO and TOUCHLAND. Let me provide a bit of color for a few of our important categories. I'd like to start off with the ARM & HAMMER brand in general. Consumers today want stability and brands they can trust. Our new campaign give it the whole darn arm reinforces the brand strength and reliability. This is driving growth across the portfolio. 5 of the 6 categories we compete in with ARM & HAMMER are growing share on a year-to-date basis. Turning to laundry detergent, ARM & HAMMER liquid laundry detergent consumption grew 1.9% in contrast to a flat category. ARM & HAMMER share in the quarter reached 15%. Beyond share and more importantly, household penetration for the long term continues to matter. And in the quarter, ARM & HAMMER laundry expanded household penetration 0.7 points to an all-time high of 30%. In fact, the only tier of laundry detergent that was positive consumption in the quarter was the value tier. This is a fun of the times as value was flat to declining in the previous 8 quarters, this is especially impressive as our actual promotional spending for laundry was lower year-over-year. Moving to Litter, ARM & HAMMER litter consumption grew 5.3%, while the category was up 5%. We saw heightened competitive promotions, especially in the lightweight segment by 1 competitor. Over to mouthwash, THERABREATH continues to perform extremely well, while the mouthwash category was down in Q3, THERABREATH consumption grew 17%, and continues to be the #2 mouthwash with a 21.8% share. Remember, we believe there's a lot of runway here. Our household penetration for THERABREATH currently sits at 11% versus the category of 65%. HERO once again outpaced the category with consumption growth of 5.2% compared to a flat acne category and remains the #1 brand in acne care with a 23.6% share. And like the THERABREATH story, we believe household penetration growth is key for this brand. It sits at 9% versus the category of 28%. Looking ahead, we're excited about our pipeline of new products. We even announced a few today. They're a key driver of our success. THERABREATH is introducing a new line of toothpaste. We launched online with 3 variants in August, and they target key consumer needs of healthy gums, deep cleaning and whitening all combined with long-lasting fresh breath. The brand's loyal users value its effective cleaning is distinctive fresh but not overpowering taste and we have a retail launch set for January 2026. We're very encouraged with the high-quality consumer reviews were seen. Meanwhile, TROJAN, the #1 condom brand in the U.S. launched TROJAN G.O.A.T., Greatest of All TROJAN, which is a nonlatex condom featuring patent-pending Ultra Flex material that's soft, flexible, odorless and colorless designed to enhance body heat transfer to deliver next-level intimacy. Turning to international. Our national business delivered sales growth of 8.4% in the quarter. Organic increased 7.7% due to a combination of higher volume price and mix. Growth was led by the HERO, THERABREATH and BATISTE brands and was broad-based across many of our international markets. I was just in Argentina 2 weeks ago with our Global Markets Group and distributor partners, and there is a lot of excitement for the future. Finally, SPD organic sales increased 4.2% due to a combination of higher price and product mix and volume. We continue to be excited about the growth opportunities in this business. As noted previously, we're undertaking a strategic review of our vitamin business, including streamlining our supply chain to strengthen the core business, new JV partnership opportunities and divestiture options. We're seeking -- we're seeing improved velocities in the core and line reviews are receiving positive retailer feedback on new products and long-term brand strategy. We continue to expect to reach a conclusion from this review by the end of 2025. Looking ahead, our full year organic growth outlook is 1%, the midpoint of our prior range. We expect full year adjusted EPS growth for 2025 to now be $3.49 or $0.02 higher than our previous outlook to the higher sales and improved margins, including higher marketing spend. As in past years, when we have stronger-than-expected business performance, we invest for the future. So we now expect marketing as a percentage of sales to exceed 11%, and these investments will continue our momentum into 2026. I'll close by saying that category consumption remains stable and our brands remain in a position of strength. We're gaining dollar and volume share across key segments of the portfolio, supported by a balanced mix of value and premium offerings. We're well positioned to navigate the current environment. The strategic actions we're executing will set us up for sustained success. Our go-forward portfolio has never been stronger. At the same time, we remain active in evaluating the right acquisition opportunities to further build our business. I'm excited to speak at Investor Day in January about some of the growth initiatives we have in development. With that, I'd like to close by thanking all of the Church & Dwight employees for executing well in a volatile environment. And now I'll hand the call over to Lee for more detail on the quarter. Lee McChesney: Thank you, Rick, and good day to everyone on this Halloween Friday. Our Church & Dwight team members across the globe delivered a quarter to be proud of that highlights once against the many strengths of our portfolio and our team's capabilities. Let's jump into the third quarter and our outlook. We'll start with EPS. Third quarter adjusted EPS was $0.81, up 2.5% from the prior year. The $0.81 was better than our $0.72 outlook, driven by higher volume and gross margin results favorable to our outlook. Reported revenue was up 5% and organic sales were up 3.4%. The organic sales was broad-based across the globe with volume growth of 4%, partially offset by negative pricing and mix of 0.6%. And beyond organic results, we were delighted with the encouraging start of TOUCHLAND as sales exceeded our initial projections. Our third quarter adjusted gross margin was 45.1%, a 10 basis point increase from a year ago and 110 basis points better than our outlook. Our results versus last year were driven by 170 basis points from productivity programs, 20 basis points from higher margin acquisitions 10 basis points from FX and 10 basis points from the combination of volume, price and mix. These factors offset 200 basis points of inflation and tariff costs. Moving to marketing. Our marketing expense as a percentage of sales was 12.8% or 50 basis points higher than the third quarter of last year. And for the year, we are now targeting to exceed 11% of net sales as we leverage our improved sales growth to invest for the future. Q3 adjusted SG&A increased 20 basis points year-over-year. Adjusted other expense increased by $3.9 million due to the lower interest income compared to last year. And we continue to expect other expense for the full year to be approximately $65 million on an adjusted basis, reflecting the lower interest income following the TOUCHLAND acquisition. In 3Q, our adjusted tax rate was 21.6% compared to 23.3% in Q3 of '24, a 170 basis point year-over-year decrease. And the expected adjusted effective tax rate for the year is now 22.5%. And now to cash, we delivered strong cash results in the quarter as cash flow from operations increased 19.6% versus last year to $435.5 million. Capital expenditures for the first 9 months were $67.2 million, a $58 million decrease from the prior year due to return to normalized capital spending in 2025. And finally, in the third quarter, the company repurchased an additional $300 million of shares, which brings our year-to-date share repurchases up to $600 million for our shareholders, certainly a third quarter full of accomplishments. Let's now turn to our outlook. Broadly, we continue to navigate well in an environment of economic uncertainty and as a result, have improved our outlook in several areas. For the year, we now expect reported sales growth of approximately 1.5% versus a prior year midpoint view of 1.0 as we expect TOUCHLAND's momentum to continue in the fourth quarter. We also remain on track to deliver 2025 organic growth of approximately 1%, the midpoint of our previous outlook, and we now expect full year gross mention to contract only 40 basis points versus 2024 based on the progress our teams are delivering from productivity programs to counter inflation and tariff headwinds. And as I noted earlier, the combination of a stronger sales and gross margin outlook allows us to increase our marketing investments beyond our prior outlook in 2025. For the year, we now expect an adjusted EPS of $3.49, which exceeds the midpoint of our prior outlook. And specifically for 4Q, we now expect reported sales growth of approximately 3.5% and an organic sales growth of approximately 1.5%. In 4Q, I note that our reported sales outlook include larger decline in sales from our discontinued businesses as these product lines run out of inventory. And for some context, we expect $30 million of lower sales or 200 basis points of drag in the fourth quarter versus last year from these discontinued businesses. And also note that our organic growth for 4Q was impacted by the prior year port strike and the negative consumption trends in our VMS business. In 4Q, our adjusted gross margin will contract approximately 50 basis points primarily from inflation and tariff costs. Marketing will be lower compared to last year. We expect an adjusted EPS of $0.83 per share, which is an increase of 8% versus last year's adjusted EPS. In my final '25 comment, the outlook really covers cash flow from operations. As noted in our press release, we've increased our outlook from $1.1 billion to $1.2 billion in consideration of our progress on several fronts. As our teams look forward, we are optimistic our teams across the globe have delivered significant accomplishments. We continue to fuel share gains. We've made strategic choices to exit brands in our portfolio. We've acquired TOUCHLAND, which is off to a great start, and we've returned $600 million to our shareholders through share repurchases. A big thank you to our employees across the globe for leaning forward and executing through the first 3 quarters of the year. Very well done. Eric, let's move to Q&A. Operator: [Operator Instructions] Your first question comes from the line of Chris Carey with Wells Fargo Securities. Christopher Carey: So TOUCHLAND is coming through better than expected, which is great to see. Can you talk about how you might view the benefits of TOUCHLAND going into 2026. And specifically, how might the positive contribution from TOUCHLAND help offset any of the potential profit outcomes you could envision from actions you may take on the vitamin business? And I have a follow-up. Richard Dierker: Yes. I mean we're going to -- I guess the first thing is you're right. TOUCHLAND is doing fantastic, even better than we expected, better than our double-digit comment last quarter. Consumption is strong, units per store per week are really strong, innovation is strong, collaborations are strong. I'm not going to really talk too much about 2026 at this point. And I would just say 2025 is doing better than we expected. It means that there's going to be a stronger baseline and as we grow that, of course, will help offset anything from the discontinued businesses or potentially anything with vitamins as well. Lee McChesney: And Chris, one thing I would note just do keep in mind, we had a good amount of cash on our books, we are earning interest on. And obviously, that will be a little bit of a headwind versus touch lend next year as well. Christopher Carey: Okay. The follow-up is just on the competitive environment picking up a bit. I think you mentioned that your laundry promotional activity was actually down a bit relative to last year, just to confirm that. And in general, how would you view the competitive backdrop right now and your potential need to respond, any activity that you're seeing? And maybe just a level of confidence that the really strong volume share performance that you've been delivering is sustainable and what might be needed to sustain that level of execution? Obviously, you have -- you kind of teased innovation plans for next year, but also just the potential level of brand support. Richard Dierker: Yes. Thanks, Chris. Yes, for laundry, in my prepared comments, I said it, and I think it's such an impactful statement. For the first time in 8 quarters, the value tier of laundry grew, and that was -- if you look year-over-year on amounts sold on deal, which again, remember that's depth and frequency. That is -- we were down 400 basis points year-over-year. Our competition was up between 300 and 600 basis points depending on what brand. So I believe that is a trend that's starting to happen in the category as consumers are pressed. They're kind of solely moving to value, which is great. That is one piece of it. Another indication is even the pods category, which is around 23% of the category, it's the most expensive form of water detergent, right, 2x liquid that's been flat the category for the last 6 quarters. So those are just indications that the value matters. And so if promotional intensity does pick up, I think, overall, we're in a great spot. Value is doing well. And even some of our higher-priced competitors, they're twice the cost of our laundry detergent. So they would have to do massive discounts to move any elasticity. So again, I think we're well positioned. I think this is starting to be a little bit of a trend in the category for consumers seeking value. Operator: Your next question comes from the line of Peter Grom with UBS. Peter Grom: [indiscernible] Richard Dierker: You're breaking up a little bit. Not really. Lee McChesney: You try to reconnect and we'll make sure you get back in. Operator: Your next question comes from the line of Rupesh Parikh with Oppenheimer. Rupesh Parikh: So I guess just going to international, another strong quarter even on a difficult comparison. So just curious, are you guys seeing any changes there, macro consumer-wise? And how do you feel about sustaining momentum in the International segment for the balance of the year? Richard Dierker: Yes. As I said, I was just in Argentina a couple of weeks ago with 300-plus people, and there's a ton of excitement about our brands and the growth profile of some of our -- even our new brands like THERABREATH and HERO and TOUCHLAND. So even as the macro GDP starts to slow in some of these countries, the tailwind of these brands, which bring problem solution brands, innovation, new categories, lot of excitement to continue to deliver against our really our evergreen model for international. So a lot of momentum in our international business. Rupesh Parikh: Great. And then maybe just one quick follow-up. Share buybacks, again, another quarter of significant buybacks. Your stock has obviously pulled back. So does anything change in terms of your priorities share buybacks versus M&A? Or should we just expect you continue to be opportunistic based on what your stock does? Lee McChesney: Yes. So good question. So to your point, we definitely took advantage of the value opportunity there. We typically try to just -- you know what our priorities are. We want to focus on M&A. This is our #1 focus of our cash. And we're out in the market accordingly. But if any opportunities come up to maybe accelerate a little bit of our share buybacks, we'll do that. As we sit here today, we've done everything we've done with the $600 million. We bought TOUCHLAND. We got great cash flow, balance sheet is in a good place as we look forward. Rupesh, we're still focused on M&A. There's still opportunities out there. And we obviously have an opportunity to do M&A. I mean -- and we've just gone through a review, you just recently saw our shares, our treasury -- our balance sheet get upgraded as well. So I mean I just think on many fronts, we got a quality balance sheet, strong cash flow gives us a lot of optionality. So frankly, the potential to do both things. Operator: Your next question comes from the line of Bonnie Herzog with Goldman Sachs. Please go ahead. Bonnie Herzog: All right. I had a question on the promotional environment. Hoping just for some more color on that. And then your volume growth was quite strong in the quarter, but price/mix was slightly negative. So I guess just could you kind of drill down on what sort of drove that? Was it the higher promotions and the need for spending behind some of your brands? And if so, should we expect that to continue in Q4 and possibly next year? Richard Dierker: Yes. Thanks, Bonnie. I would kind of characterize it as really when we talk about our promotions, we talked about laundry and Litter. I already went through the laundry category. Litter. Litter is a little unique right now as well. The category over a long period of time has bumped around between 16%, 18% sold on deal. It hit where we think is almost an all-time high at 24%. One competitor significantly discounted their lightweight litter business, and that's driving a couple of thousand points of promotion. We actually were pretty much consistent year-over-year. We were up slightly 60 basis points and still managed to grow 5%, which was -- which is fantastic. So our brand, our ARM & HAMMER brand, kind of what I said in my comments, we think the advertising and the halo effect, the seeking value is leading to ARM & HAMMER doing incredibly well in this environment and for the future. Then you look at negative price mix, part of that is some of our other businesses, right? We're doing, whether it's a rollback or price adjustments on BATISTE as we fix value for the consumer, or vitamin business to make sure that we have the right velocities. So not as much in the laundry and Litter business. Bonnie Herzog: And if I may, I just wanted to ask a quick follow-up question on TOUCHLAND. Could you give us a sense of maybe how the brand has been performing in the different channels, DTC and then certainly at Sephora and then maybe talk a little bit more about your strategy to expand the brand in additional channels, and I don't know, possibly other specialty retail channels. Maybe how has that evolved since the transaction is closed? Richard Dierker: Sure thing. TOUCHLAND, again, doing fantastically well. That business is really at 3 retailers, right? Sephora, Ulta and Amazon make up about 90% plus of that business. And we don't really have much plans in the short or medium term to change that strategy. We believe that there's prestige in being in that category. There's examples of brands that have been able to grow by hundreds of millions of dollars in that channel and expand to slightly adjacent categories over time. We think that's a good model. There will be some niche plays at other retailers. We're not ready to go through that yet. Maybe that's a good question for January. Internationally, we're really excited about growth behind TOUCHLAND. We believe that it can -- we're already seeing how fast it's growing in Canada as an example of just 1 retailer. So we're going to probably duplicate that approach across many more countries and make sure we hit the right channel, the right partner and to make sure that we keep that kind of cache of the brand. Operator: Your next question comes from the line of Peter Grom with UBS. Peter Grom: Any better now? Richard Dierker: Great. Peter Grom: All right. Let's run this back a little bit. So I guess I wanted -- 2 questions for me. So first, just on the implied step down in 4Q, and I appreciate the commentary around the port strikes and weaker VMS. But I would imagine some of that was contemplated as you were thinking about the back half of the year, which you mentioned is unchanged after a strong 2Q. So can you maybe just speak to why it steps down and would come in below the 2% category growth you mentioned? Richard Dierker: Yes. I'll give you a couple of comments and then maybe Lee has something to add as well. I think the port strike is a reality, right? There was 1 week that was the categories were up 11%. So when you do that math, all of a sudden, October will be negative as an example for categories and for the brand. Vitamins, Q4 is a larger business seasonality for vitamins. So as consumptions going backwards there, even though we have some green shoots. That's just a little bit more of an impact. And then finally, I think we were probably a little conservative on our Q3 outlook, and we were very confident in the 2.5% for the back. We're very confident that over time, we're going to grow faster than categories. But we feel like Q4 and -- Q3 and Q4 together is a good number. Lee McChesney: Yes. And again, I think just to Rick's point, we go back to what we said on August 1. Comfort in the 2.5% organic outlook. That's what we're still seeing today despite the macro doing what it's doing. That speaks to the categories, how we're performing. There's always pluses and minuses, but we're still sitting at that 2.5% organic and if you do think about 3Q to 4Q, just on a total sales perspective, I mentioned in my prepared remarks, we are running out these discontinued businesses, we're getting to the point now where that will be a bigger pressure point in the fourth quarter. So I noted that, that was kind of the $30 million or 200 basis points of drag. And then I think Rick covered very elegantly the organic piece. You adjust for that, we're right on track and certainly gives us this confidence for the fourth quarter, but certainly, as we look beyond that as well. Richard Dierker: Yes. And that is partially the port strike. So we don't feel like that's a kind of roll forward as you look into 2026. Peter Grom: Okay. That's super helpful. And then Rick, you've had some good perspectives on category growth for some time here. I wanted to get your views on kind of how you see category growth and your portfolio performing as we look out over the next 12 months or so? And then just maybe specifically on the top line, and I get we'll get official guidance in January. But do you need category growth to accelerate from 2% in order to hit your evergreen target? Richard Dierker: Yes. So look, I think for a long time, we've been very clear on how categories are doing and how our brands are doing. And categories we heard some of the competition say 1.5% to 2%. For us, it's around 2%. And that's because, in my mind, we've been very picky about what categories we go into. Our categories are doing a little bit better than most, which is great. And our long-term track record over many, many years is around 3%, and we hope to get back there for categories for sure, at some point in time. Meanwhile, we're kind of planning that it's going to be around 2%. And so as you saw this quarter, we -- despite 2%, we grew faster than that. And it's because all the great work we're doing on innovation, on marketing, on driving share gains. So I'm not going to talk about 2026, I'll do that in January. But I would just say we've been growing faster than category growth. Operator: Your next question comes from the line of Andrea Teixeira with JPMorgan. Andrea Teixeira: I was just hoping, Rick, if you can kind of decompose a bit of the price mix. And then you mentioned you have obviously a good position in the value segment. But thinking as the consumer continues to see particularly in laundry, that value segment, how to think about the mix effect? And then just as a clarification on the FX going forward, I mean, this is something that is benefiting some of the companies like that moving in the other direction how to think about international finally getting those tailwinds as you go into 2026. Richard Dierker: Yes, sure. I'll take the price mix and then Lee can take the currency question. So I said, I think it was to Bonnie, we do have a negative drag on price mix from our pricing and promotional actions on vitamins. We have a negative drag as we're fixing some value equations on BATISTE. Our share gaps are closing. We're making improvements, which is great. What is value. It's also innovations the cross-section of innovation and price. And so we're making adjustments as needed for BATISTE. And then it's also the consumer is value-seeking behavior, and that means larger sizes. And when you have larger sizes, that's also typically a little bit of a drag on price mix, whether that's in laundry or Litter. So those kind of 3 things really impact the price/mix line. Lee McChesney: And I'll go from there. I mean -- and to Rick's point, also, I mean, it's a pretty nominal amount for us. I mean, I think the big call an organic is also just this continued momentum with volume growth really driving BATISTE there. On FX, in terms of international, I mean, I'd say this, the international team is doing a really nice job of growing. They're very much focused on margins. So yes, FX can be a pressure point, tariff inflation fee, and then we combat it. We combat it with productivity, with good -- with RGM practices. So yes, if FX turns out to be a little bit of favorable, that could be helpful. But if you look at that business, they've been growing and they've been doing a good job of also bringing gross margin forward as well. So if that happens, we'll take that as a positive. Andrea Teixeira: And if I can -- this is super helpful, if I can just go back to Rick's comment on -- and thank you Lee on the FX. But Rick's comment on the pricing and promo back when you're saying promo has been technically benign for you and you're gaining share in particular in laundry, continue to gain share and your competitor has been increasing more promo. I understand that they also are kind of going into a more value proposition. Are you seeing any pressure on that most recent launch in liquid as you exit the quarter? Richard Dierker: I wouldn't change any of my comments. I'd say in general, the value tier continues to do really well, like that's almost like a macro trend, more so than what any 1 competitor is or could do. And so that's why I believe that despite us going lower on promotions to have the value piece of the category expand is just a really good indication of that. And so that's the trend we're seeing. I expect it to continue. Operator: Your next question comes from the line of Steve Powers with Deutsche Bank. Stephen Robert Powers: Two questions, which, I guess, as I look at my notes, is kind of 3. So bear with me. Rick, on the first one, laundry, not to beat a dead horse, but just can you just help us square -- help me square the circle just a little bit more. There's definitely a narrative about the Church & Dwight has been more promotional through the third quarter. We've certainly seen price/mix dip negative, kind of accelerate negative in the quarter. So is it -- what explains that is the mix within your portfolio where you've been directing the promotion? Just any more color there and how that's likely to trend going forward, number one. And then on vitamins, you mentioned some green shoots. Could you just elaborate a bit more on what those are? And then just update us if you think you'll have kind of a more comprehensive outlook and business strategy around that segment come January? Richard Dierker: Sure. Yes. The first one, price mix negative on laundry, there is no better metric to look at, the amount sold on deal. That's what we've been using for many, many years. And the reason we say that is that is the intersection again on depth and frequency, like it's really shows what's going on in market. So, all I can do is point you to the actual numbers that come out of whether you have Nielsen or Circana and we are down year-over-year in promotion, our competition is up anywhere between 300 and 600 basis points. When there's negative price mix in laundry, that can be a whole host of things. It could also be, again, as I said before, as consumers trade up to larger sizes, that mix impact can be a negative in that line. So that's kind of what I would -- I would say consistently. Number two, on vitamins, the green shoots. Two examples, I think one would be, it's kind of hard to say, but sometimes when you have consumption go backwards at a retailer, 20%, 25%, you think the world is ending. But some of that is discontinuations that have happened. So we have to lap some of that. But when you go look at the core SKUs, the ones that are remaining, they're declining at a much lower rate, which is always encouraging. The second one probably is a couple of food retailers are actually doing really well, and we've heard distribution gains there as well. So those are a couple of great shoots. On the strategy, it was the right thing to do to publicly announce this about a quarter ago. We've had even more interest externally as we look at different options. And then meanwhile, internally, we're focused on how we kind of have a plan B on our cost structure and rightsize that business. So I would say, by the end of the year, consistently, again, that we'll have more to say, and I'm optimistic. Operator: Your next question comes from the line of Anna Lizzul with Bank of America. Anna Lizzul: I have 2 parts to a question. First, I wanted to ask on retailer presence and pack size. We're continuing to hear from peers in your space about the movement of sales to club and online, which have seen better growth versus food, drug and mass. So I was curious if you could talk about this dynamic within your categories? And then secondly, on the M&A front, while you're still digesting TOUCHLAND, it has performed better than expected. And it's an interesting acquisition, given TOUCHLAND is in some of the specialty beauty stores like Sephora. You've done well in acquisitions the last few years in personal care. And I'm sure you'd like to get back to your more regular cadence of 1 tuck-in acquisition annually. So I was wondering if we should expect to continue to focus on personal care or maybe if you'd be willing to explore more in the adjacent duty space? Richard Dierker: Yes, Anna, good questions. I think actually very similar questions to -- again, when I was in Argentina that our distributors were asking. I would say we're, again, very encouraged with TOUCHLAND, and you're right, a little bit more of a niche in terms of distribution and kind of go to market. From an M&A perspective, we're typically agnostic on what categories we go into. It could be household, it could be personal care has to be more like functional beauty, like we are not a beauty company. We can't perform. We don't have -- there's a lot of dead bodies on the road to trying to be a beauty company. We don't want to do that. We want to be right in the middle where there's a personal care/beauty component. We think there's a lot of goodness there. Problem solution, yet a mode of advertising and connection. So we're laser-focused on that. Our new President, Chuck is laser focused on that as well. Retailer pack size, not surprisingly, different channels are performing at different levels, right? The club class of trade is doing extremely well. We continue to have offerings in club. Our strategy internally is how do we make sure that that's always a proactive strategy and not a reactive strategy. They have to be on the forefront of pack sizes and innovation. But you also have to meet the consumer where they're at in different channels, like the drug channel or the dollar channel and have the right pack sizes and right price points. So it's not either/or, it's both, and we have to be good at both. And we've historically done that really well. Operator: Your next question comes from the line of Filippo Falorni with Citi. Filippo Falorni: Good morning, everyone. Two questions for me. One on the retailer inventory levels. Obviously, you had some destocking in the first half of the year. Did you see any impact in Q3 and you're assuming no impact in Q4? And then as you think about '26, should we think about the first half of the year having a particularly easy component retailer inventory, so maybe faster growth in the first half? I know you haven't given guidance, but just a high level how to think about it. And then the second question on the margins. Can you review the drivers of the lower tariff guidance? And maybe if you can give some color also on the broader commodity outlook? Lee McChesney: All right. Okay. Let's try a couple of questions in there. So on the retailer inventory side, to your point, beginning of the year, we had some pressure points there about 300 basis points in the first quarter, maybe 100 basis points of pressure in 2Q. Not really seeing that we're seeing kind of stable levels here in the back half. That's what we experienced in the third quarter, and that's what we're kind of expecting as we go forward here. All -- I'll say a balanced place. We'll watch it closely. In terms of moving on to tariffs and commodities and things like that, let's go back. We've made a lot of progress on tariffs. So if we go back to April, we're looking at a bill, it could have been as high as $190 million. We quickly rallied the organization around that. We made some tough strategic decisions, but we've also really focused on what can we do about it? And additional productivity, the targeted pricing actions. We've now moved that down to what essentially is a $25 million, 12-month number. And we released back on August 1, that number was about 60 in it's moved really threefold. This move because we've driven more actions around the globe in terms of whether it's negotiations, movements, anything in the supply chain side. There's been -- there has been some targeted pricing and then, frankly, the rates change. But that puts us in a really good place as we noted in the release, as we kind of look forward to 2026, we should be able to just have an environment of, I'll say, normal commodity inflation and tariffs should not be a drag. It could actually turn out to be an opportunity. Commodities have still been sticky. You would stay here today with what our commodity view was for the year. It's still slightly up from what it was in the beginning of the year. I think as we look forward, we're kind of expecting more of the same, but we'll leave the rest of the '26 commentary until later. Operator: Your next question comes from the line of Olivia Tong with Raymond James. Olivia Tong Cheang: First, just a clarification. I assume there wasn't any pull forward from Q3 to Q4 or any other change in timing that helped contribute to the top line upside this quarter? Lee McChesney: No. Olivia Tong Cheang: Perfect. Very easy. And then just thinking about it a different way in terms of laundry. Given the strength there and obviously, consumer desire for value, how do you think about the options that are in front of you? Clearly, you've done very well in the category. You've driven greater profitability in the category. Is there -- as you think about the options in front of you, is there a thought around potentially being more aggressive on price or things for those consumers who are struggling potentially looking at it from a share perspective, given the opportunity that you have in front of you and the fact that gross margins have actually shown some pretty nice upside? Richard Dierker: Yes. I mean for laundry, I think -- look, the promotional levels, plus or minus, are going to be what they are and will always be competitive. I think overall, the medium to long term, we love where we are in the intersection of value. That's fantastic. Innovation is always the reason why we perform well over a long period of time, right? We're at a 15 or so share these days. We're in 30% of households lead in wash loads. Look, there's a reason for that. We're right there at value and innovation. So our deep clean innovation, while our most expensive form of ARM & HAMMER is still 70% the price of premium laundry detergent. And so innovation matters. We're going to have some more laundry innovation next year. And so that's why, over a long period of time, we've been able to grow our business. Operator: Your next question comes from the line of Javier Escalante with Evercore ISI. Javier Escalante Manzo: High-level question from me. Why do you think that the broader personal care sector is premiumizing in an environment like this? THERABREATH, HERO continue doing great, compounding. There is no port strike impact for them. Why is that? Is it differences in channel? Are these different consumer sets? Is because there is legacy brands from which you can gain market share? Anything that you can tell us to explain what's happening and what does it mean for your future growth into 2026. Richard Dierker: Yes, it's a good question, Javier. It's never 1 thing, right? It's always -- it's a few different things, in my opinion. I believe it's -- these are great problem solution brands, right? THERABREATH really works for bad breath. However, it's also appeals to the young and old consumer, great packaging, great story, great social media presence. HERO, it's a problem solution brand. It really works. It's the best performing acne patch out there. And TOUCHLAND, it really works and premiumizes kind of a tired old category with fragrance and scent on-the-go convenience. So I would say there's a problem solution aspect to it. There's a great branding aspect to it. There's some of the competition in those categories isn't -- it's been around for a really long time, isn't as new and fresh, I would say. So it's not just one thing. It's multiple things. That's why we believe at the end of the day that there's a lot of opportunity in those 3 businesses, right? And I said in my prepared remarks, household penetration for HERO 9%, category 28%; for THERABREATH 11%, category 65%; TOUCHLAND 7%, category 42%. And that's why we keep getting TDP growth as well. So again, it's a mix of all those things. Operator: Your next question comes from the line of Lauren Lieberman with Barclays. Lauren Lieberman: Just 1 thing I want to talk about was couponing and just how much couponing is currently part of your strategy, how much activity there's been? Because this is something that kind of shows up differently, right? It's in market. You can't necessarily see it in the Nielsen data. So I was curious if you could talk about couponing? And then also just looking specifically at laundry in the data, it does show price per EQ is down low single digits. So even though, like you said, the percentage that's on promotion is low, just curious broadly about pricing in the market and if the depth is worth talking about. Richard Dierker: Yes. I'll take the second one first. When you look at EQ, that really means wash loads and so as you have consumers trade up to larger sizes, as you have channels like club that are growing faster than that means the larger sizes are doing more sales, which then translates into a lower price per EQ, and that's part of it. And then if you go to a few of the different retailers you see, not just us, but also others having some rollbacks at mass. But in general, I think the biggest thing is the trend on larger sizes, which is channel-specific in part, but also pretty broad-based. The second one on couponing. We've been very consistent on couponing like year-over-year, we're flat on couponing. I think in general, we believe that our competitors link to couponing a heck of a lot more than we do. And you're right, that's not shown in Nielsen, the way you kind of look at that is maybe through numerator or what receipts are actually being scanned really maybe the best way to look at that. But usually, our competitors rely more heavily on couponing than we do. Lauren Lieberman: And that's the case in laundry as well? Richard Dierker: Yes. Lauren Lieberman: Okay. Lee McChesney: We obviously, a lot of questions here on discounting couponing. We've shared what we're doing here is measures depth, breadth, all of that. And I guess I'll bring you back to gross margins. Gross margins are doing what they're doing, which speaks to, obviously, all these elements here. So I think there's a good story. We've got -- we're doing things the right way here. Operator: Your next question comes from the line of Robert Moskow with TD Cowen. Robert Moskow: Thanks for the question. I think the messaging here is that despite a lot of challenges for the consumer, your categories have been pretty stable in the aggregate -- running around 2%. And adjusting for some things, you're gaining share. But when I look at your retail tracking data, at least in my metrics, things do get weaker in October, can I assume that, that's a comparison to last year's port strike? And maybe just refresh me on why that influenced consumer spending in your categories rather than just timing of shipments? Richard Dierker: Yes, Robert. Yes, in my prepared remarks, I kind of talked a little bit about October. But remember, we looked it up last night. We believe that for the category and for Church & Dwight will be a little bit negative in October. A year ago, the port strike had 11% growth in 1 week for the categories. That meant a month was around 5%. And that wasn't really real. That was pantry loading, probably massive pantry loading that was happening probably more so in other categories as well. So we think that's pretty clear. Robert Moskow: Sure. I understand. But by November and December, I would imagine the pantry loading would be kind of over. So I guess I'm just unclear like how that would affect your overall results in a quarter and then when I look at your quarterly results last year, it was very stable. Third quarter, fourth quarter were exactly the same. So it -- is it that much of a tough comparison to a year ago despite that? Richard Dierker: Yes. It's -- we can get into a little bit more detail. It's 3 things, okay? So the port strike that happened in October, if you recall, there was a threatened port strike, I believe, in early January that also had an impact. So -- and then you got to go figure out how much pantry loading really happened. Was it 1 unit? Was it 2 units? Was it 3 units? And then you got to go figure out for the category, how long that normal usage goes through. But I would tell you, October was extremely elevated a year ago. Like when categories are up 5% a year ago. That's not normal. So that's one. The second thing we said in the release was vitamin business for us in Q4 when it's down in consumption in the low 20s. Then Q4 is a seasonal business for vitamins and so it just has a little bit more of an impact. And then the third thing that I think Lee mentioned was just our international business in Q4 a year ago had a bit higher of a comp. So all those things are true, I guess, but the biggest thing for us and what I said earlier was we think the order of magnitude is really more in the port strike and some of the timing on vitamins and we don't believe there's a roll forward issue into 2026. So that's kind of how we'd button it up. Operator: Your last question comes from the line of Kevin Grundy with BNP Paribas. Kevin Grundy: Congrats on the good result this quarter. Two for me, if you don't mind. The first one to kind of revisit the portfolio and trade down risk and then the second one is going to be on AI. So the first one, Rick, how do you assess the portfolio today relative to, say, like the global financial crisis. And I think the view would be the Church was a big beneficiary. I would agree with that of trade-down risk. ARM & HAMMER did well. value laundry detergent did well. But it is a more premium portfolio today than it was and the brands that you've had success with like BATISTE and THERABREATH and HERO and TOUCHLAND are more premium price points. So how do you assess trade-down risk, particularly in those parts of your portfolio today? How do you sort of square that with some of the trade down that we're seeing and granted it's in household product categories, which you do tend to see a little bit more trade down. But I'd just be kind of curious to get your thoughts on that, Rick. Granted it skews higher to higher income consumers. It does offer unique benefits. But can you kind of have it both ways where the consumer is weak, but then the higher end of the portfolio are going to continue to sustain? And then I have a follow-up. Richard Dierker: Yes. And it's a good question. Maybe we were 40-60 around the financial crisis. Now we're 60-40 and I do believe that we will do well in most any economic environment, and that's what we've kind of shown over time. Household for sure, as folks trade down. And what's been unique a little bit, Kevin, is like these premium personal care categories I would say, in some cases, are accelerating during this time. And it kind of goes back to what I was thinking about earlier, it's just to have air. There's just 2 or 3 or 4 reasons why. But the problem solution, but even the macro behind that is the high-end consumer is still doing well. And maybe it's a barbell. That's why the club class of trade continues to do well. That's why if anything, the trade down is happening a little bit in the mass and those trends look pretty good. So I would -- I kind of view it as the company is positioned to do well and good times or bad times. Yes, the portfolio shifted a little bit, but what brands you have matter more than anything. More so than the category itself on mouthwash as an example. So that's kind of my short answer. I think that there's more than 1 reason those brands are doing well, and it's a bigger tailwind than the category headwind potentially. Kevin Grundy: Got it. Then quick follow-up is just around artificial intelligence. And what that evolution is going to mean for the CPG industry. Matt Farrell used to refer to these as the crystal ball kind of questions. But particularly on the heels of the Walmart announcement and its collaboration with OpenAI. I'd be curious to kind of get your thoughts, Rick, in a world where AI is actually going to see much, much greater levels of adoption. Do you see this evolution as a favorable development for big brands in your portfolio specifically? And relatedly, on the heels of this Walmart announcement, how do you assess the risk here that this potentially leads to a balance of power shift to retailers as they exert greater control over the virtual shelf? Richard Dierker: Yes. I think my crystal ball would probably say our company is laser-focused on our brands. Like how do we make sure that we have brands that consumers love and through our advertising, through our marketing, through our innovation. If we do those things well, then that is an enabler for how we show up online. And at the end of the day, recommendations in the future are going to be based on how well we're selling, how well consumers love our products, what the reviews say, what new news we have. And same way that advertising has shifted over a long period of time. We have to make sure we're nimble enough and fast enough to adjust with speed to the new way of playing the game. And we've shown that we can do that. When Matt and I talked back in 2016, we were 2% of sales for e-com, now we're 23%. We have adjusted and changed the way we play the game. And so that is a competitive advantage for us versus our larger peer set, in my opinion. And so we have to make sure that we're on the forefront of that. And I have no doubt that we will. Operator: There are no further questions at this time. I'd now like to turn the call over to Mr. Rick Dierker for closing remarks. Please go ahead. Richard Dierker: Okay. Thanks, Eric. Well, thank you for all the questions, and look forward to getting together next year if we talk about our go-forward strategy on Investor Day. And thank you and see you in January. Operator: Ladies and gentlemen, this concludes today's call. Thank you all for joining, and you may now disconnect.
Andreas Klauser: Good morning, and welcome to our Q3 earnings call. Just let us start on the first slide with our equity story, what sets us apart. I think it's the clear market leadership, so the added value we can provide to our customers as well as dealers. The strong resilience, this is driven by the broad product portfolio we have. The solid growth opportunity, I think here, despite the Service segment, still North America, APAC and Marine offers great opportunities and the huge earnings potential by increased profitability. I think that's an important part and all the other ingredients will follow what was presented now. Yes, we are a true global player with EUR 2.36 billion revenue in 2024 with a strong global presence, which is driven by the engineering and technology competence, sales and service network worldwide, the 30 production sites worldwide and even more important, highly motivated employees all around the globe. In addition, we are very proud that we have a strong resilience throughout the industry diversity. So we are in many different areas of doing business. And that's the reason as well when one of the activities, one of the businesses might slow down, others can compensate. And here as well, you can see the spread throughout the globe. On the next slide, and it is also something we also would like to remind yourself is stick to our product portfolio, including a very successful marine business, which we'll see later on in the presentation of Felix is strongly contributing to our results. But we are never standing still. We reach higher. So we worked for more than 9 months quite intensely on our reach higher strategy 2030+. We had a strong solid process behind, which is really bottom up and as well fully kicked off by the Board and challenged by an outside consultant. I think this is something which we will hear later on more about it and as well in the next months to come. Where are we coming from? We have a strong focus on 5 must-win action fields. One is related to lifting customer value, so the customer focus. The second area is the balanced profitable growth of the service and spare parts business expansion and as well the working platform as an additional core pillar, which is heavily requested and required in the marketplace. And the third part is execution excellence, supply chain optimization and process system and data optimization as well here to make sure that we are more efficient, we are faster in better dealing with our customers and dealers. So all in all, we are talking here about 18 programs to drive future growth and profitability. And on the next slide, this will lead, first of all, to keep our #1 position for Crane and Lifting solutions. This is very clear commitment we have. On the other hand, as well our financial targets by 2030 is EUR 3 billion revenue, a 12% EBIT margin, 15% ROCE and as well EUR 150 million bigger, the free cash flow side. And I think these are the elements where we are working towards and which are heavily supported by all the actions which are in place and the strategy which is defined. The growth target just that you can better understand where we are coming from and where we are going to. So where is the biggest portion of growth coming from? No doubt it's on the service side, followed by recovery in EMEA, which is expected, which is more related to the marketplace. Even more important, the area working platform as well a clear strategy to roll out new solutions, new successful solutions for our customers and for our dealers. Before then coming to the outlook for 2025, I ask Felix, hope you can hear for his presentation on the results to better understand where we are coming from. Please, Felix go ahead. Felix Strohbichler: Thank you, Andreas. Good morning, ladies and gentlemen. As you are aware of, we have 3 segments in which we are steering the company and how we also report our numbers, starting with the segment Sales and Service, which comprises all sales activities of Products and Solutions as well as the service activities of Palfinger, but not the external revenue in production for third parties, which is another segment. So looking at the key developments of the first 3 quarters. First of all, in EMEA, we have seen a substantial improvement of the order intake in Q4 of last year. This order intake has remained stable for the last 4 quarters. However, on the other hand, we have to say that the infrastructure package, for example, in Germany has not yet showed any impact, which on the one hand, is bad news, but it's also good news because it means that all the potentials out of those infrastructure packages in Europe are still ahead of us. If we then go to North America, we had quite some developments in summer, the increase of tariffs from 10% to 15%. Then more importantly, the Section 232 has been introduced, which has, on the one hand, a negative impact on demand, which is not surprising if you consider that some products have become more expensive by 10% to 20% for customers. So this leads to a slump in demand and also the reduction in profitability because that all the impacts of those tariffs can be fully passed on and compensated. So this also leads to a certain reduction in profitability of around EUR 10 million to EUR 12 million in 2025, which was not expected only a few months ago. Coming then to Latin America, we have here a very positive development, especially in Brazil. Due to the latest developments in Argentina, we also hope that here we will see a positive outlook. APAC is clearly dominated by India, which is driving the growth in the region. Marine, Andreas has already mentioned that Marine is a very important contributor to our bottom line, also to our top line, but even more important to our bottom line. The market environment is still very positive and the profitability is on a very good level. And last but not least, typically, we don't talk about Russia. Here, we have to mention it because in the last quarters, we have experienced a massive slump in the economy and therefore, also a sharp decline in sales and earnings, which leads to the fact that at the moment, Russia is more or less at breakeven and there is no bottom line contribution out of Russia anymore for the time being. So what does this mean for the numbers in the segment Sales and Service? So first of all, the external revenue has declined slightly by 2.5% with a profit EBIT of EUR 150 million, which represents an EBIT margin of close to 10%. So a slight decline compared to last year. However, we will recover to a large extent in the fourth quarter, but Andreas will talk about the outlook later. What I would like to highlight here is clearly the order book development. So as you all remember, we had a very large order book in the years 2022 and 2023 due to the inflated demand in the post-COVID phase. In the meantime, we have come down to EUR 1 billion of order book, which is a very healthy level. And this order book level has been stabilized over the last 12 months and even increased slightly. So we are now quite exactly at EUR 1 billion of order book in the segment Sales and Service. And what is also important, especially having in mind that one of our key strategic pillars is growth in service. Our Service business share has increased to almost 19% compared to 17.4% in the same period of the last year. Coming now to the second segment, the Segment Operations, which includes all the manufacturing and assembly activities of PALFINGER and also the production for third parties, starting with production for third parties, of course, this activity has been impacted by the challenging economic environment overall. So here, we are producing components for other machinery producers and of course, we can feel here the still calm overall environment. If we then go further, we see capacity adjustments in both directions. On the one hand, we increased our capacity at the moment and have been increasing our capacity in Europe and also in Brazil due to the fact that the order intake developments have been positive. On the other hand, due to the tariff policies, we have underutilization in the U.S., and I also mentioned already the fact that in Russia, the market is quite down. So we see underutilization in the U.S. CIS whereas we increased capacity in Europe and Brazil. What does this mean in terms of numbers? The external revenue has come down by another 5%. So every year after 2023 or 2022, we have now seen a certain decline, again, mirroring the overall economic development. The EBIT line is at EUR 10.7 million compared to EUR 22.3 million the year before and driven on the one hand, of course, by the lower utilization in production for third parties, but also by North America and CIS. Coming then to the segment other nonreportable segments. So this sounds a little bit complicated in the end. It's just a combination of 2 small units on the one hand, it's the holding unit, which comprises projects and activities for the whole group. On the other hand, it's the Tail Lifts business, which has been carved out of the Global PALFINGER Organization because it's a different industry with specific requirements. As you can see in the external revenue, the market environment for Tail Lifts, especially in our core markets, Germany and U.S. is difficult. This has led to a decline in sales for Tail Lifts by almost 20%. In the EBIT line, you see an improvement of EUR 7 million. However, this is not coming from Tail Lifts. This is mainly because we have increased our intercompany invoicing of projects to other entities. So this is the main effect of this improvement here in this segment. So coming now to the numbers for the complete group, starting with the revenue. So the revenue is still 3.5% below the previous year. But as you know from our guidance, we expect now ramp-up and an effect of our ramp-up in capacities in Europe. The EBIT line is by minus 17.6% down to EUR 130.7 million. And this means an EBIT margin of 7.8% and a consolidated net result of EUR 72.4 million. So important is to understand that we have now the opposite development compared to the previous year when we started with 2 record quarters based on the record order book we had and then we had a reduction of capacity and now it's the opposite. We are ramping up capacities in 2025. So we expect here a positive development in Q4. And if you then look at the chart on the right hand, you can see that EMEA has become, again, even a little bit more important due to the positive order intake in the last quarter. So 59% coming from EMEA in the first 3 quarters, 25% from North America, LatAm and APAC at around 6%. And CIS has declined in importance due to the market development, as mentioned, with around 4%. So coming now to our balance sheet, and this is really a great development. Our equity has improved by EUR 140 million to EUR 884.7 million, which represents an equity ratio of 41.3%. The net debt has come down from almost EUR 760 million to EUR 577 million. The gearing ratio, net debt to EBITDA is now -- are now at extremely healthy levels. So what you can see here is an extremely solid and stable balance sheet of PALFINGER. So our financial strength is absolutely positive. And this is also coming from the sale of treasury shares, not completed, but also one of the impacts was the sale of treasury shares in summer. So we had proceeds of EUR 100 million by selling 7.5% of the issued shares at the placement price of EUR 35.40. So this strengthened the balance sheet with an improvement in equity ratio of more than 3% and reduced the gearing ratio by more than 15%. But what is perhaps at least as important, especially for our investors is that this has dramatically increased the attractiveness for our investors. Now the free float is 43.5%. So this is a substantially higher level than before. So the liquidity of the share is much better. And now we also have not only a chance, but I would even say a high probability of inclusion in the ATX. At the moment, we are the #20 on the list, and there is quite a big gap to the #21. At the bottom of the slide, you can see to whom we sold the shares. So it's long only mainly 3/4 to long-only investors. And then if we look at the regions, we are happy to report that we could also internationalize and diversify our investor bases, especially the U.K., France and the U.S. with the sale of the treasury shares. What will we do with the EUR 100 million proceeds we could generate from the sale of treasury shares. Here, you can see several projects we have ahead of us. Of course, these proceeds will help us and enable us to fund these strategic investments to pull some of those forward. So we will especially expand our service business by investing in service locations in mobile services, especially in North America, but also in service locations in EMEA. We are driving a defense project to generate a product portfolio of highly developed solutions for the armed forces to improve our market position here. We have already invested in the spare parts hub in North America, which has been opened in September, which cost around EUR 10 million, and we have the investment in a new assembly plant in India ahead of us, which will cost EUR 30 million. Just some examples of what we are going to do. But as you can see, we can make very good use of the proceeds. Last but not least, let me come to our cash flow statement. Let me start with Q1 to Q3 2024. You see at the bottom line, the free cash flow was minus EUR 2 million. In the end, we reached even EUR 120 million of positive free cash flow at the year-end, driven by inventory reduction mainly. This year, we are already EUR 56 million ahead of last year. So we are fully on track to achieve more than EUR 100 million of free cash flow for the full year. And the main difference compared to the last year is that on the one hand, we will have less potential from change in working capital. However, the level of investing activities is substantially lower compared to the previous year. So we are happy to report that our target is absolutely realistic, and we are full on track. With this, I would like to hand back to Andreas Klauser for the outlook. Andreas Klauser: Yes. Thank you, Felix. Now let's see what does this mean in nutshell for full year 2025. As Felix already mentioned, unfortunately, U.S. tariffs were costing us profitability and as well caused a slowdown in our output. Nevertheless, on the other hand, we expect an output increase in Europe. The good news is here, we are having the orders on hand. So this will be mostly compensated our first 9 months and should result in a quite successful closure of 2025, which also means still good results. And what does this mean in terms of programs that we are counting on, which is not, let's say, in for 2025. There is a strong fiscal package in Germany, ReArm Europe, I think the amounts are quite well known in Western Europe, RePower Europe. So all these are the ingredients not to forget about the U.S.A. Stargate project and potentially as well at a certain point in time, the Reconstruction of Ukraine. It is just a small reminder which kind of areas, which kind of programs are already somehow announced and where we can count on in the future to fully participate. Saying this, yes, we reach higher with our 2030 plus strategy. This also means, as I mentioned earlier already, strong solid financial targets for 2030. This means on one hand side, EUR 3 billion revenue. On the other hand, a 12% EBIT margin, 15% ROCE and as a commitment to the market as a commitment to our customers, #1 for Crane and Lifting solutions. At this point in time, let me say thank you for your attention, and we will take your questions now. Operator: [Operator Instructions] The first question comes from the line of Daniel Lion from Erste Group. Daniel Lion: First question regarding your '27 outlook. As I haven't read it, just to make sure that the guidance for '27 is still valid? Felix Strohbichler: Yes, the 2027 targets were actually in the presentation of Andreas. So this was Slide #7. Daniel Lion: Okay. Okay. Sorry, then I didn't read that. Andreas Klauser: Slide #8. Financial targets 2027, EUR 2.7 billion, 10% EBIT margin, 12% ROCE and the free cash flow. Daniel Lion: Okay. I'm seeing it already, sorry. And then on your order backlog, currently at EUR 1 billion, we should expect now a stronger fourth quarter, catching up with some of the declines we've seen throughout the year. But what does this mean now for first half year? How does your visibility look like? And maybe also sneaking preview to next year? If possible, to what extent will you need some of these packages to materialize that you show as potentials in order to show further grow towards your '27 targets? Andreas Klauser: And the good thing is that we are not materializing all the shipments, all the orders we have just in 2025. I think it's already good coverage for Q1 2026. And this is partially driven already by some of the projects like the fiscal package in Germany. Our dealers are preparing themselves, our customers are preparing themselves now already placing orders to have the equipment available to work on the infrastructure projects. The same is for ReArm Europe. So most of the European armies, we were already ordering some logistic equipment. Unfortunately, we can't disclose this further as you understand for sure, the reason. So for us, the starting point looks already good. And then we will see how it will evolve. But in general, all these projects which are announced are somehow considered but only partially. So this is not something that all these ingredients need to happen next year that PALFINGER can do its results. We are quite confident that what we see now and what we have in the pipeline will lead us already to a good result in 2026. Daniel Lion: Okay. And reflecting on the services share, it's up more than 1 percentage point. How do you think this will develop going forward, especially also with the potential you have on the equipment business? Do you expect the share to grow materially in the next 2 years? Or do you think that it will more or less keep the share and increase together with the overall growth that you expect to show? Andreas Klauser: No, our expectation here is really that the service business will outperform maybe other growth areas, which we have on the equipment. This is clearly defined in the strategy and as well what we see now that our customers might even be willing to extend the life cycle of our products. So they're investing in service, they're investing in parts and we are doing this as well in North America, we had already established our new spare parts hub Huntley. We are doing certain things, which you have seen earlier in Felix presentation in Europe. So this will be quite -- should be a quite quick win, which we can see over the next couple of months. And on the other hand, yes, we will kicking in with new equipment on the AWP, Aerial Work Platform. Aerial Work Platform for example, which will still take a bit of time. But all the ingredients together are making us quite confident that we can get there. Felix Strohbichler: So perhaps to refer to the Slide #9, where you can see that service accounts for around 1/3 of our growth potential. So this means that the 1/3 of growth potential is more than the 19% of service share we have today. So service is growing over proportionately. Daniel Lion: But this will be a gradual improvement. So it's not like back-end loaded. This is actually a steady trend that we should be seeing in the figures, right? Felix Strohbichler: This is what you can already see in the last years as well. Operator: The next question comes from the line of Patrick Steiner from ODDO BHF. Patrick Steiner: Patrick Steiner speaking. Two from my side. First one, how should we interpret the new 2025 guidance? Do you expect to come close to the 2024 results in terms of EBIT? And the second one is, could you give us a bit more information on the fundamental development of the North American business? Did you expect -- or do you expect any market share losses as a result of the tariffs? Felix Strohbichler: So let me start with the 2025 guidance, how to read this. As you might recall, our target has been even when we communicated the half year results that we aimed for even exceeding the second best year 2024 in terms of EBIT, which would be EUR 186 million. At that time, we were not, of course, considering that there may be the impact, especially of Section 232, as I said, it's an impact of around EUR 10 million to EUR 12 million for this year's profitability. So this means that you have to assume that we won't get to this level, but we won't be that far away. So we are talking here about an impact of around EUR 10 million to EUR 12 million, which is now a deviation from our previous guidance. But apart from this, everything remains unchanged. Andreas Klauser: And about the North American market, here, we can already see that further orders are coming in especially as well now on the service side, which was a little bit slow earlier this year, but now it's coming back. The market is coming back. So I don't expect here any negative impact for 2026 coming from North America. Patrick Steiner: So also no market share losses? Andreas Klauser: Yes, the market share loss, clearly no market share losses, even if you consider the truck mounted forklift, here, we gained market share, but still the U.S. American market, the customers are a little bit hesitant, we are a little bit hesitant to provide orders first to see what's happening, especially on the logistics part, but clearly no market share in the game. Operator: We now have a question from the line of Elias New from Kepler Cheuvreux. Elias New: Two questions from my side on tariffs. So firstly, I mean, you mentioned the EUR 10 million to EUR 12 million hit to EBIT in 2025 due to the 232 tariffs. Given these tariffs were only introduced in the summer and assuming nothing changes with regard to this tariff policy, if I were to annualize that run rate, would it be correct to assume a sort of similar hit of, say, EUR 20 million to EUR 24 million in 2026? Or is there any reason to expect this impact to fade in 2026? Felix Strohbichler: Well, of course, you're right that the Section 232 has to be considered to remain in place. And it would be more or less even 3x the amount if there wouldn't be any counteraction. But of course, we are constantly improving here our value chain and taking measures to limit the impact of the tariffs. So we do not expect now EUR 36 million. But yes, there will be a certain impact out of the tariffs also in 2025 because we cannot fully compensate in terms of change of supply chain within a few months or even a few quarters. But we also have to say that we have implemented price increases of up to 18% depending on the product group, which sometimes has already taken effect in some cases, will take effect. So yes, there will be an impact in 2026, but it won't be 3x the impact of 2025, but it will be also probably a double-digit million number, which still remains as an impact for 2026 from today's perspective at least. Elias New: Okay. Great. That's very clear. And just on that tariff again. I mean, how much of this tariff surcharge are you currently passing through to customers, both the reciprocal and tariffs Section 232? And how you sort of try to balance increasing your price and passing that through versus accepting lower volumes? How do you kind of think about balancing that equation? And perhaps whether you are following the same approach here as your competitors or how you see sort of other players in the market kind of choosing to increase prices? Felix Strohbichler: So first of all, everybody tries to pass on the cost increases to the customers. This is also what we do. As I mentioned, price increases of up to 18%. But the reality is also that it's a lose-lose situation. So everybody has different strengths and weaknesses. And whenever somebody, for example, with one competitor for Tail Lifts in the U.S. They have just opened up a new assembly plant in Mexico. So they've doubled the capacity, market is extremely down. So they decided not to pass on any price increases, and they are the #1 player in the North American market. So there are always some competitive effects you also have to take into consideration. For example, for Cranes, we are the clear market leader. We can here also dictate more or less what is acceptable and everybody else also has imports from Europe. But for some other product groups, it's not the case that we can always fully pass on all the cost increases. And this is also true for competition. So in the end, the tariff situation creates a lose-lose situation for every competitor, but also for the customers. Elias New: That's very clear. Just as a reminder, if I understand correctly, you are just as well positioned in the U.S. in terms of manufacturing, et cetera, than your competitors. I know it differs by product, but it's not like you're structurally worse positioned than competitors? Felix Strohbichler: It depends on the product group. So for example, for loader cranes, we are better positioned than everybody else because we have an assembly plant in Canada, and there is a USMCA agreement in place between Canada and the U.S. We have assembly plants and manufacturing plants in the U.S. for products, which are also coming from the U.S. from other manufacturers. So here, we have more or less a local footprint against local competitors. But it's only in a few cases like for loader cranes where we have a substantial advantage. In some cases, we had advantages in the past like bringing components from Brazil or Europe from low-cost production sites to the U.S. Now this advantage has disappeared because we are impacted by tariffs to bring these components to the U.S. would also not help because then the cost advantage goes away even if you save some tariffs, it doesn't help a lot. So in the end, it's not only that it has been an advantage to be in the U.S. It's also that in some cases, we have competitors with a similar setup so that in total, I would say it's a picture where we have still to do some homework to compensate fully the impact of the tariffs, but we'll get there to compensate fully will probably take another year or even 1.5 years. Operator: [Operator Instructions] The next question comes from the line of Lars Vom-Cleff from Deutsche Bank. Lars Vom Cleff: You already alluded on the U.S. headwind, EUR 10 million to EUR 12 million you expect for this year's EBIT. But if I would bluntly subtract that from the EUR 186 million you generated last year, I'll end up with EUR 175 million, but that wouldn't imply any improvement of the operating performance this year or year-on-year, although your capacity is higher and Brazil Marine seems to be developed well. Is fair to assume a flat underlying -- organic underlying development, leaving U.S. impacts aside for the moment? Felix Strohbichler: I think you have to consider again the development last year and this year, I tried to highlight this in the overall group profit development. So we had a record first half year last year. And now we have the opposite development. So we had a rather weak start into the year with a lower order book and are ramping up capacity. So it's just the mirroring of what we have seen last year. And if you now say it's the same, it's not true because if we look at the individual regions, for example, Russia has had still a significant EBIT impact in 2024, which has completely done away and which has been fully compensated by other regions like Marine, for example. Lars Vom Cleff: Okay. Perfect. And then you also already shared some thoughts about the U.S. tariff impact you're expecting for next year. Is it too early to ask how you're looking at next year from an operating business performance? Are you expecting a significant recovery, investment packages finally starting to materialize? I mean the U.S. is the U.S., pretty sure we can't make any forecast regarding that region. So would you be okay with me assuming a significant better performance next year? Or would you still say rather be cautious in this regard? Felix Strohbichler: So let me answer this with Slide #8. I think it was showing the 2027 targets. So our assumption is, of course, that next year, we will see some impact of all those programs. If we would not see any tailwind, of course, we could also not keep our 2027 target. So the underlying assumption is still that we will see already in the first half year of 2026, some momentum in Europe. If this does not kick in, of course, it would become very difficult to show the year or the results we target for 2026, which has to be somewhere in between of this year results and the 2027 target. So yes, the underlying assumption is we have to see some positive impact in 2026, which shall also lead then to a substantially better year 2026 in terms of financial results. Lars Vom Cleff: Understood. And then last one for you, Felix. I mean, order backlog up 2% year-on-year. And you're commenting on the order intake by saying order intake stable at a solid level. If I do a back of the envelope calculation, given your revenue development, order backlog development, I would calculate a Q3 order intake that rose around about 20% year-on-year. Am I doing something wrong in my calculation? Felix Strohbichler: Well, it's a matter of fact that in the last 12 months, every single month with 1 or 2 exceptions has been substantially higher than the comparable month 1 year before. So if this was the question, yes, this is absolutely correct that we have seen this on a constant basis now more or less almost every month. Lars Vom Cleff: Okay. Perfect. No, I was only wondering because you stating order intake stable at a solid level for me, sounds more conservative than what I'm calculating. Felix Strohbichler: Means stable over the last 12 months, but not stable compared to 14, 15 months ago. So we have seen in 2023 and until end of Q3 2024, much lower order intake than output. So we have been eating up order book more or less every single month for 18 or even more than 18 months. And this has stopped in Q4. Since then, the order book -- the order intake is more or less on a similar level than the output, which means that the order book has stabilized on a reasonable level of EUR 1 billion. So the order book has changed dramatically anymore for the last 12 months. Operator: [Operator Instructions] We have a follow-up question from the line of Elias New from Kepler Cheuvreux. Elias New: Yes. Just one follow-up question from me. Just on sort of growth drivers for 2026 and beyond. I mean you clearly mentioned that EMEA is the growth driver for Q4 now, but order intake is stable since Q4. So just wondering when you expect this to start improving materially? Are you sort of starting to see trends already that expect a meaningful pickup into 2026? Or is the growth in 2026 to be driven more by North America. So despite tariff headwinds, et cetera, I mean, the CapEx cannot be deferred forever, right? So I'm still guessing that despite these headwinds, the U.S. will be a huge growth opportunity going forward. So do you expect that also to meaningfully drive growth in 2026? Felix Strohbichler: Well, in the end, it's very difficult to predict when all those packages will kick in. What is important to understand is that PALFINGER is early in the cycle. So for example, in 2020, after COVID, our order intake picked up already in July, whereas for many industries, it took until the fourth quarter when the improvement happened. So we assume, and this is more or less what banks sometimes think, and I think there are some bankers also in this call now that there might be an impact in the second half. If we are early in the cycle, we should see already the order intake development, hopefully, at the end of the first half year, and this is also needed upside, we will not see it in the output in half year 2. So our expectation, and of course, this is not the guidance because at the moment, it has not happened, and it's an expectation, a hope an assumption that we should see an order intake improvement already in Q2, which should then lead to an improvement of output and profitability, especially in the second half year 2026. Andreas Klauser: And here, just to add, as I mentioned earlier, that the German package is already somehow kicking in so that we see already an increase in orders because potentially our customers are expecting the infrastructure deals, which need to anyway happen. The same is that we got provided some orders from some major army as well in Europe. So this is something which is already slightly kicking in, but not yet to the full amount. And for the others, we are ready to deal with it. It's just to show you the potential and to show you that it's on our radar that we are not caught [indiscernible]. Elias New: Okay. Great. And so it's both ideally the U.S. and Europe that will be driving growth in 2026. So there's no reason to assume that the U.S. will remain kind of sluggish in '26? Felix Strohbichler: So we expect a certain growth from the U.S., but this is not the big driver. The big driver for 2026 from the base point of view is a recovery in Europe. Operator: Ladies and gentlemen, that was the last question. I would now like to turn the conference back over to Andreas Klauser for any closing remarks. Andreas Klauser: Yes. Thank you very much for your attention as well, I think for all the questions which you provided. I think this has shown how interesting PALFINGER is and as well how clearly we can explain our performance. Stay well and see you soon. Thank you.
Jessica Zaloom: " Bryan Edmiston: " Jarrett Lilien: " William Peck: " Jeremy Schwartz: " George Sutton: " Craig-Hallum Capital Group LLC, Research Division Mike Grondahl: " Northland Capital Markets, Research Division Michael Cyprys: " Morgan Stanley, Research Division Keith Housum: " Northcoast Research Partners, LLC Christoph Kotowski: " Oppenheimer & Co. Inc., Research Division[ id="-1" name="Operator" /> Greetings, and welcome to the WisdomTree Third Quarter 2025 Earnings Results Call. [Operator Instructions] Please note, this conference is being recorded. I will now turn the conference over to Jessica Zaloom, Head of Corporate Communications. Thank you. You may begin. Jessica Zaloom: Good afternoon. Before we begin, I would like to reference our legal disclaimer available in today's presentation. This presentation may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including, but not limited to, statements about our ability to achieve our financial and business plans, goals and objectives and drive stockholder value. A number of factors could cause actual results to differ materially from the results discussed in forward-looking statements, including, but not limited to, the risks set forth in this presentation in the Risk Factors section of the WisdomTree annual report on Form 10-K for the year ended December 31, 2024, and in subsequent reports filed with or furnished to the Securities and Exchange Commission. WisdomTree assumes no duty and does not undertake to update any forward-looking statements. Now it is my pleasure to turn the call over to WisdomTree's CFO, Bryan Edmon. Bryan Edmiston: Thank you, Jessica, and good morning, everyone. I'll begin by covering our third quarter results, along with updates to our forward-looking guidance before turning the call over to Jarrett and Jono for additional updates on our business. We ended the third quarter with record global AUM of $137.2 billion, driven by strong organic growth and favorable market conditions. This includes record U.S. AUM of $88.3 billion, record European AUM of $48.3 billion and digital AUM of almost $600 million. In the third quarter, we generated $2.2 billion of global net inflows, bringing year-to-date inflows through September 30 to $8.8 billion, and annualized organic growth pace of 11%. These flows have been broad and diverse across our global product suite with contributions from every region. Year-to-date inflows include $2.5 billion in the U.S., $5.8 billion in Europe and roughly $550 million in digital assets. Significant contributors during the third quarter included meaningful flows into our European gold and cryptocurrency products as well as our European defense fund and our digital money market fund. We also reached a major milestone in early October with the closing of the Ceres acquisition. This transaction immediately increases our revenue capture and operating margins by more than 200 basis points while further diversifying our AUM mix by introducing farmland as a negatively correlated asset class. Ceres also opens the door to incremental revenue opportunities stemming from alternative uses of farmland, including solar projects and AI data centers. Backed by strong organic growth, disciplined execution and strategic capital deployment, we are operating from a position of strength, well positioned to deliver sustainable growth and long-term shareholder value. Next slide. Adjusted revenues were $125.6 million during the quarter, an increase of 11.5% from the second quarter and up approximately 14.7% versus the prior year quarter, driven by higher average AUM. Our other revenues increased to $11 million this quarter versus $8 million to $9 million in previous quarters. As a reminder, other revenues comprise both asset-based and transaction-based fees on our European listed products, of which approximately 70% of these revenues are asset-based. While difficult to forecast, we would suggest the magnitude of other revenue generated in this most recent quarter serves as a fair approximation of what we could expect going forward, assuming current European AUM levels. On a year-to-date basis, our adjusted revenues have grown 10.7%, driven by higher average AUM and higher other revenues attributable to our European listed products, partly offset by a lower average fee capture. Our adjusted net income for the quarter was $34.5 million or $0.23 per share. Our adjusted net income excludes the loss on extinguishment of convertible notes of $13 million, acquisition-related costs of $2.4 million and other miscellaneous items. Next slide. Now a few comments on our forecasted guidance. We have no changes to our previously reported compensation and discretionary expense guidance. We reported a gross margin of 82.2% in the third quarter, an increase of over 100 basis points versus the second quarter due to higher AUM levels. We anticipate our gross margin increasing to 83% in the fourth quarter when factoring in the incremental revenue arising from the Ceres acquisition, resulting in an overall gross margin of about 82% for the full year. We reported $8 million of adjusted interest expense in the third quarter, an increase from $5 million in previous quarters due to convertible notes we issued in mid-August to facilitate the Ceres acquisition. We anticipate our adjusted interest expense to be approximately $11 million in the fourth quarter, taking into consideration the full quarter impact of this recently completed financing. During the third quarter, we reported $4 million of interest income, higher than our previous run rate of approximately $2 million per quarter due to temporarily investing the capital raised from our convertible note issuance to facilitate the Ceres acquisition. We anticipate interest income in the fourth quarter reverting back to earlier levels of approximately $2 million to $3 million. And our weighted average diluted shares were 150.7 million during the third quarter, which included 5.8 million of incremental shares related to our convertible notes partly offset by the weighted average effect of repurchasing 6.8 million shares of common stock in connection with our recently completed convertible note issuance. We anticipate our weighted average diluted shares to be 146 million to 149 million in the fourth quarter, taking into consideration the full quarter impact of the 6.8 million shares we repurchased in August. This also contemplates approximately 5 million to 7 million incremental shares associated with our convertible notes, assuming a stock price approximating recent levels. As a reminder, an illustration is included within our earnings presentation to assist in quantifying the incremental shares associated with our convertible notes going forward. With respect to the Ceres acquisition, our overall expense guidance for the year remains largely unchanged. Ceres' estimated annualized operating expenses are approximately $15 million, of which roughly 80% is related to compensation. Approximately 1/4 of this expense should impact us in the fourth quarter. While we generally don't provide revenue guidance, Ceres' trailing 12-month historical revenues were approximately $40 million, which should be informative for establishing a baseline revenue expectation for your models. Revenue is comprised of both a base fee of approximately 1% on AUM and a 20% performance fee. Performance fees generated will ultimately be driven by the underlying returns of the farmland managed by Ceres, and therefore, recent historical actual revenues earned is not indicative of revenue that may be earned in the future. That's all I have. I will now turn the call over to Jarrett. Jarrett Lilien: Thanks, Bryan. This was another solid quarter for WisdomTree, highlighted by record firm-wide AUM, strong net inflows and continued execution across all areas of our business. We ended the quarter with over $137 billion in AUM, setting a new high watermark, not just for the firm overall, but for every one of our business lines individually. Net inflows exceeded $2.2 billion for the quarter, driven by broad-based strength across our product lineup with nearly twice as many funds seeing inflows versus outflows and that breadth of performance underscores the depth and resilience of our platform and the consistent execution of our strategies across regions, products and channels. Since quarter end, we closed on our acquisition of Ceres Partners, bringing our total AUM to over $140 billion for the first time in our history, an important milestone that also marks our entry into private assets, an exciting new growth vector for WisdomTree. Gold also continues to be a standout. Our physical gold and gold overlay strategies now exceed $22 billion in AUM, reflecting 57% growth year-to-date. These strategies brought in over $1 billion of net inflows in the quarter alone, highlighting both the strength of our offering and the trust we've earned from clients seeking real asset exposure in today's environment. And importantly, we're not just growing AUM, we're also deepening client relationships. The number of clients using WisdomTree products grew meaningfully during the quarter and the average number of WisdomTree solutions used per client also increased. And that combination, wider reach and deeper wallet share, that's the foundation of sustainable organic growth, and we're seeing it at work. Turning to models. This continues to be one of our fastest-growing areas. Model AUM grew to approximately $5.85 billion, up more than 50% year-to-date. Adviser adoption remains strong with the number of advisers using our models now up sharply from the start of the year. Custom models were again a key driver in the quarter. We onboarded 13 new custom model clients, reinforcing our ability to meet advisers where they are. With an $18 trillion opportunity across 85,000 advisers, we're still in the early innings, but our traction is real and growing. In digital assets, we continue to also see meaningful progress, particularly within our WisdomTree Connect platform, while WisdomTree Prime is now live with on-chain transfer capabilities. We exited the quarter with around $600 million in AUM with peak levels near $900 million, driven largely by flows into our blockchain-enabled money market fund. Two core client segments are leading adoption, stablecoin issuers using the fund for reserves and on-chain native businesses using it for corporate treasury. Our ability to make redemption as seamless as funding has proven to be a real differentiator. And based on client feedback that ease of use is not a given with competing products. It's exactly the kind of frictionless experience that builds trust and wallet share over time. While digital asset flows can fluctuate week-to-week, the trend is clear. We have strong traction year-to-date and an even stronger pipeline ahead. Operationally, we remain focused on what we can control, managing expenses with discipline, maintaining efficiency and leveraging the scale of our platform. Our business model continues to demonstrate tremendous operating leverage. And as we grow, we see substantial margin expansion ahead. Back in February, we laid out our 2025 strategic priorities, and we're executing on all facets of this plan. We're doing what we said we would do, and we're doing it with consistency, focus and discipline. In summary, we have strong momentum. And as we look ahead, our foundation has never been stronger, a diversified, scalable platform that continues to perform across market cycles and positions WisdomTree for long-term success. And with that, let me now turn it over to Jono. Jonathan Steinberg: Thank you, Jarrett. Hello, everyone. Today, I'll be brief. It was a strong and straightforward quarter. Everything Bryian and Jarrett shared today reinforces that when sound strategy meets disciplined execution, strong results follow. WisdomTree is the strongest we've ever been. We've achieved a new level of scale. We've achieved a new level of diversification, diversification of asset class, client type and geography. Our scale, stability and growth initiatives have positioned WisdomTree to thrive in the years ahead. Now I'd like to turn the call back to the operator for questions.[ id="-1" name="Operator" /> [Operator Instructions] Your first question comes from George Sutton with Craig-Hallum. George Sutton: Nice results. So Europe has obviously been the star with 2x the amount of flows that the U.S. has seen. Can you just give us a kind of a 3- to 5-year vision of what you would expect to see there in terms of flows, U.S. versus rest of world? Jonathan Steinberg: George, thanks for the question. Europe is a few years behind the U.S. in terms of ETF adoption. I think -- so we feel that there's very strong fundamental underlying growth for Europe. And we really have achieved with nearly $50 billion of AUM and a very strong revenue capture, just a very strong footprint within that space. So I'm expecting that we'll continue to see very strong growth. It's hard to put a number on the 5 years, but the fundamentals of our European business is very strong. And we're seeing a synergy between the U.S. and the European business, a lot of cross-pollination of ideas and also Europe is the gateway to the global investor. And so it's a very positive for WisdomTree. Jarrett, is there anything you'd like to add? Jarrett Lilien: Yes. The only thing I'd add is really what is, I think, exciting for us is our global product suite. We now really have such breadth and depth that no matter what the markets are doing, we have a set of our products that are going to play well in that market. And you're seeing that on display, I think, this year. We've had still nice positive flows in the U.S. But as you pointed out, Europe has been great. But then as Jono also pointed out, some of the global launches now are also paying dividends. So I think it's really the global product suite that is on display here. George Sutton: Got you. So I wanted to just spend a little bit more of a focus on the digital asset side. You have a tech stack that really created this and you've been working on it for years. Now this -- the market is viewing these kinds of tech stacks as extremely valuable. I don't know if you saw securitized going public via SPAC for $1 billion. My sense is that's the least valuable part of your tech stack. So I'm just curious, when do you think the market will begin to appreciate this? Have you contemplated a tokenization as a service? Just wondered if we could move in that direction. Jonathan Steinberg: Will, why don't you start? William Peck: Yes. Thanks for the question. So yes, I did see the news, I did read their deck. I mean the short answer is yes, and we're in active conversations around tokenization as a business concept. But just taking a step back in terms of what's that technology stack that you're referring to. So we compete with securitized products today like [ BIL ], other products in the market. [Technical Difficulty] Think of us as compared to our competitors and how we're winning this business. At a big picture, it's the most regulated structures with the highest functionality. And in terms of the tech stack that we've got, it's an asset management platform. So that's what WisdomTree does today, right? We're the asset manager. It's a tokenization platform. So we refer to it as our token issuance platform, TIP. And it's also stablecoin orchestration. So an example of a stablecoin orchestrator would be like a zero hash that's been in the news recently. So we do all 3 of those things in our stack. And the synergies that come with that have allowed us to kind of customize things for clients and kind of meet them where they are and win business that way. I think going forward, we're going to be adding things like trading and 24/7 T instant liquidity to these exposures as well, making them feel more and more like a crypto-native business -- crypto native exposure, sorry, improving upon what exists today. We're very excited about that. I think you'll be seeing more coming there in the near future. So all told, I mean, we feel great about our position in the market with this. Hopefully, the market continues to value and appreciate that, and we're going to keep winning business going forward. Jarrett Lilien: George, let me just throw one thing in. I don't know whether securitized actually goes public with a valuation of $1 billion. But if it does, you would literally have a public direct value comparison to a part of our digital asset business to put in your sort of sum of the parts analysis of WisdomTree. And I would expect that if such a thing were to take place, WisdomTree would trade higher. George Sutton: Great. One other question, if I could. You mentioned relative to Ceres and the fact that you now have entered the private asset market. When you say we have just now entered the private asset market, are you contemplating other moves there? And I'm just curious how that would be done. Jarrett Lilien: So without -- first, we're very, very disciplined in our acquisition, a highly accretive transaction, one that really gave us leadership in a very exciting uncorrelated asset. But this is definitely just the beginning. For those that have been following WisdomTree for a number of years, if you remember, our first investment in Europe was now almost 11 years ago with an investment in something called Boost, and you could see how over a 10-, 11-year journey, how we grew that. We're definitely focused on privates. We see opportunities. I can't flag for you how we will execute against it, but only know that we're focused on it, and I expect that you'll see more to come. [ id="-1" name="Operator" /> Your next question comes from Mike Grondahl with Northland Securities. Mike Grondahl: Two questions. One, looking at Slide 13, the digital asset metrics, the $592 million that's just grown like a weed. Can you talk in a little bit more detail the underlying drivers of that? You mentioned stablecoin issuers. And what customers, whether it's institutional or retail, are buying those funds? I think if you break that down, it would be helpful. Jonathan Steinberg: Will, I think that's you. William Peck: Yes, happy to take the question. So in the deck, $590 million. I think as of today's close, it should be about $680 million. So yes, it's grown very quickly quarter-over-quarter, I mean, up from $30 million at the start of the year. So that's exactly right. I mean we see a lot of success with stablecoin issuers. So these are businesses that are whether in a regulated construct or kind of in other constructs issuing stablecoins and they invest in WTGXX as a reserve asset that backs their stablecoin. So that's kind of one primary market segment. We also see, as Jarrett referenced, so businesses that are crypto native or blockchain native that use stablecoin as part of their treasury management. They're looking for a kind of a treasury asset that's yield bearing that kind of fits within their workflows. And that's where the WTGXX, the money market fund has great kind of product market fit as well. I expect as more and more businesses in the U.S. adopt stablecoins, the addressable market for that is going to grow even more. And then beyond that, there's kind of different collateral management use cases that we're seeing as well, both in the kind of a crypto-native construct, but also with traditional businesses as well. So those are the 3 types of businesses that we're seeing success on the institutional side. On retail, where we see the most applicability going forward is with kind of on-chain native customers. We call them on-chain experts. So these are people that participate in DeFi, invest in DeFi, do things like yield farming. They're looking for traditional exposures that they can use as part of their strategies. So like just by way of example, we launched yesterday all 14 of our products on the Ploom blockchain. Maybe it sounds in the weeds, but it's a blockchain that's focused on real-world asset exposures, got a $10 million seed investment as part of that. And you can just see in the community after that announcement, the excitement around having assets that yield something like north of 10% that they can use as part of their exposures. So those are the types of customers that we're seeing that's driving that AUM higher. Jonathan Steinberg: Will, could you also talk about our public filing for the money market fund that's in -- we're waiting for the SEC to reopen? William Peck: Yes. And I alluded to this, but I think critically for these exposures, we want them to trade in the secondary market at instant liquidity, 24/7 liquidity. That's really the power of blockchain that you've seen with tokens, Bitcoin even itself, right? Native 24/7 peer-to-peer transferability and kind of active markets, right? So we are actively working on bringing that forward for the WisdomTree money market fund, WTGXX. That kind of adds functionality above and beyond what exists today in the traditional space and really meets a lot of the clients that I named where they are, where in addition to kind of some of the on-chain functionality, on-chain orders that we have today, the ability to sell instantly for stablecoins just adds a whole new layer that they can't do today. So that's -- we are working on that. There's a public filing around it that you can read more on at the SEC. And hopefully, we can bring that forward soon. Mike Grondahl: Jono, what would you say are the top 2 priorities for 2026 as you're sitting here today? Jonathan Steinberg: I would say faster revenue growth and higher revenue capture. Can you scale? [ id="-1" name="Operator" /> Your next question comes from Michael Cyprys with Morgan Stanley. Michael Cyprys: Maybe just sticking with the digital assets topic. Can you just talk a little bit about some of the steps you're looking to take over the next 12, 24 months to expand distribution access to build more customers, more assets in these funds. I think most of the traction has been on the money market fund, but you have a whole host of them. I think you mentioned 13. You have the treasury one. You have a gold one that's been out there for a bit. Remind us which blockchain they're on? How are you thinking about expanding access? What's the scope of partnering with some folks out there like Coinbase, Gemini and others? Jonathan Steinberg: Will? William Peck: Happy to take this. So yes, so in terms of -- specifically on the blockchain question, so we're now on 7 public blockchains, Ethereum, Arbitrum, Avalanche, Base, Optimism, Stellar and now Ploom, I think I named all 7. So I mean, it kind of gets into the weeds, but really, we want to just meet clients where they are. So when we see commercial opportunities that there's a kind of organic adoption happening on a certain blockchain for a certain use case, we like to bring our products there and certain technical kind of considerations and risk considerations that go into that as well. So I mean, in terms of expanding the reach, so right now, we've got kind of 2 platforms that we're onboarding people to, right? There's U.S. retail that can onboard to WisdomTree Prime, which feels a lot like a kind of traditional neobank, neobroker experience. We think we've done that as well as it can be, but that requires downloading an app, signing up, kind of going through that process. We've also got WisdomTree Connect, where there's businesses that onboard with us, and that's kind of a traditional business KYB onboarding process as well. And then once we onboard them, we essentially tag the wallets that they wit list with us, and they're allowed to enable to engage with our products and services from there. So that's kind of where we're starting at today. I think there's a lot of opportunity to just expand onboarding beyond what we can do just directly through those 2 channels. I mean one that we've talked about in the past would be the right sorts of fintech relationships, other fintechs where we can do a B2B2C model where WisdomTree's products, the transactions that we support could be available through other apps as well. And I think what's actually quite interesting about doing this in kind of a DeFi native way is there could be other ways that -- and this is all kind of whiteboarding hypotheticals at this point, but the industry is working on this is onboarding based on active stations or onboarding people in a more decentralized construct where they can just onboard their wallet directly with us by filling out a web form. So I mean, that's early innings on those things, but a key focus for digital assets over the next 12 months is in addition to how do we get these things trading within crypto-native workflow, but how do we just onboard more and more people just to sell our products and services to them while still doing it in like a very trusted regulatory compliant way. So that's how I think about it. I hope that answers your question. Michael Cyprys: Great. And then more broadly on tokenization with the Ceres acquisition that brings you into private space. I guess, how do you think about the opportunity for tokenizing real-world assets, including farmland? Where is that on the priority stack? How might you go about that? And what might the steps you need to take in order to bring that to fruition? Jonathan Steinberg: Jarrett, do you want to start? Jarrett Lilien: Well, sure. I think there are certain things that are certainly on the roadmap for tokenization that make all the sense in the world. Farmland is actually not one of those. It's not really the most suitable solution for it. So for us, the -- going on farmland, we've got a great model there, great returns, uncorrelated asset, but also some nice synergies with our own distribution team. And so we look to run that business, run it well with the existing team, but then look at how we better leverage our own infrastructure to enhance the returns there. Jonathan Steinberg: Mike, so I would also just add that you are seeing -- we're in the early days, the '40 Act ETFs do allow for up to 15% of the portfolio to be in privates. And so I would expect that you will see that evolve for the industry, but for WisdomTree specifically, we think it's a very big opportunity for us to blend privates and publics in the most seamless way. And so there'll be more to come on that in the coming quarters. [ id="-1" name="Operator" /> Your next question comes from Keith Housum with Northcoast Research. Keith Housum: Guys, just a basic question as we think about modeling the business, the Ceres business you guys acquired here. And I understand these are private assets and they're not priced every day like ETFs. But how would we expect to find like the AUM for this on a regular basis? Or would we? We'll just get it at the beginning of the quarter or the end of the quarter? Jonathan Steinberg: Bryan? Bryan Edmiston: Yes, it's going to be the latter. The AUM for Ceres will be reported at the end of the quarter. Keith Housum: Okay. And then the performance-based fees, is there any indicators that we can look at that we might be able to try to estimate what the performance-based fees might be? Bryan Edmiston: Yes, sure. So let's think through the AUM walk. So we are starting with AUM of roughly $1.7 billion to $1.8 billion today. Make your own flow assumption. But as a reminder, we had stated a target of roughly $750 million of AUM into farmland-based strategies over the next 5 years. It would be lower in the initial year as we integrate the business, and it would ramp up over that time horizon. And then we need to think about what mark do we apply to our AUM. I'm going to assume roughly a 7% to 8% mark on Ceres' AUM plus the flow -- whatever flow assumption we're making. That mark seems to be a reasonable one, taking into consideration rental yields, long-term historical farmland returns, offset by fund expenses and fees. That mark assumption is a baseline solar and data center opportunities could drive this higher. That said, an adverse market environment could drive it lower as well. The performance fee, it's roughly 15% of the mark on a net basis. So the formula, if I were thinking about this, Ceres' beginning AUM plus your flow assumption times your mark assumption times 15%, and that should get you into the neighborhood of what our performance fee would be. On the management fees, it's 1% of average AUM, and then we provided some indication with respect to expenses on our prepared remarks. Keith Housum: Great. I appreciate that. In terms of the digital strategy, I know there's a lot going on there. I can appreciate it, but I may not be able to understand all the complexities there. But if I think about what the impact is today to the income statement, I guess, what kind of impact are we talking about today? I'm sure it's not that great, but maybe you can verify for me. And then does today's performance justify increased investment or maintaining where you're at and just continuing down that path? Jonathan Steinberg: Bryan? Bryan Edmiston: So I'm sorry, just you want confirmation on what our current spend is in 2025? Keith Housum: Well, not only the spend, but also the revenue. I know a lot's going on here, and I understand the fact you've got the... Bryan Edmiston: Yes. Got it. So on the revenue side, right now, we have, as Will had indicated earlier, $650 million of AUM. That's roughly at a, call it, 25 basis point fee capture. And that's our primary driver with respect to revenue today on the digital platform. And the expenses and our net operating loss is in the neighborhood of what we've communicated previously. It's mid-20s is kind of where we're at, at this point in time. Jonathan Steinberg: Let me also just add. We believe strongly that there is a structural shift going on. We're ready for it, and the trend is much higher. In fact, I would say we believe eventually, everything -- nearly everything will go on chain. So tokenization of real-world assets over time will change the face of financial services. And with what we've accomplished year-to-date, I mean, we've gone from almost 0 to over $600 million, and we're on the functional cutting edge of what is happening in real-world assets. So we're very, very bullish on it. [ id="-1" name="Operator" /> And your next question comes from Chris Kotowski with Oppenheimer & Company. Christoph Kotowski: Yes, most of mine have been answered. But I was just wondering the $2.4 billion in outflows post the quarter, it seems like it was like in commodities and USFR on like 2 or 3 days that just look kind of like not your normal flows. I was wondering if there's any explanation you have for that? Jonathan Steinberg: Jeremy, do you want to start there? Jeremy Schwartz: Sure. Great to talk to you. Jeremy Schwartz, Global CIO. Our commodities AUM, when you look at the start of the year, it started at $22 billion. Today, it's $32 billion. So you've had a 50% to 60% increase in some of these prices like gold moving higher. So I think after the big, big move higher, there was some profit taking, but most people's positions are up 50% down the year. So that was a natural source. And we did see some allocations. You had the Fed meeting and there's some discussion of interest rates. You saw some people with the robust market put more of that cash to work in other things. In the same time, as USFR redeemed, we saw Japan, which had been in outflow mode, but has reduced -- had $300 million or $400 million, some of that might have been a reallocation putting cash to work. And I think we continue to see from the big flows at the start of the year, just actually a lot of energy below the surface in a bunch of the new thematics having this halo effect where you're getting new funds to scale in $100 million much quicker. So even beyond those few big ones, you're seeing things like nuclear, rare earth, quantum computing, which are all recent launches get to $100 million in our European business very quickly. So there's a lot of good breadth, as Jarrett talked about earlier, that's building under that surface there. Jarrett Lilien: Yes. Just I want to jump in there, too, and underlying some of the things that Jerry said. I mean some of these you never like to see outflows, but some profit taking in gold when you've seen the move that gold has had is pretty reasonable. With USFR, really, that was down to 1 or 2 clients that were rotating into other names, as Jerry also mentioned. And actually, in one case, and the largest piece of that rotated into something with actually a higher fee. So while AUM was down, the net revenue of that rotation was up. But the biggest point I'd make is you can get caught up in some of the noise of some short-term moves. But what I'm always looking at are more of the fundamentals. And we continue to do the things that are precursors for continued growth, and that is growing the number of our clients, but also growing the numbers of products per client, and that continues, and that is the recipe for growth. And really, the rest of it in my book is short-term noise, but the long-term fundamentals for growth continue to be with us in a strong way. [ id="-1" name="Operator" /> And that's all the questions we have today. I'll hand the floor back to Jonathan Steinberg, CEO, for closing remarks. Thank you. Jonathan Steinberg: I just want to thank all of you for your time and attention, and we'll speak to you next quarter. Thank you, everybody. Have a good day. [ id="-1" name="Operator" /> Thank you. This concludes today's call. All parties may disconnect. Have a good day.
Operator: Good day, and thank you for standing by. Welcome to the Silicon Motion Technology Corporation's Third Quarter 2025 Earnings Conference Call. [Operator Instructions] Be advised that today's conference is being recorded. This conference call contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 as amended. Such forward-looking statements include, without limitation, statements regarding trends in the operations, financial condition and business prospects. Although such statements are based on our own information and information from other sources we believe to be reliable, you should not place undue reliance on them. These statements involve risks and uncertainties and actual market trends and our results may differ materially from those expressed or implied in these forward-looking statements for a variety of reasons. Potential risks and uncertainties include, but are not limited to, continued competitive pressure in the semiconductor industry and the effect of such pressure on prices, unpredictable changes in technology and consumer demand for multimedia consumer electronics, the state of and any change in our relationship with our major customers, and changes in political, economic, legal and social conditions in Taiwan. For additional discussion of these risks and uncertainties and other factors please see the documents we file from time to time with the Securities and Exchange Commission. We assume no obligation to update any forward-looking statements, which apply only as of the date of this conference call. And with that, I'll now hand you over to Mr. Thomas Sepenzis, Senior Director of IR and Strategy. Please go ahead, sir. Thomas Andrew Sepenzis: Thank you, operator. Good morning, everyone, and welcome to Silicon Motion's Third Quarter 2025 financial results conference call and webcast. Joining me today is Wallace Kou, our President and CEO; and Jason Tsai, our CFO. Wallace will provide a review of our key business developments, and then Jason will discuss our third quarter results and outlook. Following our prepared remarks, we will conclude with a Q&A session. Before we begin, I would like to remind you of our safe harbor policy, which was read at the start of this call. For a comprehensive overview of the risks involved in investing in our securities, please refer to our filings with the U.S. Securities and Exchange Commission. For more details on our financial results, please refer to our press release which was filed on Form 6-K after the close of market yesterday. This webcast will be available for replay in the Investor Relations section of our website for a limited time. To enhance investors' understanding of our ongoing economic performance, we will discuss non-GAAP information during this call. We use non-GAAP financial measures internally to evaluate and manage our operations. We have, therefore, chosen to provide this information to enable you to perform comparisons of our operating results in a manner consistent with how we analyze our own operating results. The reconciliation of the GAAP to non-GAAP financial data can be found in our earnings release issued yesterday. We ask that you review it in conjunction with this call. With that, I will turn the call over to Wallace. Chia-Chang Kou: Thank you, Tom. Hello, everyone, and thank you for joining us today. I'm pleased to report that we delivered another strong performance in the third quarter, exceeding our revenue and operational margin guidance, we continue to benefit from the introduction of new controller existing and new markets and drive increased market share across our portfolio. We remain focused on delivering both top and bottom line growth and improving profitability while investing heavily in the next-generation controllers, increasing our engineering resources to support new products and markets and further positioning Silicon Motion for long-term market share expansion. We expect strong revenue growth to continue as we introduced compelling new PCIe client SSD controller, next-generation eMMC and UFS controllers that drive higher share, benefit from strong growth in our automotive business and as our MonTitan enterprise business begins to scale. I'm excited about the foundation for growth that we are building across each of our major markets and believe we are well positioned to see sustained revenue and profitability growth in both the near and long term. Let me start by discussion and broader market environment and then each of our major business in greater detail. AI remains a significant growth vector across memory and storage industry, driving strong demand for NAND and other technology, including DRAM and HDD. The growing AI demand has, for the first time, greater supply shortages in HDD, NAND and DRAM, leading to price increases for the past 3 quarters, a trend we expect will continue at least through 2026. In the early stage of AI development, AI training drove strong demand for high-performance memory and storage using DRAM, HBM and NAND for lower capacity TLC-based compute SSD. As AI evolves, the focus is changing to inference, which relies more on high-performance, high-capacity storage rather than raw computing power. The increasing demand from inference is putting a large strength in HDD supply chain that traditionally serve this market, and is expected to continue well into next year as HDD makers struggle to quickly meet the growing demand. Inference is also increasing NAND demand for high-capacity, high-performance QLC-based SSD and creating a significant trend for the NAND market supply and availability. As AI is still in its infancy, we expect that these demand drivers will continue to impact supply availability across all memory technologies for quite some time as CapEx spend increases to catch up with market demand over the next few years. Growing AI demand is also forcing a more disciplined CapEx spending approach and is driving difficult resource allocation decisions by the memory and storage makers to prioritize engineering resources across multiple technologies, products and markets. Increasingly, we are seeing a greater willingness by the NAND flash makers to rely on Silicon Motion to complete their product portfolio as they shift their internal resources to focus on DRAM, HBM and future customized memory technology for high-performance AI [ in promise ]. We are in active discussion with all NAND makers about expanding our partnership and taking on broader range of project long term to offset growing internal resource shortages. Looking ahead, we see continued NAND flash price increases and shortages given the impact of AI on overall demand, which has been amplified by reduced new capacity investment at the flash maker over the past years. Despite the challenges inherent with the NAND price increases, we believe our business will remain robust. Our module maker customers have been building NAND inventory ahead of anticipated price increases and are well positioned for next year to meet expected market demand. Our direct business with NAND makers continue to be strong, accounting for more than 50% of our revenue, and we expect to gain significant share over the next few years. Additionally, more than 70% of our business with NAND flash maker and module maker customers goes directly to PC, smartphones, servers and other device OEMs that are not significantly impacted by high NAND markets. We are a robust design pipeline in eMMC and UFS, client SSD and enterprise SSD controllers and our Ferri product line should benefit from the increased NAND price trend. Additionally, given increased NAND prices, we expect OEMs to more rapidly adopt QLC technology where we have a significant advantage over our competition. And finally, we are starting to scale our new enterprise products, including, MonTitan, which are less price sensitive than the consumer markets. We expect AI demand to continue to put greater demand on inference than it has. A more large learning model reach maturity, putting more focus on the high-performance, high-capacity storage capability that QLC-based SSD are ideally suited to address. I will now discuss each of our business units in greater detail, starting with eMMC and UFS. We experienced another exceptional quarter of growth in our eMMC/UFS business with strength across the board in smartphone, automotive, industrial and IoT. eMMC and UFS revenue was up over 20% sequentially as we continue to increase our market share and capitalize on new product introduction. Module makers are benefiting as NAND makers have walked away from eMMC and UFS 2 due to lower ASP margin, which have helped module makers gain market share rapidly using our eMMC and UFS controllers. Overall, end market demand in the third quarter was higher than expected and helped us deliver strong sequential growth with our NAND flash partner as well. Smartphone OEM continued to shift to our new UFS controller in mainstream and now value line devices, driving better ASP and margin for our business. Additionally, we continue to have success with our direct OEM engagement with QLC controller. Our first customer is introducing a second smartphone with our chip in the current quarter. We plan to introduce additional model next year. Given the current NAND environment, we expect that other smartphone manufacturers will increasingly look to QLC to deliver high-capacity storage at lower cost, which could lead to further customer engagement. UFS will continue to grow rapidly in the smartphone market as low-end smartphone continue migrating from eMMC to UFS to deliver better performance cost effectively. While smartphones are rapidly shifting away from eMMC to UFS, eMMC remains an important revenue driver for Silicon Motion. As we mentioned, the market for eMMC extended well beyond mobile phones and account for more than 900 million units annually. The market for eMMC include automotive, commercial, industrial, IoT, smart devices, set-top box and streaming devices, robotics and many more, including the rapid growing market for smart glasses championed by Meta, Apple, Google, Amazon, Xiaomi and others. These solutions will likely continue to use eMMC, providing a strong foundation for market growth for years to come. As the NAND flash maker increasingly concentrate on the enterprise market, the opportunity for Silicon Motion eMMC UFS continue to grow. We expect to see further market share expansion as the flash maker outsource more and believe that our share gain in eMMC UFS will remain strong, a strong contributor for our future growth, leading to expanding market opportunity and end market growth. I will now discuss our client SSD business. Our client SSD revenue was up more than 20% sequentially in the September quarter after a slower start in the first half of the year. We are beginning to see greater PC demand driven by sunsetting of Windows 10 this month and the adoption of AI at the edge in commercial and consumer PC, which require higher performance SSD solutions. We are also benefiting from the positive impact of our 8-channel PCIe 5 controller that launched at the end of last year, which with revenue growing 45% sequentially in the third quarter and which now represents more than 15% of our client SSD revenue. This new controller has significantly higher ASP than our PCIe 4 offering and will help drive revenue growth as they scale. As we have discussed, we have 4 of the 6 NAND flash makers and nearly all the module makers using this performance leading controller for their high-end offerings. And we expect to capture significant market share in the top tier for the PC market first time, which represent approximately 10% to 15% of the overall market. We have win with all the top PC OEMs in many of their upcoming high-end models that are expected to ship later this year and scale throughout next year. We are introducing our second 6-nanometer PCIe 5 controller even with 4-channel version by targeting the mass PC market and that we will begin initial shipments this quarter. We have already secured design wins with also 4 NAND flash makers and nearly all the module makers for this controller as well. This new controller targets the largest segment of PC and retail SSD market, and we expect that it will help drive our client SSD market share from approximately 30% today to 40% over the next few years. We expect the, PCIe 5 will become the dominant technology in consumer application over the next few years, and we are in the best position to benefit given our strong customer partnership with both NAND flash makers and module makers. I will now provide an update of our automotive business. We continue to experience significant design win activity in our automotive segment across each of our product units, including eMMC, UFS, PCIe and our Ferri embedded solutions. While the overall market has experienced challenges in 2025, given the broader geopolitical and tariff issues, we continue to grow our product portfolio and market share. We are also benefiting from the super trend of increased vehicle complexity, which is driving the need for additional high-speed, high-performance storage. We recently won significant design wins with a Tier 1 Japanese auto manufacturer in their global model that could contribute to top line growth moving forward. As I mentioned during our last call, we also recently won with a large South Korea customer that has started to sample our eMMC controller-based solution to multiple automotive OEMs, which we expect to drive further growth in our automotive business in 2026 and beyond. We are also on track to extend our lead in ASPICE certification, which we achieved this year with the Level 3 certification for our PCIe 4 controller with plan to take out our next-generation automotive PCIe 5 controller next year. Increased demand for advanced storage solutions in automotive is being driven by AI multiple screen integration, ADAS sensors, cameras, navigation and other applications. We are shipping to many of the leading automotive manufacturers in the world, including Tesla, BYD, Xiaomi, Mercedes, Toyota, Honda and many others. Entering the second half 2025, we experienced greater-than-expected demand from our partner in China as our strong design pipeline has led to market share gains with Beijing car makers like BYD and Geely. Chinese automotive brands are rapidly taking market share worldwide given their leadership in electric low-cost vehicles. As we continue to introduce compelling new automotive controllers and as we expand our customer relationships, we remain confident that automotive will represent at least 10% of our revenue by 2026 and 2027. Finally, I will now provide an update to our enterprise business. The requirement of AI computation, training and inference are rapidly evolving and driving new requirements from storage and memory solutions that deliver performance, capacity, power and affordability. These growing opportunity are expanding the prospect, the prospect for Silicon Motion MonTitan family of enterprise-grade controllers. The need for increased speed and lower latency is driving greater adoption of [indiscernible] in the data center and the industry is increasingly looking to adopt NAND solution in 1 storage, 2 storage and eventually near DPU storage as well. Our MonTitan solution ideally suited to address the increasing requirements of AI workload for both compute SSD using TLC and high-capacity warm storage SSD using QLC. The opportunity for compute SSD represent most of the enterprise SSD market today, while high-capacity SSD are just beginning to ramp, but are expected to be much larger market opportunity [indiscernible] Interest in MonTitan for compute storage TLC SSD application is increasing. This quarter, our customers are beginning qualification with end customer TLC, enterprise and data center with TLC-based high-performance USB using our MonTitan controller, targeting the high-performance requirements of AI in the data center. We expect this qualification to progress into first half of next year and begin to ramp commercially in the second half of next year. For high-performance, high-capacity QLC SSD, our MonTitan-based solution helped deliver significant advantage over HDD for the AI inference for CSP, hyperscaler and enterprise by elevating the speed and power bottleneck inherent in HDD technology for warm storage. The switch to NAND technology for warm storage is being accelerated by the current supply shortage in the major HD manufacturers, making HDD more expensive and high-capacity QLC SSD is cost effective, better performance option. Longer term, warm storage requirement offer a much bigger market opportunity when compared to the opportunity for compute SSD, and we see increasing interest in our industry-leading MonTitan QLC solution. We are on track to begin end customer qualification for QLC-based high-capacity SSD late this year or early next year. We are increasingly confident in MonTitan, a significant new growth opportunity given our successes and win to date in both the compute and high-capacity warm storage market. We remain confident that MonTitan will deliver 5% to 10% of revenue by the late 2026 or '27 time frame as this new opportunity and customer scale in the near and the midterm. And finally, we continue to collaborate with customers to deliver [ compounding ] enterprise boot drive solution that can work across multiple platforms, engaging directly with the world's leading AI GPU makers as well as hyperscaler and CSP. We began volume shipments of the boot drive to the leading AI GPU makers this quarter for their current DPU product and starting qualification of their next-generation DPU for follow-on products. Working on expanding our relationship with the customer, we are also in the qualification process of our Boot Drive Solutions for a variety of switch products also as well, including [indiscernible] based design as well as Ethernet switch design, both of which are expected to ramp later next year. We expect the Boot Drive Solutions will add an additional long-term sustainable growth driver for Silicon Motion as we expand our storage technology and business partnership with this leading GPU-DPU maker. In conclusion, the third quarter of 2025 delivered significant growth of our business as we execute on our diversification strategy with new products and into new markets. We continue to see the reward of investments that we have made over the past few years. These investments include our market-leading 6-nanometer product, our new UFS and PCIe 5 controller, our new MonTitan and Boot Storage Enterprise cloud solution, our growing automotive portfolio and our new microSD product for multiple locations, including Nintendo Switch 2. We have never been in a better position to expand our market share given our leading product portfolio and the growing need for flash makers to shift their focus from consumer to enterprise applications. Given the growing demand in our legacy business and our new automotive and enterprise products, I'm increasingly confident that we will deliver strong, sustainable top and bottom line growth. And given our current backlog, I'm very confident in our ability to exceed our target annual revenue run rate of more than $1 billion this quarter. Now let me turn the call to Jason to go over our financial performance and outlook. Jason Tsai: Thank you, Wallace, and good morning to everyone joining us today. I will discuss additional details of our third quarter results and then provide our outlook. Please note and my comments today will focus primarily on our non-GAAP results, unless otherwise specifically noted. A reconciliation of our GAAP to non-GAAP data is included in the earnings release issued today. The September quarter sales increased 22% to $242 million, coming in well above the high end of our guided ranges. We experienced a strong rebound to mobile demand, strong growth in our PCIe 5 climate. Gross margins was at the higher end of our guidance range and increased again in the quarter to 48.7% as we continue to capitalize on new product introductions and improving mix. Operating expenses increased sequentially to $79.5 million as we continue to invest in new projects and expand our customer engagements to further grow and support our significant pipeline of new opportunities. Operating margin increased sequentially to 15.8%, well above our guided range, resulting from improved gross margins and higher-than-expected revenues during the quarter. Our earnings per ADS was $1. Total stock compensation, which we exclude from non-GAAP results, was $5.5 million in the third quarter, and we had $272.4 million cash, cash equivalents and restricted cash at the end of the third quarter compared to $282.3 million at the end of the second quarter 2025. Cash declined in the third quarter primarily from a combination of dividend payment of $16.7 million and an increase in inventory to support our expected strong business ramp. Our team executed well, and our operational discipline delivered significant outperformance despite continuing investments in new advanced geometry products and our emerging MonTitan platform for their enterprise and AI market. Now I'll discuss our fourth quarter outlook. Revenue is expected to increase 5% to 10% to $254 million to $266 million, above our initial target of $250 million we had set at the start of this year. We expect fourth quarter strength to be driven primarily from our client SSD controllers and SSD solutions. Gross margins are expected to be in the range of 48.5% to 49.5%, and operating margin is expected to be in the range of 15% -- excuse me, 19% to 20%, approaching our historical operating profitability levels as we plan to benefit from higher revenue, higher gross margins and lower operating expenses sequentially. Our effective tax rate is expected to be approximately 18%. Stock-based compensation and dispute-related expenses is expected to be in the range of $18.1 million to $19.1 million. Despite the uncertainty this year given rapid geopolitical changes and tariff impacts, our team has remained focused on execution and building an incredibly strong pipeline for long-term growth. We have successfully scaled new products, engaged with new customers and expanded into new markets that will lead to higher market share and greenfield growth opportunities in enterprise storage, and we're just getting started. We expect to continue to invest to further expand our position as the leading merchant controller maker in the world for eMMC and UFS, client SSDs, automotive applications, high-performance and high-capacity enterprise and data storage -- data center storage. As we look ahead, our pipeline for growth in 2026 and beyond has never been stronger, and we look forward to discussing it in greater detail when we report again in 3 months. This concludes our prepared comments. I'd like to open up for questions now. Operator? Operator: [Operator Instructions] We will take our first question from the line of Neil Young from Needham & Company. Neil Young: Could you dive a little deeper in your comment in the press release about white box AI server makers continuing to leverage mainstream hardware components. I believe your SSD controller sales are typically a PC/other consumer applications. So can you just give us a sense of how much of the SSD controller revenue in this quarter came from the white box AI server makers you referenced? And where you expect that to trend going forward? And then I have a follow-up. Chia-Chang Kou: The mention with the white box is an AI all-in-one server and primarily that come from China and Taiwan from the DeepSeek Volume-1 surveyor [ flybox ] and some in others, bundled with other training model. I think there are 2508 8-channel PCIe 5 controller is well positioned in the market. We cannot comment. We don't know exactly the volume, but there is a growing momentum for all the AI all-in-one server. it is similar like NVIDIA announced MGX, DGX GPU for this kind of a market. Neil Young: Okay. And then looking at the gross margin guide, midpoint coming in at 49%. I was wondering if you could maybe walk through the moving pieces of the gross margin in 4Q. And then if possible, could you share sort of where you expect gross margin to trend next year? If not, at least what the main drivers of the gross margin improvement should be in 2026? Jason Tsai: So certainly, as we continue into the fourth quarter, scaling new products like PCIe 5 new generation products tend to have better gross margins that offset the declining gross margins of older products. We do expect to see, as MonTitan continues to scale to have some incremental benefits, but certainly, that remains a relatively small portion of our business today. We're not guiding for 2026 at this point. We'll talk more about that in 3 months' time. So stay tuned for that. But certainly, we are excited that we're back to kind of the normalized range that we historically have been, historical range has been 48% to 50%, and we're guiding smack in the middle of that. So we're pretty happy that we've been able to recover off of obviously some tough times a couple of years ago, but we're back to where we historically have been. Operator: We will now take the next question from the line of Craig Ellis from B. Riley Securities. Craig Ellis: Team, congratulations on real good execution. I wanted to start with a question that takes off from Jason's comments that the company is just getting started in enterprise storage and ask a question that's fairly broad and has a couple of parts to it. So if we look at what our ambition is over the next year plus with MonTitan and enterprise storage classically defined and think about what's going on currently with boot drive controllers and full solutions already starting to ship and picking up and maybe diversifying our customer base next year. And then -- and this part would be for you, Wallace. As we think about some of the news that's coming out of Korea and other countries about the development of high-bandwidth flash. And while some could be skeptical that, that may just be like storage class memory, which went nowhere for 15 years, but with some leading OEMs behind it, it very likely could. How do we think about the arc of those drivers as we go from '25 to '26 and '27? And what can enterprise broadly defined be for the company longer term? Operator: Thank you for your question. Please remain on the line. Your conference will resume shortly. Thank you. Presenters, you may continue your conference. Craig, you may want to repeat your question? Craig Ellis: Yes. The question is this, if we look at enterprise storage broadly, including MonTitan's traditional enterprise storage but also include the boot drive business with one customer shipping now, but maybe diversifying and think longer term about what's possible from high bandwidth flash, if that were to be an opportunity because certainly that's going to be QLC where you're particularly strong. Can you talk about... Operator: Just a moment, sir. The conference will resume shortly. Just a moment. Ladies and gentlemen, please remain on the line your conference will resume shortly. [Technical Difficulty] We have the speakers back. Thomas Andrew Sepenzis: Hi, there. Sorry about that. We're back. Craig Ellis: Should I give the question a third shot. Thomas Andrew Sepenzis: Yes, one more time Craig. Sorry about that. Craig Ellis: So looking at enterprise storage broadly from MonTitan classic enterprise storage that's starting to ramp with qualifications and then shipments next year, but boot drive controllers and storage getting going now and with the potential for high bandwidth flash to come in as a much-needed AI-based solution a few years down the road, how do we think about the longer-term market storage as we just get started with boot drives this year, pick up MonTitan and then ramp those over the ensuing years. And what could high-bandwidth flash do to the business as a third driver longer term? Chia-Chang Kou: So first of all, I want to clarify the 5% to 10% of total revenue, '26 to '27 does not include our Blue Drive for the current DPU design and also for the additional switch Blue Drive solution. But we do see -- moving to 2026 is the best and challenging year for storage industry. There's so many new opportunity coming, not the conventional compute storage, but also one storage, the high-capacity QLC SSD. And then moving forward, it will be near GPU storage. So there's so many new opportunities for MonTitan controller to fit in. And we're also preparing to work on growing market. We just need more R&D resources to meet the demand. And in parallel, I think this is a great opportunity. We see MonTitan to scale up. our Blue Drive solution also could scale up quickly in 2026 and moving to some CSV design too. Craig Ellis: And Wallace, what's your view on the potential for high bandwidth flash to be a third driver of enterprise broadly defined longer term? Chia-Chang Kou: So high HBF, I think this is a very interesting product. And this is -- as you know, this is all designed for AI inference near GPU. We see there's 3D SoC technology moving to meet certain new GPU leaders requirement. But HBS also very interesting in packing technology is the conventional standard 3D NAND. But this require new controller and packing technology. We will monitor it carefully because we believe initially this belong to all the NAND makers development, and we are also invited to join the business. But I think we are out of a resource. We want to monitor when the market become more mature, more stable and where we'll participate. Craig Ellis: And then the second question is a question regarding the comments from you and Jason around NAND sufficiency and the implications for shipments next year. So you have an advantage, you're levered with all NAND suppliers. What messaging are they giving you with regard to how they're going to prioritize their output and capacity allocations across enterprise versus PC versus smartphone and then consumer applications? And what does that mean for the various growth drivers of the business in 2026? Chia-Chang Kou: I think you asked a very good question. We are facing a never happened before the HDD, DRAM, HBM, NAND, all in severe shortage in 2026. Most of our capacity are sold out. And I think I did talk to many of the major makers but I really cannot comment what kind of allocation policy is going to do. However the leading maker, they will keep a discipline and then we can see the balancing for the industry. They are not just favoring AI and server of AI data center. They will consider certain percent for smart phone, certain percentage for PC and certain percent for automotive, of course, the majority would go to the AI and the AI server. So but balancing is very important so we can keep the whole industry moving forward. Operator: We will now take our next question from the line of Suji Desilva from ROTH Capital. Sujeeva De Silva: Wallace, Jason, congratulations on the progress here. For MonTitan, I know you're going to talk about 2 lead customers initially, now more. I know one of them was an OEM who was, I think, in turn, trying to themselves secure hyperscaler customers. Has that happened with that lead customer? And if so, what's the start of ramp timing for that customer? Chia-Chang Kou: I cannot comment their ramping. I think they're very close to the -- as you know, Tier 1 customers, some will develop their firmware themselves, some with joint development with us together. We cannot comment their ramping but getting very close. But because MonTitan getting tremendous demand from multiple customers from Tier 2, so we are busy to provide solutions for both TLC and QLC. Hopefully, we can start a small ramp in the Q4, and we see the more meaningful ramp in 2026. Sujeeva De Silva: Okay. Well, it's very helpful. And my other question is on the arbitration. I'm wondering if there's any update there. Jason Tsai: Yes. Thanks, Suji. Yes, the arbitration, we had -- the arbitration has begun. The hearing was held as scheduled earlier this month. The tribunal scheduled oral closing arguments to be in March of 2026 and is expected that a decision by the tribunal will be available sometime after that. Operator: We will now take our next question from the line of Tiffany Ye from Morgan Stanley. Hsin Yeh: Congrats on the great results and guidance. So my first question is that it seems your inventory value rose around 62% in the third quarter. May we know the reason behind? Is it due to the inventory preparation for the BT substrate shortage? And I have a follow-up. Jason Tsai: Yes. So inventory did come up. Inventory increase is to support the growing backlog and new business and orders that we have already received. And that's expected to ship over the next few quarters. And the increase in inventories across really all of our product categories, including some low-cost NAND that we have procured earlier as well as controllers for SSD as well as eMMC and UFS. So it's a pretty broad-based demand that we're seeing, and we're preparing ahead of that. Hsin Yeh: Okay. Got it. So it seems that the BT substrate shortage has kept some of our fabless peers upside in first half next year. So do we see any impact from that? Or because as what you just indicated, we're fully loaded now. So not worry about that impact. Chia-Chang Kou: I think the substrate PCB shortage or long lead time in non-power business, we have prepared in advance. But we do need to prepare the production ramp for more controller as well as the Ferri product line. That's why we increased our inventory right now. Hsin Yeh: Got it. Got it. I have one more question. So as we head into 2026, we see both our foundry partner and OSAT partners all initiating price hike to reflect the elevated material costs. So how should we think about the impact to our profitability? And do you think we can further pass through all these elevated costs to our customers? That's all. Chia-Chang Kou: I think what I can say that TSMC will increase the wafer price from 5, 4, 3, 2-nanometer, start from 2025. Our PCIe Gen6 TSMC 4-nanometer won't be production until late '27 or '28. So there's no cost impact, foundry wafer impact for our cost in our controller in the next 2 to 3 years. Jason Tsai: And Tiffany, most of our products are on more trailing edge process geometry. So availability is -- and pricing is certainly better at those trailing edges. The more advanced ones we have today is 6 nano, but a lot of our other products are at 12 and 20 or even higher process geometries. Hsin Yeh: So maybe the impact from foundry is quite nearly limited in 2026, but how about OSATs? Chia-Chang Kou: OSAT, I think because we have a preliminary agreement, so the OSAT cost impact will be very limited to us almost irrelevant. Operator: Next question comes from Gokul Hariharan from JPMorgan. Gokul Hariharan: My first question, given this very rapid increase in NAND flash pricing, and it seems like you're going to be in a reasonably short supply situation all through 2026. What are the business dynamics that you're seeing from your customers? Historically, Silicon Motion used to be a little bit more affected when NAND flash is very tight, given OEMs try to allocate to certain customers. At the same time, QLC NAND is clearly rising. Could you talk a little bit about anything more that you see in terms of either engagement, any reason why you're not kind of getting more bullish about your 5% to 10% kind of enterprise SSD exposure given a lot of the activities happening in QLC NAND right now? Chia-Chang Kou: I think, first of all, more than 50% of our business we engage with the NAND OEM business. So we are really well protected in the NAND maker. Second is most of our module maker, they have prepared the potential NAND price increase and shortage in advance. So they all have at least 8 to 12 months inventory. And I think they also -- although they do have a certain contract with the NAND supplier, but definitely, there will be some impact. But I think most of our customers, when we discussed in the last couple of weeks, they all have confidence they should walk through in 2026. So we do not see impact of our business as the coming quarter or even the first half of 2026. We feel very strong for our backlog and we see we will benefit from the NAND supply shortage and become a stronger player in the industry. Gokul Hariharan: Understood. Any updates on the QLC NAND pipeline -- design pipeline and revenue pipeline, I was thinking maybe you would be sounding a little bit more bullish about enterprise SSD given a lot of the activity on QLD NANDs recently. Chia-Chang Kou: That's exactly true. We are very excited about the high demand for QLC, high-capacity enterprise SSD. We just need to deliver the result. I think the -- as you can see, even it's not just the AI inferences, really require high-capacity enterprise SSD because HDD shortage also trigger higher demand or an urgent demand for the high-capacity SSD. That's why we are very busy. I cannot comment about the potential outcome, but we have to deliver results ASAP. Jason Tsai: Gokul, we're not changing our expectations at this point in spite of the strong demand. We're still targeting 5% to 10% of our revenue in that '26, '27 time frame. Gokul Hariharan: Okay. Are your existing customers because new designs will obviously take time to kind of cascade in. But are your existing customers upsizing meaningfully compared to what you thought maybe 6 months back? Jason Tsai: I mean I think across the board, we're certainly doing better, right? We're coming in ahead of where we were anticipating exiting the year at. So we're going to be above the $1 billion run rate. We are seeing strength in eMMC, UFS as we gain share there. We're seeing strength with our PCIe 5 as we gain share there. So across the board, we are. And so our business today is certainly stronger than what we had anticipated at the start of the year. Gokul Hariharan: Yes, I think this is more to do with enterprise rather than -- I mean consumer is very clear, I think, but this is more to do with enterprise. Jason Tsai: Yes. I mean, look, our target still remains at 5% to 10% in '26, '27. Obviously, if we can get -- do that faster, we certainly will, but we are resource constrained. We are working as fast as we can. Our products are beginning to sample with end customers. So as they get ready to ramp up, we're going to be ready to support them. So there are a number of processes in place that right now, we're working through it. Gokul Hariharan: Got it. Just back to client SSDs. How are you thinking about the next couple of quarters? I think we have probably seen a lot of the benefits of the Windows 10 sunsetting and the demand pull in for PC as a result of that. As we kind of start to lap that in the next couple of quarters, how do you see this pan out? Do you see a little bit of moderation in growth there or the spec migration to PCIe 5 is enough to kind of offset any of that volume growth tail off? Chia-Chang Kou: I think you are correct. We benefit from PCIe 5 market share gain. As we said, our PCIe 5, 8 channel have a 4 NAND maker and nearly all the module maker design win. So when PC OEMs start to ramp late this quarter, I think we benefit from revenue growth as well as market share gain. Our 4-channel mainstream DRAM PCIe 5 also is near production. I think we will start to see initial production by late this quarter and start to ramping up by middle of next year through another combination 4 NAND maker as well as the module maker. So when PCIe 5 become mainstream in the PC market, Silicon Motion will benefit from the market trend because we will move towards 40% global market share. Jason Tsai: And we -- as I said in the comments that we do anticipate our SSD controller business to grow again sequentially in the fourth quarter. Gokul Hariharan: Okay. So just a clarification. So for PCIe Gen5, let's say, for next year, what percentage of the PC OEM market do you expect it to be? Is it like 15%, 20%? Or once you have your 4-channel controller also ready? Or is it even higher than that? Chia-Chang Kou: We cannot comment for PC OEM what they plan to ramp. We just know when they ramp more model, we benefit from market share gain. Operator: [Operator Instructions] our next question comes from Matt Bryson from Wedbush. All right. We are not getting a response from Matt. So I'm not showing any further questions. I'll now turn the conference back to Mr. Wallace Kou for closing comments. Chia-Chang Kou: Thank you, everyone, for joining us today and for your continued interest in Silicon Motion. We will be attending several investor conferences over the next few months. The schedule of these events will be posted on the Investor Relationship section of our corporate website, and we look forward to speaking with you at these events. Thank you, everyone, for joining us today. Operator: Thank you for your participation in today's conference. This does conclude the program. You may now disconnect your lines.
Operator: Greetings, and welcome to the Q3 2025 Nine Energy Service Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded. It's now my pleasure to introduce Heather Schmidt, Senior Vice President of Strategic Development and Investor Relations. Please go ahead. Heather Schmidt: Thank you. Good morning, everyone, and welcome to the Nine Energy Service earnings conference call to discuss our results for the third quarter of 2025. With me today are Ann Fox, President and Chief Executive Officer; and Guy Sirkes, Chief Financial Officer. We appreciate your participation. Some of our comments today may include forward-looking statements reflecting Nine's views about future events. Forward-looking statements are subject to a number of risks and uncertainties, many of which are beyond our control. These risks and uncertainties can cause actual results to differ materially from our current expectations. We advise listeners to review our earnings release and the risk factors discussed in our filings with the SEC. We undertake no obligation to revise or update publicly any forward-looking statements for any reason. Our comments today also include non-GAAP financial measures. Additional details and a reconciliation to the most directly comparable GAAP financial measures are also included in our third quarter press release and can be found in the Investor Relations section of our website. I will now turn the call over to Ann. Ann Fox: Thank you, Heather. Good morning, everyone. Thank you for joining us today to discuss our third quarter results for 2025. Revenue for the quarter was $132 million, which was below the range of our original guidance of $135 million to $145 million. We generated adjusted EBITDA of $9.6 million. Q3 was a challenging quarter for the market following significant rig declines and subsequent pricing pressure beginning in Q2, in conjunction with the announcement of tariffs and a decline in oil prices. As a reminder, at the end of Q1, the U.S. rig count was 592 and by the end of Q3, had declined to 549 rigs, a decline of 43 rigs or approximately 7% over 2 quarters. With activity declines, we have also had significant pricing pressure, most evident in the Permian, where the average rig count has declined by approximately 15% from Q1 to Q3, and the competition is most saturated. Oilfield service providers are making unsolicited bids on work, and customers are also bidding out work outside of the typical bidding season to drive down price. This has led to Nine and other providers either losing market share to lower pricing, and/or lowering our current pricing to maintain work in conjunction with overall lower activity levels. Activity declines and pricing pressure negatively impacted revenue and earnings across all of our service lines this quarter and revenue was down sequentially across divisions. In addition to market impacts, our completion tool division had domestic market share losses during the quarter that negatively impacted revenue and earnings. These market share losses were due mostly to customer consolidation and a change in certain of our customers' completion designs specifically around casing sizes. Our R&D team is working real time in the design and testing of tools that will address these casing size changes. Our international tools business continues to perform well and remains an important part of our growth strategy. For the first 9 months of 2025 compared to the same period in 2024, we have grown international revenue by approximately 19%, driven mostly by increased sales in the UAE, Argentina and Australia. We still anticipate that our international revenue will increase this year versus last year despite a tough market backdrop. Natural gas prices remained mostly supportive during the quarter, averaging approximately $3.03 in Q3 versus $3.19 in Q2. While the natural gas outlook remains positive, we faced temporary headwinds in the Northeast starting in Q3 due to droughts in the area. A lack of water is causing completion delays and inefficiencies that are negatively impacting our wireline and completion tool operations in the Northeast region. Before handing it over to Guy, I want to highlight a significant technical and operational accomplishment in our cementing division. The team recently completed a landmark cementing job for a large operator in the Haynesville basin. This basin is characterized as an extremely challenging operating environment with bottom hole temperatures often exceeding 400 degrees Fahrenheit and bottom hole pressures requiring elevated fluid densities. These conditions necessitate stringent design requirements and precise execution methods. Our cementing team formulated a latex-based cement slurry that maintains stability while being placed in an extremely narrow annulus and mitigated friction pressure concerns due to its reduced viscosity. The end result was an exceptionally capable slurry pumped at increased rates and reduced pumping pressures, all while maintaining full fluid returns during the process. I am extremely proud of this team and how they continue to innovate on technology and execute at the well site. I would now like to turn the call over to Guy to walk through detailed financial information. Guy Sirkes: Thank you, Ann. As of September 30, 2025, Nine's cash and cash equivalents were $14.4 million, with $25.9 million of availability under the revolving credit facility, resulting in a total liquidity position of $40.3 million as of September 30, 2025. On September 30, 2025, the company had $63.3 million of borrowings under its revolving credit facility. At September 30, 2025, we had $14.4 million of cash and cash equivalents and $25.9 million of availability under the credit facility, which resulted in a total liquidity position of $40.3 million. As a result of the current commodity price environment and its impact on our inventories appraised value, we currently expect the borrowing base under the 2025 ABL credit facility will be reduced by approximately $2.2 million as of October 31, 2025, and will be further reduced by approximately $2.2 million on each of November 30, 2025, December 31, 2025, and January 31, 2026, which would reduce availability thereunder and our total liquidity position by such amounts. Future increases or decreases in our inventories appraised value would increase or decrease, respectively, our borrowing base. Our next inventory appraisal is currently expected to be conducted by mid-December 2025 and could increase or decrease our borrowing base as of December 31, 2025. During Q3, we did not sell any shares under the ATM program. As per the terms of the indenture governing Nine senior secured notes, the company is required to periodically offer to repurchase such notes with a portion of any excess cash flow. Nine did not generate any excess cash flow as defined in the indenture in the most recently ended 2 fiscal quarters. As a result, no excess cash flow offer will be made to noteholders this month. During the third quarter, revenue totaled $132 million with adjusted gross profit of $20.3 million. During the third quarter, we completed 1,015 cementing jobs, a decrease of approximately 4%. The average blended revenue per job decreased by approximately 1%. Cementing revenue for the quarter was $49.3 million, a decrease of approximately 6%. During the third quarter, we completed 8,267 wireline stages, a decrease of approximately 4%. The average blended revenue per stage was down by approximately 11%. Wireline revenue for the quarter was $28.2 million, a decrease of approximately 15%. For completion tools, we completed 22,067 stages, a decrease of approximately 27%. Completion tool revenue was $31.2 million, a decrease of approximately 16%. During the third quarter, our coiled tubing days were decreased by approximately 11% with the average blended day rate increasing by approximately 5%. Coiled tubing revenue was $23.4 million, a decrease of approximately 7%. During the third quarter, the company reported general and administrative expense of $12.8 million. Depreciation and amortization expense was $8.6 million. The company's tax benefit was approximately $0.3 million year-to-date. The benefit for 2025 is a result of a $0.5 million discrete tax benefit recorded during the second quarter of 2025, offset by tax positions in state and non-U.S. jurisdictions. For the third quarter, the company reported net cash used in operating activities of $9.9 million. The average DSO for Q3 was 56.8 days. CapEx spend during Q3 was $3.5 million and total CapEx through Q3 has totaled $13.9 million. Our full year CapEx budget remains unchanged at $15 million to $25 million but will likely come in at the lower end of the range. I will now turn it back to Ann. Ann Fox: Thank you, Guy. As I discussed, the market backdrop for the past few quarters has been challenging with both activity declines and pricing pressure. It is too early to provide any specifics on potential 2026 activity. Many operators have begun bidding out 2026 work but many are continuing to evaluate their 2026 CapEx plans, especially with the recent volatility in oil prices. Natural gas prices remain mostly supportive, helping to drive more efficient operations in the Northeast and Haynesville and building a more positive sentiment, which has and will continue to benefit our operations and earnings. For Q4, we do not expect any significant changes in activity but do anticipate typical seasonality related to weather, holidays and budget exhaustion as well as continued low pricing of services. The extent and magnitude of these slowdowns are still unknown, but will create more white space in the calendar. Because of this, we anticipate both revenue and adjusted EBITDA will be down compared to Q3 and project Q4 revenue between $122 million and $132 million. We will continue to navigate these challenging market dynamics, the team is extremely capable and resilient, and we will remain focused on growing market share, both domestically and internationally, while simultaneously lowering our costs without impeding the quality of service execution, safety and technology. We will now open up the call for Q&A. Operator: [Operator Instructions] And the first question comes from the line of John Daniel with Daniel Energy. John Daniel: So Ann, I'm going to ask probably one of the dumbest questions of your career. But when you think about like the pain that's happening right now in the service market, and I think most people would say that we're probably flattish next year, right, maybe down -- maybe down if oil prices drop. But I'm just curious, like, in this environment, at what point do customers recognize that relief is needed, where we got to -- you've been through plenty of cycles or at some point, you can go to your customers and say, "Hey, this ain't working anymore." When do we hit that point? And when will they listen? Ann Fox: Yes. I mean I think we are certainly flirting with that point now, John. We're at the point where we're starting to hear about frac availability problems in the Northeast right, because there's been such underinvestment, people are moving assets around. So that certainly starts to reach a point where operators are thinking. But I think the challenge is, as you mentioned, a lot of people are thinking flat CapEx next year. So our operators are becoming under pressure as well, their cost curve is moving up. They're moving into Tier 2 or lesser acreage. So I think commodity prices aren't supportive for them. So they're also under pressure. So finding relief is, I think, challenging for the service sector and becoming more challenging for the upstream sector. So it's conflating the situation, and I think it's a more complicated potential outcome. John Daniel: Okay. Fair enough. And then just one sort of a nerdy question on coiled tubing, but there's at least 1 person that's rolled out the 2 7/8 unit. I'm just curious, is there a chance that we could see a step change, if you will, in terms of what type of equipment will be needed for the coiled market? Or is that -- do you see that as sort of a unique opportunity, If you will? Ann Fox: Yes. I think the fact that these laterals are getting so long, it begs for a step change. But I think, again, to your earlier point, the service sector is under so much pressure that, that capital investment is more challenged. So yes, technically, the field needs it but is there the capital to support it. So I think that is a challenging situation, but we're not seeing operators slow down on the long laterals. Operator: Thank you. There are no further questions at this time. I'd like to hand the call back to Ann Fox for closing remarks. Ann Fox: Thank you for your participation in the call today. I want to thank our employees, our E&P partners and investors. Thank you. Operator: Thank you. This concludes today's conference. You may disconnect your lines at this time. We thank you for your participation.
Operator: Good morning. My name is Daniel, and I will be your conference facilitator today. Welcome to T. Rowe Price's Third Quarter 2025 Earnings Conference Call. [Operator Instructions] As a reminder, this call is being recorded and will be available for replay on T. Rowe Price's website shortly after the call concludes. I will now turn the call over to Linsley Carruth, T. Rowe Price's Director of Investor Relations. Linsley Carruth: Hello, and thank you for joining us today for our third quarter earnings call. The press release and the supplemental materials document can be found on our IR website at investors.troweprice.com. Today's call will last approximately 45 minutes. Our Chair, CEO and President, Rob Sharps; and CFO, Jen Dardis, will discuss the company's results for about 15 minutes. Then we'll open it up to your questions, at which time we'll be joined by Head of Global Investments, Eric Veiel. We ask that you limit it to one question per participant. I'd like to remind you that during the course of this call, we may make a number of forward-looking statements and reference certain non-GAAP financial measures. Please refer to the forward-looking statement language and the reconciliations to GAAP in the supplemental materials as well as in our press release and 10-Q. Discussions related to the funds is intended to demonstrate their contribution to the organization's results and are not recommendations. All investment performance references to peer groups on today's call are using Morningstar peer groups and for the quarter that ended September 30, 2025. I'll now turn it over to Rob. Robert Sharps: Thank you, Linsley, and thank you for joining today's call. Third quarter returns were strong across equity markets with concentration in mega cap growth sectors remaining near peak levels. We reached an end-of-period high of $1.77 trillion in assets under management as of September 30 and created an opportunity to bring innovative new solutions to market for our clients with our recently announced strategic collaboration with Goldman Sachs. I'll talk in more detail about this collaboration in a minute, but first I'll share an update on investment performance. Our long-term investment performance is solid with 50% or more of our funds beating their peer groups on the 3-, 5- and 10-year basis. On an asset-weighted basis, results were stronger with 64%, 57% and 78% of our fund assets beating their peer groups on the 3-, 5- and 10-year basis. While we have always believed that focusing on the long term is the right lens for investment performance, I want to call out improvement in our 1-year numbers with 53% of fund assets now beating their peer groups. We're encouraged by this improvement and the momentum we are building. I'd like to share a few other highlights. On an asset-weighted basis, over half of our equity fund assets beat their peer groups for the 1-, 3- and 5-year time periods and over 70% beat their peers over 10 years. Fixed income performance is even stronger with over 70% of fund assets beating their peer groups in all reported time periods. In our Target Date franchise, 81%, 71% and 98% of fund assets beat their peer groups on a 3-, 5- and 10-year basis. One-year results were weaker with 43% of Target Date fund assets beating their peers as underlying security selection in some of the equity building blocks impacted performance. Across alternatives, performance in senior direct lending strategies was strong and distressed mandates outperformed their targets. Liquid credit strategies generally performed in line with their benchmarks, while results in certain opportunistic funds were modestly below target. Importantly, individual credit selection continued to be strong, and portfolios did not have any exposure to the high-profile credit issues that have dominated headlines. While private credit deployment was roughly similar with the prior quarter, there was a noticeable acceleration in deal activity leading to a more robust pipeline of pending transactions. I'd like to spend a few minutes on our strategic collaboration with Goldman Sachs, a collaboration that aims to deliver a range of diversified public and private market solutions designed for the unique needs of retirement and wealth investors. Initially, we will focus on 4 areas: a co-branded sister series for the Target Date franchise, model portfolios, multi-asset offerings and personalized advice solutions and adviser managed accounts. Given that the sister series for the Target Date franchise and the retirement opportunity have been covered broadly since the announcement, I thought I would focus on the products we're designing for the wealth channel, starting with model portfolios. We are developing a co-branded series of asset allocation model portfolios with alternative investment allocations with plans underway to be on the first platform before year-end, followed by other platforms in 2026. Goldman Sachs will be the adviser, providing tactical and strategic allocation for the models and some of the underlying products. OHA will provide the private credit exposure and T. Rowe Price will provide the balance of the other underlying products. We are also working on multi-asset public private market solutions that will allow advisers to easily incorporate alternative investments into their clients' portfolios. The first 2 offerings, a public private equity strategy and a multi-alternative strategy are expected to launch by mid-2026. T. Rowe Price will be the adviser on these solutions, which will incorporate capabilities from T. Rowe Price, OHA and Goldman Sachs. Moving to our third focus area. We will offer a managed account platform for independent advisers so they can deliver participant advice in plans on T. Rowe Price's recordkeeping platform and for retirement savers out of plan in the latter half of 2026. These personalized accounts will combine T. Rowe Price's investment and advice capabilities and Goldman Sachs Asset Management's digital planning and personalized management account technology, enabling independent advisers to manage individual accounts at scale. These solutions will include allocations to both T. Rowe Price and Goldman Sachs products. Finally, and as I mentioned at the start, the co-branded sister series for the Target Date franchise, which will include allocations to T. Rowe Price public equities and fixed income, OHA private credit and other alternatives from Goldman Sachs has received significant attention. Work is ongoing and we expect to launch in mid-2026. We believe that exposure to high-quality alternatives at the right price in professionally managed retirement accounts can improve results for retirement savers by providing diversified sources of returns and we believe our co-branded Target Date series will be a highly competitive solution in the marketplace. Before I hand it to Jen, I want to share a few additional highlights from the quarter. We introduced 2 new retirement allocation funds with a strategic partner in Asia, marking the first time a U.S. asset manager is making retirement-focused products available to retail investors in Hong Kong and Singapore. We continue to grow our ETF business with $19 billion in AUM as of September 30, 12 of our ETFs surpassed $500 million with 5 reaching over $1 billion. Together with the International Finance Corporation, a member of the World Bank Group, we launched the Emerging Markets Blue Economy Bond strategy, aiming to address water challenges by investing in corporate blue bonds in emerging markets. With over $200 million in commitments from partners, the strategy supports projects such as clean water infrastructure. And we hosted our inaugural investor development program, a week-long investment training program for large strategic clients. Over the course of a week, we provided insight into our investment process and research platform while also gaining a better understanding of what matters to them as clients. We are focused on delivering excellent investment performance while partnering more closely with our clients in developing broader solutions that meet their financial objectives. At the same time, we are running our business efficiently and keeping pace with the change in our industry. I want to thank our dedicated and talented associates for their continued work on behalf of our clients. And with that, I will ask Jen to share an update on the third quarter financial results. Jen Dardis: Thanks, Rob, and hello, everyone. I'll review our third quarter results before opening the line for questions. Our adjusted diluted earnings per share of $2.81 for Q3 2025 is up over the prior quarter and Q3 2024 from higher revenue driven by higher average AUM. As previously reported, we had $7.9 billion of net outflows in Q3. Outflows in our retail and intermediary channels were partially offset by several large institutional wins. This quarter, we saw strong net inflows for our U.S. equity research strategy from multiple clients, including a large SMA model delivery win in July that we mentioned last quarter. However, U.S. equities overall continue to drive net outflows. Fixed income, multi-asset and alternatives had positive net flows this quarter and we also saw positive net flows from clients in EMEA and APAC. Fixed income included a large institutional win for our global multi-sector bond strategy. Our Target Date franchise had $2.6 billion of net inflows as our blend products continued to generate strong client demand. And within our growing ETF business, we saw nearly $2 billion of net inflows into our products. Investment advisory fees of $1.7 billion were up over 4% from Q3 2024 and over 8% from the prior quarter on higher average AUM. Adjusted deferred carried interest revenue of $56.2 million was up from the prior quarter, reflecting higher relative investment returns. In Q3, we began including SMA model delivery assets in our reported AUM. As a result, related revenue is now reported as investment advisory fees. This change was the primary driver behind the decline in administrative, distribution, service and other fees from prior quarters. Total adjusted revenues of $1.9 billion were up 6% over Q3 2024 and up almost 10% from the prior quarter. The Q3 effective fee rate, excluding performance-based fees of 39.1 basis points, was down from Q2 2025 due to the continued shift to lower-priced vehicles and strategies. This is driven primarily by ongoing outflows in U.S. equities and mutual funds, which have higher than average fees and the growth of our Target Date trust and the blend series. Turning to expenses. Q3 2025 adjusted operating expenses of $1.1 billion were up a little over 3% from Q3 2024, largely from higher technology and depreciation costs, but down 1.1% from the prior quarter on lower compensation and related costs and lower advertising and promotional expenses. We continue to expect 2025 adjusted operating expenses, excluding carried interest expense, to be up 2% to 4% over 2024's $4.46 billion. Similar to recent years, in Q4, we anticipate increases in our long-term incentive compensation expense, reflecting the timing of our annual grants in December and seasonally higher advertising and promotional and G&A expenses. These increases will not carry into the Q1 2026 run rate. As we discussed last quarter, we developed a broad and ongoing expense management program that will allow us to continue investing in our future, while keeping our controllable expense growth rate in the low single digits in 2026 and 2027. We have taken several steps to execute on this plan, including eliminating a number of roles across the firm in July and outsourcing and expanding some of our technology capabilities through trusted vendor partnerships. As a result, headcount as of September 30 is down 4% from December 31, 2024. In Q3, we incurred $28.5 million in nonrecurring costs, primarily severance and related compensation associated with these actions. These onetime costs were excluded from our adjusted operating expenses. The reduction in average headcount also contributed to a decline in compensation, benefits and related costs to $632.5 million in Q3 compared to prior quarters. We have also identified several opportunities to better manage our real estate portfolio, including transitioning over time from owning to leasing certain properties. In some smaller locations, we will also transition to serviced offices. As part of this effort, we've made the decision to exit 2 of the 6 buildings on our Owings Mills campus which are currently unoccupied. This will result in a nonrecurring charge of approximately $100 million in Q4, which will be excluded from our non-GAAP measures. Looking at capital management, our financial position remains strong with over $4.3 billion in cash and discretionary investments on our balance sheet. As a reminder, the third quarter is often a high watermark for cash prior to paying our variable compensation in December. We bought back $158 million worth of shares during the third quarter, bringing buybacks through September 30 to $484 million or 4.8 million shares. Notably, this figure is twice the number of shares repurchased in the full year 2023. We continue to buy back in October and have surpassed $525 million worth of shares year-to-date. We're pleased with the progress we have made to advance several initiatives in our ongoing expense management program, allowing us to better align our revenue and expense growth and preserve capacity to attract and retain talent, enhance our client experience and invest in strategic growth opportunities. And now I'll ask the operator to open the line for questions. Operator: [Operator Instructions] Our first question comes from Michael Cyprys with Morgan Stanley. Michael Cyprys: I wanted to ask about digital assets. I saw that you filed for a multi-token crypto ETF. So I was hoping you could talk about how you see crypto fitting into client portfolios, how you're seeing demand trends evolve? And if you could talk about your strategy, aspirations and the steps that you're taking in the digital asset space. Eric Veiel: Yes. Michael, this is Eric. I'll be happy to take that question. We started on the journey in digital assets back in 2022 working on our investment capabilities with the premise that the digital asset space will have both operational and investment alpha available there. And we've been focusing on building our expertise internally before launching a product, investing a small amount of our internal seed capital across multiple tokens and blockchains, really using our own fit-for-purpose digital asset platform. The ETF that we're going to launch technically in ETP, we're confident will be an important building block across different parts of the value chain for our clients. Ultimately, we're a solutions provider and we think that digital assets will be a growing part of what clients are interested in and will play a role in different portfolios. Our team, our multi-asset team, has studied momentum, volatility, tail risk characteristics of these assets, and we think it will be a part of these portfolios over time. In terms of demand, it's certainly growing. We see it when we talk to advisers and gatekeepers and so we're really happy to be a part of it and think that we've got something innovative here. Operator: Our next question comes from Ben Budish with Barclays. Benjamin Budish: Rob, you gave some helpful detail on the partnership with Goldman Sachs in your prepared remarks. So if you could unpack a little bit more, any details you could share on the economic arrangements, so T. Rowe will be acting as an adviser. There will be some OHA credit assets. I know it's probably still early, perhaps those discussions are still ongoing, and it will obviously be some time before these products launch. But anything you can share there in terms of how we should think about the ultimate economic impact given an assumed level of flows would be helpful. Robert Sharps: Sure. I'm not going to get into the specifics with regard to the economics for obvious reasons. I will say that the economics are balanced and equitable and appropriately incent both our team and Goldman to put resources behind the collaboration. I think the collaboration really will feature strong capabilities across a range of liquid public and private market alternative offerings including capabilities from OHA. OHA private credit is incorporated into the offerings across wealth and retirement. So kind of overall, I would characterize the economics as balanced. And look, I'm really enthusiastic about this opportunity. I think Goldman is going to be a great partner. They do bring strong capabilities and returns across a range of private market alternative offerings. They bring complementary distribution. They bring additional expertise around things like advice and technology. In terms of your question with regard to who will be the adviser. On the sister series, T. Rowe Price will be the adviser. On the multi-asset solutions, T. Rowe Price will be the adviser. On the model accounts, Goldman Sachs will be the adviser, and we'll work together on the advice offerings. Jen Dardis: I might just add from a timing perspective, we're moving at pace. A lot of the discussion -- we had a lot of the discussions ahead of time on product construction and how the fees might work. And so we're moving at pace to try to get some of the first offerings into market over the next 6 months. Obviously, those take time to scale, but we are moving at pace. Operator: Our next question comes from Dan Fannon with Jefferies. Daniel Fannon: Rob, I was hoping you could just talk a little bit more broadly about flows and kind of trends. We obviously have the seasonal impacts going into year-end and maybe how that might transpire in terms of the near-term momentum. But also then looking into next year, you've highlighted improving performance, I guess, areas where you think there could be emerging strength. And then obviously, the U.S. equity headwinds, do you see that persisting at a similar rate as you look ahead? Or is there some changes underneath that maybe are a little more encouraging? Robert Sharps: Yes, Dan, thanks for the question. A number of puts and takes. At this point, our outlook for Q4 flows is weaker at the margin. The month of October is looking more like August than July or September. And the weakness can largely be attributed to higher redemptions in equities. We're seeing rebalancing after strong equity market returns. I think given the concentration of returns and the benefit to the cap-weighted benchmarks, it's continued to drive passive share gains, and our institutional pipeline right now is softer than it's been when we've given updates in previous quarters. To your point about kind of some of the positives, I think there are a number of positives. From a gross sale perspective, our gross sales were up substantially in the quarter relative to Q3 '24 and were up in every channel. As Jen pointed out in her prepared remarks, we've had strong flows year-to-date in Retirement Date Fund, in global fixed income. I would say our suite of ETFs and SMA are also building momentum. In alternatives, OHA is having a record capital raising year with particular success in private credit. They have raised over $6 billion of gross capital commitments in the quarter on an unlevered basis. Ultimately, that will convert to flow and fee basis AUM as they selectively deploy it. So look, I think there are a number of positives. But I would say in the near to intermediate term, those need to continue to build and become a bigger portion of the book before we get to a point that growth in those areas will be significant enough to offset what we're seeing from an equity redemption perspective. Operator: Our next question comes from Craig Siegenthaler with Bank of America. Craig Siegenthaler: We have a follow-up on the potential migration of privates into 401(k)s and your newly formed partnership with Goldman. So I heard your commentary that a co-branded sister series will be launched very soon. But when will you start marketing these strategies to DC plan sponsors both via your DCIO relationships and also with plans where T. Rowe Price is the record keeper. And from your recent conversations with clients, do you have an idea of the level of substituting that you expect with the new strategy from your legacy Target Date strategies? Robert Sharps: So in terms of timing, the sister series will be launched in collective trust. And ultimately, the launch will coincide with the initial client. Look, in terms of interest, our engagement with clients suggests that they understand and embrace the investment case, but fees and fiduciary risk remain a very meaningful concern. So I would say, particularly among large plan sponsors where ERISA is a meaningful consideration, this is going to develop slowly, and a lot will depend on what we hear in response to the executive order from the DOL and the SEC coming at some point after the first of the year. I think to the extent that you get clarity from a safe harbor perspective, interest will build in time. But my sense is that, that uptake will be relatively slow at the outset. Our objective with the sister series is to be in market with a best-in-class product, building and demonstrating track records. So ultimately, as enthusiasm for these builds, we have something that can be a leader in the market. Operator: Our next question comes from Ken Worthington with JPMorgan. Kenneth Worthington: Can you help us better gauge the potential sales you could generate from the 3 strategies you highlighted this morning? I think it's the co-branded, the public, private and the managed account. I would think that the addressable market for these 3 are substantial. But if we look at a few years, what does success look like in terms of assets under management from these products? Are we talking success looking like a couple of billion? Could it be far greater than that if we look at a couple of years? Like help us sort of size what you're thinking with these 3, I don't know, comp strategies? Robert Sharps: Yes. Ken, as you point out, wealth and retirement are very large markets. We think these are well designed and compelling solutions. And in time, I would say our aspirations are meaningfully greater than a couple billion dollars. I would caution you that we'll be launching them with the first model product available in market late this year, but throughout the course of next year. And ultimately, we'll have to build track record, we'll have to build scale, we'll have to get placement on platforms, but I would be really disappointed if you used a 3-year time horizon, if we'd only raised in these strategies, a couple billion dollars. I think my ambitions would be significantly greater than that. Operator: Our next question comes from Bill Katz with TD Cowen. William Katz: Appreciate the commentary. Just coming back to expenses a little bit. Just sort of wondering, as we look into next year, obviously a really good belt tightening this quarter. Can you maybe frame out some of the savings you could see on the real estate side? Or maybe just if you want to frame it out relative to the 2% to 4% growth rate that you still anticipate for this year. Jen Dardis: Thanks for the question. I'll start in. So we did say as part of my prepared remarks that we are -- we have had this broad expense management program that we've been executing. We're a few months into it. Obviously, we've seen some good success already in terms of our ability to execute into the third quarter. We have set the plans in place such that we would be able to have our controllable expenses, which as a reminder make up about 2/3 of our expense base grow in the low single digits in 2026 and 2027. So there are a series of plans that we're continuing to execute. I'd highlight the ones that we've done thus far this year. Number one, we did the reduction in force in July. Number two, we've been refining our sourcing strategy, particularly in technology, and that's just executing in-house where we're differentiated and looking at using third parties where it makes sense to leverage scale and capabilities to better support our clients. And then third, as you mentioned, our real estate portfolio that will take some time to execute. The largest piece of which though is the Owings Mills campus change that I mentioned in my prepared remarks. Robert Sharps: Yes. On expenses, I think it's important to understand that this is purposeful and the objective here is to allow us to invest behind our strategic priorities. So the savings that were generated are going to be reinvested in extending our leadership in retirement with a focus on solutions and advice, broadening our investment capabilities, whether you look at it from a vehicle lens with ETF and SMA, when you look at our product road map, we continue to broaden our ETF offering and are confident that by the end of '26 we'll have ETFs in market that cover over 3/4 of the Morningstar AUM universe, broadening our capabilities in alternatives, in digital and combining those capabilities to deliver solutions. I also would say that we are freeing up resources to invest in our AI capabilities enterprise-wide, which I think, to some extent, can give us payback from a productivity perspective. But I think also can help us execute and deliver better on behalf of our clients over time. So what you characterize as belt tightening, I would say, is kind of very purposeful focus on driving productivity and efficiency in order to have the resources to invest in our strategic priorities. Operator: Our next question comes from Alex Bond with KBW. Alexander Bond: Hoping to drill down a bit on the ETF offerings. Wondering how traction has been here more recently and where you're seeing relative strength. And then also curious just to get your take on how big of an opportunity you think this could be -- the active ETF space could be for both T. Rowe and the broader industry. Eric Veiel: Yes. Thanks, Alex. This is Eric. As we talked about, we've filed for 8 new ETFs, active ETFs, 4 on the equity side and 4 on the fixed income side. Two of those on the equity side open up a new market for us in the active core, the lower fee, lower tracking error piece of the market where we have not had an offering and it's a very large and growing part of the market, and we feel like we have a right to win in that space. So we're moving into it with those 2 specific ETFs. In terms of our existing growth in the ETF arena, we're seeing it across both individual investors and RIAs and advisers increasingly as we build track record and we build time and market, we're being added to platforms across a host of different strategies that we've launched. And as we look into 2026, we have over a dozen ETFs in plan that we have not filed yet, but that we are working towards filing. So we have a lot more to go. In terms of the overall size, I mean this can and should be a very big business for us through time. We're very much happy with the wrapper. We've learned how to use it well from an active management perspective, and so we think we have a right to win here, and we should see growth continue. Robert Sharps: Yes. I would add a handful of things. One, it's a growing market and we've doubled our market share in each of the 2 previous years. We think we have about 1.5% share of the active ETF market in the U.S. I think in order to continue growing market share, we are going to need to have success with our third-party asset allocation models, incorporating our range of ETFs. We're going to need to continue to scale them and get placement across the wealth platforms and our wealth partners. We also see an opportunity in ETFs outside of the U.S. in time. I don't expect that, that will be a meaningful driver of flow for us in the near term, but there's potential kind of certainly in Europe and potentially also in Australia to offer ETF product in time. The appetite and demand for ETFs in those geographies also continues to grow. I would also say that I think in order to accelerate our growth, we're going to need to have some success with some innovative and differentiated solutions. We talked earlier about the multi-token ETP. So digital could be an area that could be additive for us over time. We launched earlier this year, TCAL, which I think is an innovative solution. So look, I think, as Eric said, there is a very big opportunity here, and this should be a much bigger business for us in time across equity, fixed income, models and innovative solutions. Jen Dardis: I might only add, as Rob talked about, investing in capabilities, we talked a lot about product and the wrapper itself. But we've also been investing in the distribution and marketing behind ETFs. It's a different ecosystem, and that's been part of our overall plan. We're seeing some uplift from those efforts. Robert Sharps: So to support our regional investment consultants, we've got ETF specialists that ultimately can help them engage with advisers but also can focus on RIAs and power users of ETFs. So it's a very good point Jen makes that we're also making an investment not just behind the investment capability, but our go-to-market approach in these areas that are more specialized. Operator: Our next question comes from Brennan Hawken with BMO. Brennan Hawken: I totally appreciate that performance is a little hard to speak to. I know Rob, you spoke to the improvement versus last quarter, but it's still down pretty substantially versus even just 6 months ago, the performance versus the benchmarks and the passive is also still rather weak and actually deteriorated. So is it possible to give some color around the sources and attribution around some of that weakness and possible -- I know it's challenging to take steps, but possible steps that you can take to address that? Robert Sharps: Yes. I'll ask Eric to start on that one. Eric Veiel: Yes, for sure. Thanks for the question, Brennan. Obviously, delivering investment performance for our clients is the #1 focus of the investment organization, no matter how much we talk about different products across the ecosystem, delivering alpha has to be the single biggest focus that we have, and it is. When you look at the market environment that we've been operating in, especially since back to November of 2024, it's been a very narrow market. It's been one in which quality and value have been the worst performing factors and frankly, risky -- the riskiest quintile of stocks have been the best performers. That's not an environment that is particularly conducive to our longer-term investment approach. So that's been a bit of a headwind for us from a market backdrop. But I would also tell you that we're being very introspective about the decisioning that we've made. We have fallen short in some sectors where we've had some stock selection issues, we've had some errors of omission. Some stocks that have really performed at exceptional levels that we were underweight or didn't own and we're making sure that we're re-underwriting those decisions. A lot of the fundamentals of those companies are hard to justify. When you look at -- or the valuation of those companies are hard to justify given where their fundamentals are. But we're not just throwing our hands up and saying, well, it's a hard market and we can't -- we have to really think about how we're making our decisions, and the teams are incredibly focused on that. The last thing I would say is that in some situations we have made some changes at the portfolio manager level where we felt like it was the right long-term decision for our clients. Operator: Our next question comes from Patrick Davitt with Autonomous Research. Patrick Davitt: I have a follow-up on the sister Target Date series. Any early read on how you think the mix between T. Rowe and GS managed products will look like? And if you're adding more higher fee alts to the mix, do you think you'll need to barbell that with more passive to keep the all-in costs more palatable for platforms? Or will they just be higher fee products? Robert Sharps: Yes. Maybe before we take that one, a handful of other points on performance that I would make. Our performance in fixed income right now is very, very strong. Performance in retirement date -- blend is very, very strong. There are a number of equity strategies with really compelling multiyear performance and a number with compelling near-term performance. We've had -- got very good recent performance in global focus growth. I think if you look over 3-, 5- and 10-year horizon, our structured research equity strategy is now over $100 billion, our U.S. equity research strategy, the results are very compelling. We've gotten a lot of traction with international value. So right now, it is a very difficult market backdrop. There is a lot of momentum in the hyperscalers where you have multitrillion dollar market cap dominating the benchmark weighted returns. My sense is there's a lot of idiosyncratic risk in going passive right now. And if you look at the opportunity for alpha generation post concentration peaks in the past, whether you're looking at the Nifty 50, whether you're looking at Japan as a percent of EPA in the late 80s, whether you're looking at the TMT bubble, there's a very significant opportunity for alpha generation. I'm not saying we're at a concentration peak. There are kind of obvious differences today relative to those periods of time. But the fact pattern would suggest that once concentration peaks, there will be very significant alpha generation opportunity and that it will be you'll have a period of time where active management can meaningfully outperform. Going to the question with regard to sister series, the product design at this point is largely set. We think that the all-in fee can be very, very competitive and we'll -- the product design incorporates the underlying cost of the private market alternatives. So again, I think we'll be able to deliver something that is consistent with offerings in the marketplace today, despite having allocations that are kind of up to mid to high teens and private market alternatives at certain points along the glide path. Operator: And our final question comes from Glenn Schorr with Evercore. With that, this concludes today's conference call. Thank you for participating. You may now disconnect.
Operator: Thank you for standing by. My name is Tina, and I will be your conference operator today. At this time, I would like to welcome everyone to the NPK International Third Quarter 2025 Earnings Call. [Operator Instructions]. Thank you. It is now my pleasure to turn today's call over to Gregg Piontek. You may begin. Greggg Piontek: Thank you, operator. I'd like to welcome everyone to the NPK International Third Quarter 2025 Conference Call. Joining me today is Matthew Lanigan, our President and Chief Executive Officer. Before handing over to Matthew, I'd like to highlight that today's discussion contains forward-looking statements regarding future business and financial expectations. Actual results may differ significantly from those projected in today's forward-looking statements due to various risks and uncertainties, including the risks described in our periodic reports filed with the SEC. Except as required by law, we undertake no obligation to update our forward-looking statements. Our comments on today's call may also contain certain non-GAAP financial measures. Additional details and reconciliations to the most directly comparable GAAP financial measures are included in our quarterly earnings release, which can be found on our corporate website. There will be a replay of today's call, and it will be available by webcast within the Investor Relations section of our website at npki.com. Please note that the information disclosed on today's call is current as of October 31, 2025. At the conclusion of our prepared remarks, we will open the line for questions. And with that, I'd like to turn the call over to our President and CEO, Matthew Lanigan. Matthew Lanigan: Thanks, Gregg, and welcome to everyone joining us on today's call. We are very encouraged by our third quarter performance that continued to showcase the robust outlook for our served markets and our ability and agility in responding to our customers' needs. The quarter produced very strong year-over-year growth that reflects the strengthening demand for our products and services. We also saw modest quarter-over-quarter growth, a result of our purposeful focus on maximizing our rental asset utilization during a traditionally slower seasonal quarter. Our total third quarter revenues of $69 million is very pleasing given Q3 has traditionally seen a more meaningful pullback in utility activities during the warmer summer months. On a year-over-year basis, our total revenues improved 56%, while rental and service revenues improved 37%. Focusing on our rental and service activity, which we believe represents the stickiest and highest long-term driver of returns, we recently achieved our highest rental fleet utilization on record as we responded to multiple short notice project extensions and expansions. As we have mentioned in the past, we are proud of our fleet scale and our operational flexibility to be able to meet these changing customer demands. However, the combination of short notice, accelerated start times and high utilization does lead to certain transportation inefficiencies as matting inventory is relocated. While we expect some level of this inefficiency due to changing customer demands, the timing and extent experienced late in the third quarter led to approximately $1 million of elevated costs that negatively impacted our gross margins in Q3. We anticipate some carryover impact of these elevated costs in early Q4. However, we believe they will be recovered over the project term, allowing us to maintain our typical gross margins over the longer term. Product sales activity also remained robust, generating $25 million of revenue, reflecting continued strength in demand from multiple utility customers. Given the continued demand and robust outlook across our served markets, we maintain our commitment to the expansion of our rental fleet, investing a net $12 million in the third quarter and increasing our full year fleet investment by $10 million to meet the anticipated demand growth as we approach 2026. I also wanted to highlight that with the strengthening market outlook underpinned by continued upward revisions in forecasted utility transmission spend as well as a strengthening midstream and general infrastructure outlook, we accelerated our manufacturing capacity expansion planning efforts during the quarter. We expect these efforts to continue into early 2026 before moving on to procurement and construction activities. We are also making progress with our previously mentioned debottlenecking activities at our plant, which are being executed in parallel with the manufacturing capacity expansion planning. Notably, we recently completed process modification, achieving roughly 5% increase in production levels, which further supports our growth plans and operational efficiency objectives. Finally, I wanted to touch on cash flow generation and capital allocation during the quarter. We are once again very pleased with the strong cash generation in the third quarter with cash provided by operating activities of $25 million and free cash flow of $13 million. During the quarter, we used $3.4 million to repurchase more than 400,000 shares at an average price of $8.45, while also building our cash balance by $10 million. And with that, I'll turn the call over to Gregg for his prepared remarks. Greggg Piontek: Thanks, Matthew. I'll begin with a more detailed discussion of our third quarter and year-to-date results, then provide an update on our outlook and capital allocation priorities for the remainder of 2025. As Matthew touched on, third quarter revenues came in above our expectations, benefiting from our strategic focus on maintaining strong rental utilization through the seasonally slower summer months, along with several late quarter large-scale mobilizations and robust product sale demand. Total rental and service revenues were $44 million for the third quarter, with rental revenues down 7% sequentially through the seasonally slower Q3, but improving 57% year-over-year, while associated service revenues were flat sequentially and improved 9% year-over-year. Revenues from product sales also remained robust at $25 million for the third quarter, up 12% sequentially and more than doubling the third quarter of last year. For the first 9 months of 2025, rental and service revenues have increased 29% year-over-year, while revenues from product sales increased 21%, both primarily driven by significant demand growth in the power transmission sector. Turning to gross profit. The third quarter result was impacted by roughly $1.7 million of costs in the quarter, related to the late quarter transportation costs required to meet customer project time lines, along with manufacturing planning projects and other charges. Gross margin was 31.9% in the third quarter, down from 36.9% in the second quarter and up from 27.5% in the third quarter of last year. Third quarter SG&A expenses totaled $13.3 million, a decrease of $400,000 sequentially and a $2.3 million increase compared to the prior year. The third quarter was again impacted by elevated costs associated with performance-based incentives, including long-term incentive programs linked to the company's share price as well as those tied to 2025 revenues, profitability and other performance targets. The third quarter SG&A also included roughly $500,000 of project costs associated with strategic planning efforts and our ongoing ERP implementation. Income tax expense was $3 million in the third quarter, reflecting an effective tax rate of 33% as our year-to-date effective tax rate increased modestly to 28%. Adjusted EPS from continuing operations was $0.07 per diluted share in the third quarter compared to $0.11 in the second quarter and breakeven in the third quarter of last year. Turning to cash flows. Operating activities generated $25 million of cash in the third quarter, including $16 million from net income adjusted for noncash expenses and $9 million of cash provided by a net decrease in working capital. Net CapEx used $12 million, which includes $10 million of net investment in fleet expansion. Additionally, as Matthew touched on, we used $3.4 million to purchase 402,000 shares under our repurchase program, reflecting an average purchase price of $8.45 per share. Looking at year-to-date cash flows for the first 9 months of 2025, we've generated a total of $55 million of cash from operating activities, along with $14 million of additional proceeds from the fluids divestiture using $31 million to fund net capital expenditures and expanding our mat rental fleet by approximately 13% from the end of 2024, while also using $20 million to repurchase 3 million shares at an average purchase price of $6.70 per share reducing our outstanding share count by nearly 4% from the end of 2024. We ended the quarter with total cash of $36 million and total debt of $10 million for a net cash position of $26 million. Additionally, we have $144 million of availability under our bank facility. Now turning to our business outlook. As disclosed in yesterday's press release, considering the continued strength in rental project activity and robust product sale demand, particularly within the utility sector, we have increased our full year 2025 expectations with total anticipated revenues now in the $268 million to $272 million range and adjusted EBITDA of $71 million to $74 million. The midpoint of our 2025 range reflects 24% revenue growth and 32% adjusted EBITDA growth over 2024. Breaking our full year revenue expectation down further, we expect total rental and service revenues to grow by a mid-20s percentage and product sales to grow by a high teens percentage range relative to 2024 levels. With the current strong demand and outlook carrying into 2026, we're increasing our full year net CapEx expectation for 2025 to $45 million to $50 million with over $40 million invested into the rental fleet. As for the near-term outlook, we expect to see Q4 rental revenue set a new quarterly record, surpassing the level achieved in Q2. On the product sales side, we expect Q4 revenues to pull back from the exceptionally strong third quarter, likely in the upper teens range. Q4 gross margin is expected to return to the mid-30s range, which includes some continued transitory impacts of the elevated transportation and cross rerent activity. In terms of SG&A, we expect Q4 incentive-related expenses will remain elevated in light of our share price performance and projected full year results against 2025 performance targets. Additionally, we expect Q4 SG&A will also be impacted by costs from the ongoing strategic planning and ERP implementation projects, which will likely keep SG&A around the Q3 level in the fourth quarter. Our goal of mid-teens SG&A percentage of revenue following the completion of our ERP implementation in early 2026 remains unchanged. Though it's worth noting that we expect 2026 SG&A will continue to carry elevated incentive costs associated with the company's 2025 share price performance. In terms of taxes, we expect our effective tax rate to remain in the upper 20s range. Though with the benefit of existing NOLs and other tax carryforwards, along with accelerated deductions under the recent OB3 legislation, we expect our cash tax obligations will remain limited for the next several years. In terms of our capital allocation strategy, we continue to prioritize investments in the growth of our rental fleet and expect to continue returning a portion of free cash flow generation to shareholders through our share repurchase program. And with that, I'd like to turn the call back over to Matthew for his concluding remarks. Matthew Lanigan: Thanks, Gregg. As discussed previously, our strategy for 2025 remains focused on 3 foundational elements to drive long-term shareholder value creation through scale enhancement, operating efficiency and return of capital optimization. Our primary focus remains on achieving consistent revenue growth through the scale-up of our high-return rental business, which includes a combination of geographic expansion and market share growth within our currently served U.S. and U.K. markets. Over the course of 2025, we have focused heavily on our commercial front-end scale-up to drive our geographic expansion, and we remain very pleased with the team's continued strong execution. Our quoted volume is growing meaningfully year-over-year, while our award rate remains in line with historical levels, resulting in a 40% year-over-year growth in rental revenue for the first 9 months of 2025. To support this growth, we remain committed to expanding our mat rental fleet, which grew by approximately 13% in 2024 and by an additional 13% in the first 9 months of 2025 as we continue to build on our leading position within the rental market. As I touched on in my opening remarks, in light of what we see as a strengthening multiyear capital cycle for our utility customers and the sustained market conversion from timber to composite, we have also kicked off manufacturing expansion planning. Our second focus area is on driving organizational efficiencies across every aspect of our business. During the quarter, we began the rollout of a new ERP system, a process that will continue into early 2026 as we look to further streamline our overhead structure and achieve our targeted SG&A as a percent of revenue in the mid-teens by early 2026. And our final priority is the allocation of capital beyond our organic requirements. With a strong balance sheet and a disciplined approach, we remain committed to our programmatic share repurchase program while also actively evaluating several core strategic inorganic opportunities that increase our market coverage, value and relevance to customers in key critical infrastructure markets. As we close out the final quarter of 2025 and sharpen our focus on 2026, I'm exceptionally proud of our team's execution and how we have positioned the company. Now a full year removed from our disposition of the fluids business, we have a world-class team, meaningful growing scale and manufacturing capacity and a strong balance sheet to support our capital allocation priorities. We expect to deliver over 20% revenue growth and 30% adjusted EBITDA growth in 2025. And with the building blocks in place and a robust outlook in our key served markets, I believe we are positioned to continue to deliver double-digit growth in 2026 and beyond. In closing, I want to thank our shareholders for their ongoing support, our employees for their dedication to the business, including their commitment to safety and compliance and our customers for their ongoing partnerships. And with that, we'll open the call for questions. Operator: [Operator Instructions]. Our first question comes from the line of Aaron Spychalla with Craig-Hallum. Aaron Spychalla: First for me, you're obviously increasing expansion in the rental fleet and a lot of your customers are increasing CapEx plans. You're starting to get incrementally better project visibility from some of these longer duration projects. Can you just talk about how the overall pipeline has been growing year-over-year or just some kind of figures as you kind of look towards 2026? Matthew Lanigan: Yes. Thanks, Aaron. I'll take that one. Look, if you look at the rate of growth that we have kind of commented on a year-over-year basis, it's fair to assume that the pipeline growth is in line with that, maybe a little outstripping that. What we are seeing is with these longer duration projects, we're getting a little bit longer to look at those. So we are seeing some elongation of the time to award as part of that. So kind of encouraging on both fronts, pipeline building in that kind of range that I quoted there and then longer duration visibility that you mentioned earlier in your question. So I think all of that is shaping up well into '26. Aaron Spychalla: Got you. And then on the capacity expansion plans, I mean, accelerating the efforts there. Can you just give some more detail on what this might add from a percentage standpoint and any details on kind of cost potential and timing? Matthew Lanigan: Yes, it's a little early for us on that one. We've ticked off the planning. I mean it's -- we will continue to work through it, but I would expect that we would be putting something in line with about half of our existing capacity in that range is what we would be looking at, at this point. And then we're really working hard on the cost, Aaron. It's a pretty wide range. So I'm nervous about getting anyone fixated on a given figure. The outside cost that we're looking to bring down would be what we spent on our last plant expansion. We continue to think we can do better than that. So we feel like it will be south of that figure. Operator: Our next question comes from the line of Laura Maher with B. Riley Securities. Laura Maher: My first question, how are you thinking about industrial distributors in your competitive landscape? Are they contributing to additional competition? Or are they primarily a source of sales for you right now? Matthew Lanigan: Yes. I would say that we're kind of -- they don't play a big part in our business at all really, Lauren. Most of everything we do is direct to the end customer rather than intermediated. I mean, at the margin, there are the occasional time, particularly international sales, not that they've played a big part in this year. But at this point, we're not really seeing it as a meaningful influence on our strategy. Greggg Piontek: Yes. I think one of the things to highlight here is, yes, on the product sales side, that's one of the major changes that we saw over the past year. As we had talked about in 2024, a lot of our product sales went to operators that had fleets. This year, the sales are much more concentrated with end user utility companies, which is really the preferred end customer that we're looking to build the relationships with. Laura Maher: Okay. And then maybe just one more. Is the fleet expansion CapEx tracking proportionately with revenue growth? Greggg Piontek: It's -- over the long term, it should. This year, it's short -- there's a couple of things to that. Number one is we have really improved the level of utilization. So we're basically getting more revenue generation from our existing fleet. And then obviously, you also have a gap here that we're filling currently with cross rents. And that has the margin compression impact, and that's in part why we're accelerating investments into the fleet to help drive that cost reduction and get a better margin on that. Operator: Next question comes from the line of Gerry Sweeney with ROTH Capital. Gerard Sweeney: Sticking top line, you called out transmission and distribution and midstream being strong. But curious how much of growth is industry growth? And how is that coming into play as well as the opportunity to continue to expand maybe geographically as well as maybe with additional customers? Matthew Lanigan: Yes. Good question, Gerry. I mean, we are seeing some increased traction in the areas that we did kind of see with our commercial. During the quarter, I think the Mid-Atlantic, and we've called out the Midwest a few times. We did see meaningful quarter-on-quarter growth in those areas. Again, when you're coming from a smaller base there, those numbers aren't as material as some of our historical basis, but we're very encouraged with the progress we're making there. So I would say our commercial efforts to grow our -- the breadth of our distribution geographically is paying off. And then this quarter, you could definitely see we called out large projects, extensions, et cetera. They were more in our established territories. So that I would put more as an industry growth. So I feel there's a nice blend of both, probably industry-leading over the geography at this point on an absolute basis. Greggg Piontek: Yes. I think -- and that also plays into that the whole material conversion, the composite to wood. I think that it is important to note that we don't see that mix changing dramatically this year because everyone is just keeping up with the industry growth as we the rest of the year. Gerard Sweeney: Yes. Then separately, on the margins, I think you obviously called out the transportation side. But you also made the comment that you may pick that margin back up. I wasn't sure if the margins will return to, we'll say, the mid-30s or whatever the exact number is, just as they're getting settled on a go-forward basis or there's an ability to maybe make up some of that lost margin. I'm not sure if that was pricing or other opportunities. Greggg Piontek: I think this kind of goes back to our commentary that we've made in the past of the business we need to look at over the course of the year and mid-30s, maintaining mid-30s as we grow is our expectations. But within that, you're going to see some exceptionally strong quarters, such as what we saw in Q1, where it was 39%, and we said that's when everything is hitting mass or down high utilization, all that. And then you have the quarters such as this where it's obviously the seasonally slower, so that builds in some inefficiencies. And then just the timing of projects, we talked about as we hit the higher utilization levels, we found ourselves having some elevated transportation. That's -- we don't expect that to continue. There's some level of that noise always in there, but that's why we expect Q4 to be back in that typical mid-30s range. Gerard Sweeney: Okay. I'm going to squeeze in one quick one. I know you said 2. But just on that front, logistics, transportation, et cetera, was this more of a strategic move to get in with more clients, keep bigger clients happy and you saw longer rental times with some of these projects or juxtaposed to maybe at some point in the future, you can build in some better pricing and stuff to manage some of these shorter-term projects? Quickly accelerating projects, I guess. Matthew Lanigan: Yes -- late. Yes. This was wholly and solely around a key strategic customer that had some needs very late in the quarter that we felt compelled to respond to and we'll continue to do so for this customer, Gerry. So on the long term, that relationship is a very healthy one, one that continues to return well for both of us. So we'll continue to protect that. I think what we're doing on the margin recovery, it goes to the capacity expansion. It goes to kind of helping coordinate better across our network to make sure that we can stage our inventory a little closer. To be honest, in this case, some of the matting we thought we were going to be able to help them with didn't come off other projects. So that's why we're in a scramble when we planned, it all looked good on paper. And then as projects got extended and we couldn't get that inventory off the ground, that's why we had to go to kind of plan B here. So it wasn't our intention to always kind of compress margins this way. It just happened to be the case. And so we'll continue to kind of look at our logistics efficiency and manage it going forward. Operator: Your next question comes from the line of Min Cho with Texas Capital. Min Cho: Congratulations on a strong quarter here. So a couple of questions. So in terms of your raising CapEx, I know that you're talking about -- you're planning for some new manufacturing capacity. Is that more in terms of adding lines at existing manufacturing locations? Or are you actually looking to expand your location as well? Matthew Lanigan: Yes. Min, I'd say we're not kind of settled on that one yet. Part of the planning that we're doing is to look at what the right answer there is. There's obviously a lot of pull towards the [indiscernible] facility based on the space we have at the site and the investment we already have there. But I'd say we're not settled on that one yet as we continue to look at optionality. Min Cho: Okay. And then obviously, just given these plans, should we assume that directionally CapEx for 2026 will be higher than 2025? Greggg Piontek: Tough to say that. I think we'll talk more about our 2026 expectation in the next call. Obviously, we stepped up the CapEx here in the current year, which will now get us upper teens growth in the fleet. I think our '26 expectation is going to be a function of how we see the year shaping up as we get closer to it. But I think it is important to highlight that's one of the important pieces of this business is we can adjust our CapEx in the fleet based on the demand that we see in the marketplace. Min Cho: All right. And then just finally, I know you don't talk about your U.K. business a lot, but what percentage of revenue was U.K.? And can you just talk about the growth dynamics you're seeing there? Greggg Piontek: So yes, the U.K. business, I mean, as you look at it on the rental and service side, it's a high single-digit percentage contributor to the overall portfolio, so the smaller pieces. But a lot of the same dynamics as what we see in the U.S. They have a lot of infrastructure projects, a lot of plans here in the coming years that's going to require an increase in spend and also an increasing recognition in the marketplace of the differentiation of the composite mats over the alternative products. Operator: Your final question comes from the line of Bill Dezellem with Tieton Capital. William Dezellem: Well, let's start with the name. It's Bill Dezellem. And I have a couple of questions as you probably would guess here that the utilities, would you talk to us about their mindset towards rentals versus purchases today with this accelerated demand versus how they may have been thinking in the past, if there's any difference at all? Matthew Lanigan: Yes, Bill, there's no one answer across the utilities here. I think, generally speaking, utilities have shown us that they have an appetite to purchase some portion of their fleet requirements. Again, we talk to the economic incentives they have internally to spend capital and get a return of and a return on, on that. So we see that trend continuing. I think what we're seeing is with the scale of what they're needing to achieve here over the next few years, they're also recognizing that they need strong rental partners to help them, strong rental and service partners to help them through with that workload. So we're seeing them lean on both sides. It's been like that. I mean I think coming out of COVID, we saw them pull back on sales a little bit as they were looking to spend their capital on things that the supply chain was saying were perhaps more strained. So they wanted to secure those items to make sure they had what they needed for their projects. I think as supply chains are opening up a little bit, they're looking more broadly at their potential capital categories and matting is certainly one that we've seen this year, they're bouncing back towards. So I hope that answers your question, Bill. William Dezellem: That is helpful. And then relative to nonutility markets, are you seeing any new or other markets that are demonstrating meaningful potential? Or is the opportunity really centric on utilities? Matthew Lanigan: Yes. I think we called it out. I mean midstream has been very dormant for many years. Previous administrations, I think, were very much curtailing activity in that market space. We're seeing a lot more activity there. Again, the majority of that activity is met with a different matting technology that we don't have in our fleet for the mainstreaming operations there, but definitely around laydown areas and egress and so on, we have a role to play. So generally speaking, the stronger that industry, the more opportunity we will have there. And so -- but when you really think about it, the majority of the spend and focus will be around the electrical utility transmission spend over the next few years, the way we see just the relative contributions. Greggg Piontek: Yes. And when you look at the year-to-date numbers year-over-year, the growth on the RNS side, it really is coming from the utility sector. As Matthew touched on, midstream is strengthening, but it's coming off of a pretty small base. And really, when you take a step back, that's offsetting really the -- what has been a modest pullback on the upstream side of things. So overall, oil and gas there is kind of flat year-on-year. William Dezellem: That's helpful. And since then the last question, I'm going to keep going here a little more, if I may. The M&A, you referenced that your eyes are wide open. Would you provide kind of some strategic insights in terms of what you are looking to accomplish with the M&A? Matthew Lanigan: Yes. I think we've covered this on previous calls, Bill. Our focus now is really on close core, what we do today and then just looking to see how we can accelerate our penetration of markets where we believe that we could play a bigger role. So I think you can expect that to be where we're spending our time. William Dezellem: Nothing has changed there. Matthew Lanigan: Correct. William Dezellem: And then one additional question, please. So as you -- I think this is the second quarter this year that you have had some inefficiencies tied to customers changing project scope, time line, et cetera. Does that imply that ultimately, you want your inventories to be higher and to give you more flexibility to respond to these situations? And then if the answer is yes, do you even have the capacity with the level of activity in the market to increase your inventories enough to solve the riddle that we're talking about here? Matthew Lanigan: Yes. I think I'd say the answer is yes, Bill. Obviously, the higher our utilization gets, you're more responsive to moving things further than you would ideally like to. And that's what happened to us in Q3 here. So the CapEx that we're spending on our fleet, the planning we're doing on manufacturing expansion is all designed to help manage that challenge and get the margins back into the business. When it comes to capacity, if we look at '25, we ran -- we started running the plants 24/7 in April. So year-on-year, we're going to have incremental capacity going into '26. We talked about our debottlenecking activities, which give us incremental capacity. We've always got the cross-rent flex that we've been working. So we feel comfortable that we're able to meet our growth requirements and get better at our planning efficiency. But honestly, Bill, it's during a quarter, projects you planned on coming up to speed new projects. If that doesn't happen exactly the way it was planned, you're always going to have a level of inefficiency. And I would say when you're running at the high utilizations we are, that's a heightened challenge for you. So -- but we feel like we can manage it. William Dezellem: Good luck with the ongoing high-class problems. Operator: And with no further questions in queue, I will now hand the call back to management for closing remarks. Greggg Piontek: Great. Thanks for joining us on the call today. Should you have any questions or requests, please e-mail us at investors@npki.com, and we look forward to hosting you again on our next quarterly call. Thanks. Operator: Thank you again for joining us today. This does conclude today's presentation. You may now disconnect.
Operator: Hello, everyone, and welcome to the ACCO Brands Third Quarter 2025 Earnings Conference Call. My name is Ezra, and I will be your coordinator today. [Operator Instructions] I will now hand over to Chris McGinnis, Director of Investor Relations to begin. Please go ahead. Christopher McGinnis: Good morning, and welcome to ACCO Brands Third Quarter 2025 Conference Call. This is Chris McGinnis, Senior Director of Investor Relations. Speaking on the call today is Tom Tedford, President and Chief Executive Officer of ACCO Brands Corporation. Tom will provide an overview of our third quarter results and provide an update on our 2025 priorities. Also speaking today is Deborah O’Connor, Executive Vice President and Chief Financial Officer, who will provide greater detail on our third quarter results and our outlook for the full year. We will then open the line for questions. Slides that accompany this call have been posted to the Investor Relations section of accobrands.com. When speaking about our results, we may refer to adjusted results. Adjusted results exclude amortization and restructuring costs, noncash goodwill and intangible asset impairment charges and other nonrecurring items and unusual tax items and include adjustments to reflect the estimated annual tax rate on quarterly earnings. Schedules of adjusted results and other non-GAAP financial measures and a reconciliation of these measures to the most directly comparable GAAP measures are in the earnings release and slides that accompany this call. Due to the inherent difficulty in forecasting and quantifying certain amounts, we do not reconcile our forward-looking non-GAAP measures. Forward-looking statements made during the call are based on the beliefs and assumptions of management based on information available to us at the time the statements are made. Our forward-looking statements are subject to risks and uncertainties, and our actual results could differ materially. Please refer to our earnings release and SEC filings for an explanation of certain risk factors and assumptions. Our forward-looking statements are made as of today, and we assume no obligation to update them going forward. Now I'll turn the call over to Tom Tedford. Thomas Tedford: Thank you, Chris. Good morning, everyone, and welcome to ACCO Brands Third Quarter 2025 Earnings Call. Last night, we reported third quarter sales that were slightly below our third quarter outlook. However, our improved operating structure enabled us to meet our adjusted EPS outlook and improve gross margins by 50 basis points. Sales in the quarter were challenged by softer demand globally and trade down in some of our categories. The slower implementation of tariff-related price increases and the timing of forecasted revenue that moved out of the third quarter give us confidence we will see an improvement in the fourth quarter. We are making excellent progress on our $100 million multiyear cost reduction program, realizing an additional $10 million in savings in the third quarter. That brings the cumulative program total to approximately $50 million. We remain highly focused on managing all global spending to preserve profitability and cash flow. I am pleased with our team's work to mitigate the impact of incremental U.S. tariffs on our business. We believe we are well positioned to support our customers with our balanced and cost-competitive supply chain. We have implemented most of our price increases. However, the timing of those increases has lagged, impacting our outlook sales in the third quarter. We will see greater benefits from our pricing strategies in the fourth quarter. We closely monitor evolving trade policies and will take appropriate action, if needed, to mitigate the impact on ACCO Brands. Moving to our third quarter results. In the Americas segment, sales for the back-to-school season in the U.S. and Canada finished in line with our expectations, down mid-single digits. The decline was partially due to purchasing decisions by customers in response to tariffs early in the back-to-school season. Retailers continue to tightly manage inventory, resulting in minimal replenishment for the season. Our leading student notetaking brands, Five Star and Mead, grew market share in the season, highlighting the strength of our brands and the value they offer the consumer. In Latin America, sales were weaker than expected due to a constrained consumer as trade down was prevalent in the quarter. In Brazil, we began shipping the important stocking orders for their back-to-school season at the end of the third quarter, although softer than expected as customers delayed making purchasing decisions. We remain cautiously optimistic about our expanded product offering and the back-to-school season in Brazil. In Mexico, sales trends improved during the quarter across most categories. In the International segment, demand was mixed with Europe being soft, partially offset by increases in Australia and Asia. In our office categories, while sales declined, we maintained our market position across the segment. Transitioning to our global technology businesses, Kensington computer accessories sales declined modestly in the quarter, reflecting delayed business spending. In the fourth quarter, we expect a return to growth, driven by new product launches and a more robust end-user pipeline. In gaming accessories, PowerA sales declined in the quarter due to a combination of reduced demand for legacy consoles and timing for a Nintendo Switch 2 accessories. We expect solid growth in the fourth quarter for the gaming accessories category. We are well positioned for the important holiday season as PowerA is the first officially licensed Nintendo Switch 2 wireless controller in the market. Over the next 12 months, we have an impressive pipeline of innovative new products across multiple categories, many of which will have exclusive IP. Our product road map is strong and will give us momentum as we go into Q4 and next year. Turning to our Office Essentials and Learning & Creative categories. Global demand continues to be challenged. We have good syndication of our product assortment. However, the lower rate of sales is due to reduced demand in our core categories. We continue to refine our new product development approach to enhance our category positions, expand our assortment and enter faster-growing adjacencies like ergonomics and hybrid work offerings. We are optimistic this will improve revenue trends in the future. Let me highlight some of our new products that have been recently introduced. In EMEA, we are actively broadening our portfolio of lights branded ergonomic and hybrid work solutions. Our innovative offerings have received multiple design awards and represent an area of strong sales growth for our European business. We are now evaluating expansion beyond EMEA and have high expectations for our enhanced ergonomic product portfolio. In the U.S., we have introduced the West Village line by Mead. West Village offers premium products at accessible price points designed to appeal to today's value-conscious consumers. The product portfolio features a selection of notebooks, time management products and more, all of which have been positively received by our retail partners through gain syndication. Finally, we have successfully integrated the Buro Seating acquisition and are evaluating geographic expansion opportunities beyond Australia and New Zealand. This is an exciting category and serves as a platform to expand into new geographies as well as new product categories, such as gaming seating. As I conclude my remarks, we continue to monitor the evolving external dynamics that impact demand for our products. We remain committed to pivoting our business to higher growth categories while streamlining operations, optimizing our cost structure and inorganically enhancing our product portfolio. I am confident our team and our strategy will better position ACCO Brands for profitable, sustainable growth. Before I hand the call over to Deb, I would like to thank the employees of ACCO Brands for their tireless efforts in support of our strategy. I am proud of our team and the work we are doing to transform our company. I will come back to answer your questions. Deb? Deborah OConnor: Thank you, Tom, and good morning, everyone. As Tom mentioned, third quarter sales were below the outlook we provided in August, while cost rationalization and strong controls led to adjusted EPS that was in line with outlook. Reported sales in the third quarter decreased 9% and including favorable foreign exchange impact of almost 2%. Underlying demand continued to be constrained by global macroeconomic factors, including consumer and business spending uncertainty and fluctuating tariff policies. As Tom mentioned, the timing of some forecasted shipments and the slower implementation of price increases in the U.S. also negatively impacted sales versus our outlook for the quarter. Gross profit for the third quarter was $127 million, a decrease of 8%, with the margin rate improving 50 basis points to 33%. While the dollar decline was driven by lower volumes, the improvement in the rate was due to the progress on our multiyear cost reduction program as well as some favorable timing items. SG&A expense of $87 million was down versus the prior year due to cost reduction actions and lower incentive compensation expense. Adjusted operating income for the third quarter was $39 million versus $45 million a year ago. The adjusted operating income ratio to sales has been impacted by the lower volumes deleveraging our SG&A costs. Now let's turn to our segment results for the third quarter. In the Americas segment, comparable sales declined 12%. The decline is indicative of lower demand as well as weakness in Brazil and timing for Nintendo Switch 2 accessory sales. The Americas adjusted operating income margin for the third quarter was 14.4%, ahead of last year. The margin rate in the quarter was positively impacted by cost savings. Now let's turn to our International segment. For the third quarter, comparable sales declined 7%. Underlying demand continued to be down in Europe, especially in Germany, U.K. and France, which are our largest markets. International adjusted operating income was down just over $1 million. The adjusted operating margin for the third quarter decreased to 10.2% as the lower volume more than offset the benefit of pricing and cost savings. Let's move to cash flow. As a reminder of the seasonal aspects of our business, we are a user of cash in the first half, while cash flow was positive in the second half of the year. Year-to-date adjusted free cash flow was $42 million. This includes $17 million in cash proceeds from the sale of 2 owned facilities we announced in the second quarter. In addition, we paid down our debt by repatriating cash from Brazil during the quarter. Cash flow this year is lower, reflecting the EBITDA decline as well as the significant new tariff costs paid upon receipt of goods. Our supply chain teams have done an excellent job reducing inventories, which mitigates the impact of incremental tariffs. During the quarter, we returned $7 million to shareholders in the form of dividends. Though a balanced capital allocation remains important, our primary focus will be paying down debt. At quarter end, we had approximately $271 million available for borrowing under our revolver and finished the quarter with a consolidated leverage ratio of 4.1x. Now turning to the outlook. We are reaffirming our sales and adjusted EPS guidance for the full year. We do expect sales trends to improve in the fourth quarter, led by positive foreign exchange and growth in the technology accessories categories. However, overall demand trends remain constrained due to the evolving tariff environment and cautious consumer and business spending. As Tom mentioned earlier, we expect to see greater price realization in the fourth quarter to cover the incremental U.S. tariff costs. For the full year, we expect reported sales to be down 7% to 8.5% and adjusted EPS to be within the range of $0.83 to $0.90. We expect adjusted free cash flow to be within a range of approximately $90 million to $100 million, which includes the $17 million from asset sales. We anticipate a net leverage ratio of approximately 3.9x at year-end. While the current environment poses challenges, we remain confident in the long-term future of our company and our ability to navigate this dynamic period. We have no debt maturities until 2029 and a long history of productivity savings and cost management. Our strategy continues to focus on repositioning the company to grow sales modestly from organic and inorganic initiatives and consistently generate solid cash flow. Now let's move on to Q&A, where Tom and I will be happy to answer your questions. Operator? Operator: [Operator Instructions] Our first question comes from Joe Gomes with NOBLE Capital. Joseph Gomes: Thomas, the first question I want to ask here is, you mentioned that you're confident see improvement in the fourth quarter. And just seeing what's going on here, you read the headlines. I just want to know what underpins your confidence for fourth quarter? Thomas Tedford: Yes, Joe, that's a good question. So there are a number of data points that we've reviewed and are improving confidence is because of those. So let's start with, first, our technology accessories business. It represents roughly 20% of our total portfolio, and it has been modestly down in the quarter in aggregate, and we expect that to return to growth driven by 2 things. First is the holiday season and our support of the Switch 2 launch from Nintendo. We're seeing really good momentum in that business as we transition from Q3 to Q4 and feel confident that it will grow in the quarter. Secondly, our end user pipeline and our new product development product launches from our Kensington business is far more robust in Q4 than it has been in Q3 and previous quarters this year. So those 2 pieces of business, again, represent roughly 20% of our total, and we feel confident that both will return to growth in the quarter. The second point I'd like to just make sure you understand is our pricing actions took longer to implement than we had anticipated. And so whatever that we thought was going to happen in Q3 has simply just shift from a timing perspective. The quantification of that is a little difficult to nail down, but we do believe that there was a significant shift into Q4 from Q3 from price. And then finally, we had some timing of orders that shifted from Q3 into Q4. Those aren't immaterial. And those 3 things give us confidence that we can improve the rate of decline in the quarter. Joseph Gomes: Okay. And you mentioned in your opening remarks about trade down in some categories. I wonder if you could give us a little more color on that. Are we seeing a heightened competitive environment, just consumers trading down because of the economy or kind of maybe a little more color there, please. Operator: [Technical Difficulty] Thomas Tedford: Joe, sorry about the disconnect. I'm not sure what happened, but I just want to make sure that I address your question. You had mentioned that we're seeing trade down and that is a true statement. We are seeing some trade down really across most of the geographies that we compete in. The good thing is, is we are well positioned from a brand portfolio perspective to capitalize sales as the consumer trades down. We have brands that serve the consumer in most of our categories that service each of the price points but it does impact top line sales and has a modest impact on profitability as well. Joseph Gomes: Okay. Great. And then just one last one here for me, Tom, if you may. So in the press release, you're talking about the new product launches, and also evaluating strategic opportunities that align with the growth objectives. Are we talking additional acquisitions here? I just wonder if you can talk a little bit more about what the strategic opportunities may be. Thomas Tedford: Yes. So it's another good question. We're always looking for accretive acquisitions, highly synergistic opportunities that present themselves that reposition our product portfolio into faster-growing either categories or channels or markets, right? Those are things that we're constantly evaluating. We also look at other things like licensing agreements with key licensors, expansion of OEM relationships. So each of those are important, and each of those are under review, and we're using all of our tools that we can to accelerate sales. Operator: Our next question comes from Greg Burns with Sidoti. Gregory Burns: It sounded like the back-to-school season got off to a slow start in Brazil. Have you seen any pickup there as we move into this quarter? Thomas Tedford: Yes. So our results are -- it's still early in the season. I would say they're fairly consistent with our expectations. We expected the season to start slow. We expected customers to defer purchases later into the quarter, and that's basically what we're seeing play out. Gregory Burns: Okay. And then in terms of the trade down dynamic, I know you have kind of good, better, best pricing price points in the market. But how do you manage that without cannibalizing maybe your higher end product lines? Like are all the products sitting in the same -- on the same shelves next to each other? Like how do you account for that maybe not cannibalizing yourself within the market with some of these new products like the Mead product line you mentioned? Thomas Tedford: Yes. So it's important to note that when we introduce new products, we do so that are mostly at greater than fleet gross margin averages. Now that's not always the case, but in most instances, that is. And so as we introduce these new product lines, they should be incremental gross margin rates to the company. Cannibalization is a difficult thing to avoid when consumers are trading down and you have such a broad product portfolio. We believe that we offer tremendous value in our price points and in our products. And the consumer choice is obviously dependent on a lot of different things. But we're there, and it's great to have an ACCO Brands presence for that consumer on shelf when they are making their choice. I think back-to-school in the U.S. is probably indicative of that, where we saw both our Five Star brand, which is our premium brand in the category and our Mead brand, which is our value brand in the category. They both took market share this season. I think that just gives you some illustration of the strength of the brands that we offer in the categories that we compete in. And we feel like that's the appropriate approach for our business. Gregory Burns: Okay. And then in terms of -- I think you mentioned syndication, but do you feel like you're in all the right spots from a distribution perspective? Is there -- are there any opportunities to either expand or optimize your distribution network to maybe stimulate some more sales growth? Thomas Tedford: Yes, Kevin, good question. We do. We think there's opportunities outside our current channels. We actually like certain verticals, and so we're shifting some of our product focus to verticals like health care, for example. Our Kensington business has a good, strong end-user selling organization that we think we can better leverage in the future. But certainly, channel expansion, geographic expansion is an important part of our go-to-market strategy. Operator: Our next question comes from Kevin Steinke with Barrington Research. Kevin Steinke: Just following up on the North America back-to-school discussion. Obviously, you talked about the cautious buying patterns by retailers and minimal inventory replenishment. I mean, is that also an indication of a softer consumer sell-through or pull-through? And how meaningful was product trade down in the North American back-to-school season? Thomas Tedford: Sure, Kevin. That's a really good question. So our products sold through at or better than our customer targets. So from that perspective, we had a really strong season. Our supply chain responded incredibly well through all the disruptions of country of origin and tariffs. We supported our customers throughout. So we were in stock on time, and we supported them with modest late season demand as well. So we think we're well positioned as we transition into 2026 because of the strong supply chain management and sell-through of our product this back-to-school. Kevin Steinke: Okay. That's good to hear. So you mentioned the revenue that got pushed out of the third quarter. I don't know if there's any we characterize how meaningful that is in terms of that shift to the fourth quarter? Thomas Tedford: Yes, I don't know that that's something that's easily defined for us publicly. I think we have a fairly good understanding of it internally. But there's also other dynamics that could come into play. But we do see the orders. They were sizable enough for us to call them out, obviously. But I think we would refer commenting on the specific size because of the other things that may happen in the quarter. Deborah OConnor: Yes. And it was one of the factors that really just made us miss the low end of the guidance, if you think about it that way. Kevin Steinke: Okay. And the slower implementation of the tariff-related price increases, you talked about those benefiting the fourth quarter. Again, any sense as to how meaningful those are either on a percentage basis, perhaps? Thomas Tedford: So we went to market with roughly mid-single-digit price increases. So each of those get negotiated with our customers, the implementation gets negotiated, et cetera. We want to ensure that our products are fairly priced on shelf that we don't do anything inadvertently to the demand of our products. But the price increases that we took to market and then have been accepted or mid-single-digit increases. Kevin Steinke: Okay. And then just one last one. You obviously sound optimistic about Kensington and the robust product launches coming in the fourth quarter. Can you just characterize the type of products that you're launching and what gives you enthusiasm that's going to benefit your sales in the fourth quarter? Thomas Tedford: Yes. Product launches are slow to adapt. That's more of a longer-term benefit. What gives me great enthusiasm is the strength of our pipeline. Our pipeline is large. Our close rate is good. We get a significant amount of our revenue in the Kensington business from end-user deals that our salespeople partner with the trade and channel to develop, and that pipeline is extremely robust. So the new products are being launched in conjunction with a very robust pipeline in Q4. Operator: [Operator Instructions] Our next question comes from William Reuter with Bank of America. William Reuter: Just a couple for me. The first is, I was curious, you mentioned about opportunity to move into new channels. I guess, are you overexposed to some channels such as pharmacies that are experiencing a lot of closures and kind of have shifting sales mix between different channels been one of the headwinds to revenues in North America? Thomas Tedford: No. First of all, our business in the channel that you mentioned is relatively small. In fact, it's small on a total percentage basis. But we do see opportunities, as I mentioned, in verticals more so than channels. We think that developing businesses in growing verticals is an important part of our strategy. Developing relationships with the end user is an important part of our strategy. From a channel perspective, I think we've got the appropriate balance for the business here in North America. We have a keen focus on e-commerce, and that is our largest channel, mass retail and then specialty superstores, kind of follow-up behind that. And then you've got the office independent dealers and wholesale channels. So those are kind of the key channels for us in the North American market that we sell product through. And on the tech side, obviously, we sell through tech distributors. So we think we have a fairly balanced channel approach. Where we see opportunities is, frankly, in value in user deals, and that's where our focus is at the moment. William Reuter: Got it. And then with regard to your price increases that were related to tariffs, did you generally pass those through on a dollar-for-dollar basis? Your gross margin percentage was up. I know that's probably some of your expense savings initiatives. But I guess, was that the goal with those price increases that pretty much the dollars are passed through? Deborah OConnor: That was the goal, Bill. I will tell you, though, like we said in the third quarter, we didn't get all the pricing in. So the majority of that improvement in the margin in the quarter really relates to our footprint rationalization and some other cost reductions that we did up in COGS as well. This time, this year, about half of our savings are in COGS and about half are in SG&A. So we're really seeing a benefit from the cost takeout. William Reuter: Got it. And then just lastly for me, and I know this is difficult and someone kind of already asked it, so there might not be much more to add to it. But I feel like macro conditions in Brazil are pretty challenged, and I feel like a lot of consumer products companies are having difficulty there. I guess what gives you that confidence? Have you seen in the last week that you have seen an acceleration and improvement in trends? I know it's early for back-to-school, but I guess I'm surprised if there's not a little more caution in your tone. Thomas Tedford: Yes. If that came across, then that's not the case. Obviously, we are closely monitoring the developments in Brazil. We watch our order entry, our order input from the market. It's improved slightly from the third quarter, but it's still early in our back-to-school season, and we're predominantly a back-to-school business there. And so we don't want to draw any conclusions on the season, but we certainly see all the things that everybody else is speaking of and are cautious in terms of our spending there, in terms of our production and inventory there. Our customers are being cautious with their inventory purchases. But we have seen some modest improvements in trend over the last 4 to 5 weeks. Operator: We currently have no further questions. So I will hand back over to Tom for any closing remarks. Thomas Tedford: Thank you, everyone, for joining us. While the third quarter results were mixed, we executed well against our strategic initiatives and do expect sales trends to improve in the fourth quarter. I remain confident that our proactive actions are better positioning us for long-term growth. We appreciate your interest in ACCO Brands and look forward to talking with you when we report our fourth quarter and full year results in February. Operator: Thank you very much, Tom, and thank you, everyone, for joining. That concludes today's call. You may now disconnect your lines.
Marta Noguer: Good morning, and welcome to CaixaBank results presentation for the third quarter and the first 9 months of 2025. We are joined today by our CEO, Gonzalo Gortazar; and our CFO, Javier Pano. Just a brief reminder in terms of logistics, we will spend about 30 minutes with the presentation and about 45 minutes to 1 hour with the Q&A. The Q&A, as you know, is live, and you should have received by e-mail the instructions on how to participate. Let me end by saying that my team and I will be at your full disposal after the call. And without further ado, Gonzalo, the floor is yours. Gonzalo Gortázar Rotaeche: Thank you, Marta, and good morning, everybody, and welcome to this results presentation. It's a quarter that, I think, confirms the trends that we've been seeing for the last year and even further where volume growth sort of accelerates despite the seasonality. Obviously, we need to understand that comment in the context of the weakness due to seasonal reasons in the third quarter, you see how basically, loans and customer funds are close to 7% up; premia for insurance business, 13% up; and remarkably growth in number of clients, almost 400,000 new clients in Spain on a net basis, which indicates, clearly, the group is in the right direction, growing client base for much more than population growth in Spain. So very good dynamics for the business, for the organization. With respect to NII, as we predicted last quarter, finally, we've seen an inflection point with a pretty decent increase, 1.4% quarter-on-quarter. So Javier will elaborate on the Q&A. We'll have further details on trends. But certainly, it feels very good at this stage. Revenue from services, up over 5%; asset quality, record lows. Cost of risk, in fact, we're improving guidance as Javier will sort of detail. Capital in the right direction. And obviously, this quarter, we, as per our policy, are announcing the interim dividend to be paid in November, which is the top of the range of 30% to 40% of first 6 year -- of the first 6 months results, sorry. And announcing a further share buyback, the seventh I'm keeping core equity Tier 1 above our targets and with, again, strong trends, particularly given the deduction of the share buyback that is included in the figures. We're upgrading our return on tangible equity to circa 17%, which indicates again the good trend of the business, which we obviously expect to see for the foreseeable future. The economy, the economy has again surprised on the upside. We have raised our estimates for Spain from 2.4% to 2.9% currently. A couple of days ago, we had the figures for the third quarter very much sustaining the projections that we've made for this year, this 2.9%. We expect some slowing down, but to a pretty decent level, just above 2% this year for Spain, similar level for Portugal. By the way, Portugal published their GDP figures yesterday, also very strong. So a nice outperformance of the Iberian economies, expected to last. And certainly, we are a clear beneficiary there. What's behind this? First of all, the labor growth. You can see over 0.5 million of new jobs created in the last 12 months. Disposable income and savings rates, both moving in the right direction. And obviously, that's a tailwind for our customer funds and for the economy. Consumption figures that we saw a couple of days ago, private consumption up 3.3%. Investment part of the GDP, very strong growth, 7.6%, and very remarkable export of services, close to 10%, 9.5%, and of that, the tourism-related services is only 5.8%. So it gives you an indication of the recovery and the strength of the Spanish economy goes much further beyond pure tourism, which is very relevant because obviously, tourism is going to continue to contribute to the economy, but not to the same extent that it has had in the past and as the sector has recovered. Continue to have a very low private sector leverage compared to the Eurozone, which is great news, both in terms of defensive scenario if there are issues. And certainly, glass half full opportunities for loan growth, which we see sustainable -- sorry, which we see sustained for the next year. So in that context, obviously, volume growth, 6.8% up. Client acquisition, as I mentioned. On the right-hand side, you have a reminder, this is coming from FRS Inmark of our client penetration, we have 40.4% increased during this year, along with that increasing client base. It's very important to see here the group gaining the traditional commercial strength that it has always had, and the fact that the type of relationship that we have with our banks is much stronger than the other peers. As you can see, 72% of our clients use Caixa as their primary bank, which is well above all. Market share gains, I'd say, across the board, but highlighting some of them. Payroll deposits, in particular, which is very relevant, certainly. On the lending side, consumer and business lending, in particular, not so much in mortgages, where we are stable, a slight -- a few basis points reduction in deposits and generally in life risk. But as you will see in protection, we also have pretty good trends. imagin, as mentioned in the previous quarter, we're planning to give you a brief update on representation. Continuous nice growth and number of clients, market share, particularly in payroll business volume, half of our net new client acquisition comes through imagin -- sorry, half of our gross client acquisition comes through imagin. And just to remind you, it's at this stage, a full-service bank with obviously stronger component of customer funds, but also many other products, including lending, which is not typically what you see in neobanks compared to imagin. It's been a year where we've not only focused on growth. Remember our strategic plan, we talk about two pillars. It was growth and transformation. And here, you have a few initiatives. Obviously, the world continues to change very quickly. And we're planning on taking advantage of that. We're not on the defensive. We have to defend our positions, but we think there are great opportunities in the current environment and launch of the portals and Facilitea Coches, which by the way, we won a gold award a couple of days ago in the Qorus Banking Innovation Global Award, which is very nice, and we won another three and bank in the world that has won more awards at these prestigious event. Facilitea Casa growing nicely. We have, by today, already 1 million visits to our platform. So a successful example. Generacion + [indiscernible], which is at the beginning of a very significant project targeting sort of seniors. Tap To Pay, Apple Pay Later, VidaCare, all cases where we are actually leading the industry in Spain. Stablecoin consortium, another one, and the cash back program, which we have just launched is another example. I just want to make sure you have the feeling that it's not just about the current quarter or the current year. We're spending money and planning to make sure that growth not only stays but accelerates in the future. Loan book, 5% growth, and the stock of mortgages quite remarkable, 10% plus in consumer lending, business lending 4.5%. Obviously, very good trends. I won't spend more time because I mentioned it before. Loan origination, new production, strongly as the market is in residential mortgages, consumer lending and new business lending. So pretty good trends and trends that we see for the time being certainly staying with us. Customer funds, strong performance, 6.9% year-on-year, I think pretty balanced look at figures on deposits and wealth management. There is, again, in this case, a seasonality impact. That's what you see deposits coming down quarter-on-quarter. But certainly, when we look at details and the trends, they are much better than they were in the third quarter of last year. So nothing to worry about those numbers. They are actually good numbers once you adjust them. And when you look at a comparison of how we're doing in terms of deposits, Spain obviously outpacing the Eurozone by an ample margin, but CaixaBank further gaining market share there is a great sign. The off-balance sheet business, wealth management doing very nicely. And you can see that the -- our market share continues to be much bigger than even our two main peers combined, 29% versus 24%. You really almost need to add the third peer to get to our market share, which is obviously a reflection of the kind of franchise we have in wealth management, which has been actually doing very nicely this quarter and this year. Protection insurance, as I mentioned, again, strong growth, 12.7% in total premium. And as you can see, both life-risk and non-life doing very well. I mentioned the life-risk market shares. You can see here a similar on some of the key non-life market shares, again, doing very nicely. So a key part of our business and one where we have, again, delivered a pretty good quarter. Vis-a-vis our strategic plan, obviously, there's a big gap, all of it in our favor. Market is helping, there's no question. We actually at least have that ability to identify this trend and hence, focus on the growth opportunity that we had at hand. And we're doing much better. And as you heard before, also doing better than the market gaining market share. All that gives us quite a lot of confidence. Obviously, capital distribution is a key part of what we do. Based on increase in earnings per share, we have, as I mentioned, set the interim dividend at the maximum of the range that we had announced in our dividend policy. And got recent approval for another EUR 500 million share buyback. Well, we haven't yet finished the sixth share buyback. So we have share buybacks for some time now and a strong capital position give us confidence that we will continue in this direction. Javier? Javier Pano Riera: Okay. Thank you. Thank you very much, Gonzalo, and good morning, all of you. Well, from my side, as always, the details on the P&L and balance sheet. I have to say that all trends are in line with our expectations, if not better. So we are quite a bit. Here, you have the consolidated income statement. Net income pro forma, the quarterly accrual of the 2024 banking tax, you may see EUR 1.445 billion. That is flattish year-on-year. If we move to the revenue front, well, as I mentioned, NII, we had already the trough in the second quarter. As you may see, up by 1.4% on a quarter-on-quarter basis. Revenues from services despite being in the third quarter quite seasonal, we have had a really strong quarter also. You may see up by 6.2% year-on-year, flattish quarter-on-quarter, but that's remarkable, precisely due to that seasonality. The main driver being wealth management on the back of strong inflows, also markets doing well. You may see here year-on-year up by close to 12%, quarter-on-quarter also up. Protection insurance on a growing trend, underpinned by commercial dynamism. And then finally, banking fees, flattish on a year-on-year basis, quarter-on-quarter, impacted by seasonality with strong CIB this year. On other revenues, the most remarkable, I would say, is that in the third quarter, we have strong positive seasonality from SegurCaixaAdeslas, something that is very well known. Expenses, nothing to say, on track to meet our guidance for the year. And on cost of risk, you know that we have fine-tuned our guidance for the year to less than 25 basis points. So also on track to meet our improved guidance. On the tax line on the P&L, you know that beyond the corporate tax, we have the banking tax and also, as in recent quarters, we have some DTA write-ups. With that, an overview on Portugal. For the first 9 months of the year, EUR 351 million net income. Volumes are doing even better than in Spain. So as you may see, volume growth up by 8.5%. Relentless market share gains across the key businesses, I would say. Efficiency circa 40%. Profitability is just shy in terms of RoTE of 20%, NPL 1.5% and with nice coverage, 85%. And -- well, a significant milestone because we had this quarter disposal of 14.7% of the stake in BFA, the Angolan stake. Well, this is equivalent to circa EUR 100 million. And as I say, a significant milestone, an IPO in Angola. So with that, our stake is now 33.4%, not major or not material impact on P&L or solvency from that disposal. With that, let's move to the details. NII, as I was saying, here you clearly see the drop from the second quarter. And on the right-hand side, on that usual quarterly bridge, you may see that still, let's say, client yields having a negative impact as we still have a negative index resets on the floating rate loan book. This is a trend that will still continue for a few quarters. But in any case, this is more than compensated by volumes. You may see business volumes and also the ALCO this quarter, we have increased the size of the fixed income portfolio by EUR 2.6 billion net because we had also some maturities. And also we have increased hedges by EUR 5 billion to EUR 58.5 billion outstanding. Below, you have the customer spread, slightly over 300 basis points. The evolution of yields, the back book yield of the loan book, 355 basis points, down 20 basis points, but also the cost of client funds also down to 49 basis points, including -- excluding, in this case, hedges and foreign exchange. Well, in any case, we expect a clear acceleration of NII on the -- from the second half of next year. A zoom on our deposit base, client deposit base. Here, you have the evolution of average quarterly balances. You may see steady growth, but the most remarkable is the mix precisely. That improvement in volumes of noninterest-bearing deposits, you may see, on average, the third quarter up by circa EUR 7 billion. It's true that also we have some increase of interest-bearing balances. In this case, remember that is not only retail, it's also corporate SMEs because we do more business. So also, we have some increase on that. But in any case, the weight is very well contained, as you may see, a gradual reduction 26.8% weight of interest-bearing balances. At the same time, we'll continue to reduce the cost of our interest-bearing deposits. Now standing at 1.66%, significant reduction in the quarter, as you may see, with a strong correlation with the evolution of the overnight rate as we have, as you know, circa 50% of those interest-bearing balances fully indexed and the major part precisely to the overnight rate. Changing gear, we move to revenue from services, up by 5.7% year-on-year for the first 9 months. The main driver, as commented, wealth management, up by 13.4% for the first 9 months, also an accelerating trend on protection insurance, up by 4.2% when adjusted by a positive extraordinary on the last year and flattish fees, which is, I would say, quite remarkable. And you may see on the chart on the right, precisely, that this year, we have had almost no negative impact from seasonality. So really strong trends on that front. A few words on costs, up by 5.2% year-on-year, on track to meet our guidance. Remember, for costs up by circa 5%, cost-to-income below 40%, which is, by the way, well below the peer average. Asset quality and loan loss charges, asset quality really strong. You may see here NPLs trending down this quarter by EUR 300 million. I would say almost everything is organic, that reduction with the NPL ratio also trending down 2.27%. And you may see across the different segments that there is a broad-based improvement, so not anything part of our loan book to worry about, honestly. The coverage up by 3 percentage points in the year to 72% and we still keep our unassigned collective provisions unchanged for the year, EUR 341 million. On the right-hand side, cost of risk, loan loss charges, 24 basis points on a 12-month trailing basis. So remember that we have fine-tuned and slightly improved our guidance for cost of risk to less than 25 basis points. So we are set to meet that guidance comfortably. Liquidity, the same picture as every quarter, ample liquidity sources, EUR 229 billion and a liquidity coverage ratio at 200%, 199%. 148% for the net stable funding ratio. The loan to deposits is not moving at all. It's really stable, 86%, as we are growing on lending, but also we're growing on deposits almost at the same pace, so quite nice. And you know that the liquidity ratios are well above our peer average basically due to a strong and stable deposit base composed mainly from stable retail deposits and wholesale operational deposits. Capital, we are already deducting the seventh EUR 500 million share buyback, minus 21 basis points. From there, we have plus 67 basis points capital accretion that includes net income plus DTA consumption, then we have minus 8% from organic risk-weighted assets, that's basically lending. And from there, minus 38 basis points, dividend accrual at 60% plus AT1s and just minus 3 basis points from other impacts. That results into a CET1 ratio of 12.44% by the end of the quarter. On the right hand side, additional details, you know that we are still executing the sixth share buyback. We are today announcing this interim dividend close to EUR 1.2 billion, which is EUR 0.1679 per share. And the seventh share buyback, EUR 500 million set to start at some point after we finish the sixth one. Bottom right, well, you know that the stress test results was just released a few days after our second quarter results presentation. Here, you have the CET1 drawdown under the adverse scenario for the case of CaixaBank is minus 162 basis points. And you may see here that compares extremely well versus our comparables. And finally, this upgrade on guidance, fine-tuning as there is only one quarter to end the year. So NII now expected to come down by circa 4%. And then we have cost of risk expected to be less than 25 basis points and return on tangible equity circa 17%. So thank you very much and ready for questions. Marta Noguer: Yes. Operator, can you let in the first question, please? Operator: The first question is from Maks Mishyn, JB Capital. Maksym Mishyn: I have two questions from my side. The first one is on loan book growth. It keeps on accelerating nicely, and we seem to be gaining market share across the board and even in mortgages. Some banks indicate that the market environment is very competitive there. And can you please share your thoughts on why you think you need to grow there? And the second one is on provisions. What was the reason for the quarter-on-quarter increase? Do you think that the 25 basis points that you expect for 2025 could also become the number for 2026? Or is there any reason it could increase? Gonzalo Gortázar Rotaeche: Thank you, Maks. On loan book growth, indeed, we're doing very nicely, I'd say, in terms of market share, we're gaining market share, as I mentioned, on the business front and consumer lending. In mortgages, we're not gaining market share. Actually, market share year-to-date has decreased by 10 basis points. It doesn't mean that we're not doing a lot. That's why we have this strong increase in loan production. But we're doing a bit less than our fair share, I would say, given that it's only 10 basis points, in line with our fair share. And yes, this is a very competitive business. When you look at the numbers that banks disclosed at the ACB, you actually see that the Spanish mortgages are the cheapest in Europe currently, in terms of new production, around 2.5%. So it is indeed a business that only makes sense as long as, a, you have the ability to fund it from an ALCO point of view because now the market has moved mostly again to fixed rate mortgage. And there, you will see that different banks have different capacity to add long-term fixed rate mortgages. Obviously, given that we have a disproportionate share of transactional deposits, and you can see that because of our payroll market share close to 36%, 37%. We're obviously very well positioned there. And in terms of having that in our book because it is a natural hedge and all the banks do not have the same sort of long-term duration of liabilities. So not to the same extent, I would say. And second, most importantly, obviously, to get the numbers to an attractive return, you need to cross-sell other products. And that cross-selling is absolutely critical. If you look at our franchise and how we do our business and the market shares we have in insurance, in particular, but obviously, not just insurance, you are, I think, in agreement probably with us that we do cross-selling better than the average in the market so that we have a natural competitive advantage there. We are only doing mortgages as long as they make sense. We don't have any particular sort of extra point to grow in mortgages. It's just doing the business when we think it is attractive. And in the case of mortgages, obviously, it needs to incorporate both things, the ability to fund long-term fixed rate and the willingness because it fits in your ALCO portfolio. And then secondly, that ability to make it profitable as sort of an overall relationship with the client. But again, skipping away from mortgages. The key point is growth is actually in consumer lending and on the business front, particularly on the SME front, which are the two most attractive margin opportunities in the market. That's where we're growing market share. So we're extremely pleased with our loan growth is going absolutely in the right direction. Second point was on provisions, and I'll let Javier comment on that. But I think generally, we're seeing no change in the very good trends we have in asset quality, what you've seen also in the sort of early doubtful loans, i.e., sort of less than 90 days, we continue to see very good trends. We haven't used, obviously, the overlays, as you said. We keep reducing the nonperforming loan numbers. So mathematically, you see these this kind of change. I think going forward, this is a trend. If we manage to keep bringing down our NPLs, coverage will increase for the industry generally. You remember before the sort of great financial crisis in 2005, 2006, coverage ratios in the industry were above 100 because you had very -- and actually didn't make that much sense because most of the provisions or significant part of provisions were not covering actually nonperforming loans, but all the risks of exposures potentially becoming nonperforming loan. So we'll see. But still, I think at this stage, it's very nice to see that we have a very low cost of risk, 20 basis points annualized in the quarter and still that is not affecting the quality of our coverage. It's quite the opposite, we are increasing that coverage. Then quarter-by-quarter because this is lumpy sometimes. So there may be portfolio sales and write-offs and et cetera, you may have some volatility. But I think the trend is these levels are probably the ones that we will see for the next few quarters. With that, I'm afraid I've gone into most of it, Javier. I'm sure you have things to add. Javier Pano Riera: No. On cost of risk, well, we are quite a bit on the evolution, and you just saw that we were upgrading our macro views in general. Well, the dynamics in the economy, both Portugal and Spain are so good. So we are working on our budget for next year as we speak, but I don't foresee major changes on the levels of loan loss charges for next year, honestly. So obviously, unless there is an external shock, no, but let's assume that this is not the case, and the situation continues to do as well as is the case currently. I would say that you can count on no major changes. We'll fine tune obviously, when we will comment in January, but the assumption is that it's going to be in line. Marta Noguer: Thank you, Maks. Operator, next question, please. Operator: The next question is from Ignacio Ulargui of BNP Paribas Exane. Ignacio Ulargui: I just have 2 questions, if I may. One, looking to the other side of the balance sheet to the deposit growth. If I just look to Page 20, you are clearly exceeding the target of deposit growth that you were aiming in the plan. Just wanted to see how you think about deposit growth going forward in '26 and '27. The second question, I think that Javier, you touched a bit upon this on the call, but I wanted to look to the reinvestment of the ALCO. Some of your Southern European competitors are investing around 2.6% the bond maturities have a 1.6%, 1.5%. ALCO. How should we think about the phasing of that reimbursement in the NII over the coming 3 years? Gonzalo Gortázar Rotaeche: Thank you, Nacho. I'll maybe take the first question on deposits. There are 2 main factors. One is the trends in the market and then it's how do we do in terms of relative performance, market share. On both fronts, I feel very confident at this stage. So we're definitely going to be outperforming the expectations that we had in our strategic plan. The market is still showing significant growth in disposable income. Our estimate for next year is again another 2% of gain in terms of real disposable income, so 2 percentage points above inflation. And the savings rate is sustained pretty high across -- actually across Europe, certainly also in Spain, where it used to be much lower. I think there might be a slow sort of gradual decrease. But at this stage, it doesn't seem that the numbers are going to be very different. So as long as we are in a growing market, then it's up to us. And what we're seeing this year is, I mean, we have the machine and 100% of its functionality. And actually, the quarter passes the further quarter, the more confident we become. This is a virtuous circle. It's a great organization we have. And undisputed leadership in Spain, over 50% larger than our competitors and now it seems that, that position is going to stay for the foreseeable future, very stable, that's a great advantage. We have the team very focused, and we have been doing greatly this year, particularly in the non-remunerated part, which is obviously one that creates the highest value. I say the outlook is very positive for next year. And certainly, if the macro -- the macro numbers continue to be there, which is our expectation, not just for the next year but for the following months. So pretty good momentum and likely to be sustained. Javier Pano Riera: Okay. If I may, Ignacio. On the ALCO reinvestments, well, you know that in order to manage our NII sensitivity, we are basically using both swaps and bonds. This quarter, we have added to both on a net basis in the case of bonds because we had also some maturities. You know that you have a slide on our presentation on the appendix with plenty of details on the yield of all maturities per year or even per quarter for hedges. So you can count on rolling over those fixed income maturities for sure. So we need to do so in order to keep that sensitivity, let's say, contain it within our targets. And you are right, no? So the average yield is 1.5%. So any reinvestment basically from 4 to 7, 8 years is usually the maturities. We are investing in it's going to be accretive. And more specifically, what is maturing until the end of this year is having a 0% yield. Next year, we are having close to 9 billion maturities at a yield of 0.4%. So you may see that this is clearly accretive. And this is part of the reason beyond commercial volumes where we are quite a bit on NII for '26 and '27 and beyond because this is an additional tailwind. I mentioned NII sensitivity. I would like to take the opportunity to note that we have slightly changed our NII sensitivity target to 7.5% to a parallel shift of the yield curve. This is no changes in practical terms, but it's basically allowing for some additional hedging flexibility precisely to accommodate faster volume growth, generally speaking. And keep in mind that we are disclosing sensitivity for the period 12 to 24 months. What we have benchmarked that we see that our peers are usually giving sensitivity for the first year, so 0 to 12 months. If you think about our sensitivity for those 0 to 12 months it's circa 4%. So pretty much in line with what everything is disclosing. It's a more asset view. The view that we are giving us you. So basically, please note that. So we are going to be opportunistic here depending on basically the spread between swaps and the sovereigns. We are using to add to the portfolio. And depending on that, we are more keen to use swaps or fixed income. The shorter the maturities usually, we tend to use swaps because you capture a narrower margin. So it will have a wider margin at longer maturities. Operator: The next question is from Francisco Riquel, Alantra. Francisco Riquel: Yes. My first one is a follow-up on the first question from Ignacio. So I see demand deposits are growing 7% year-on-year, time deposits are flat. So can you comment on customer behavior in a lower interest rate environment. Your strategic plan was based on a stable deposit mix. And I wonder if you see upside here. And if you can also update on your guidance for deposit costs, both with and without hedges. And my second question is customer spread. I see is proving resilient in Spain above 3%, but Portugal has fallen to below 2.9%. So you are growing faster in Portugal than Spain. So I wonder if you have noticed increased competition in this market or if it is related to different speed of balance sheet repricing, so you can give guidance for customer spread in both countries? Gonzalo Gortázar Rotaeche: I will just say an introductory word, I'll let Javier deal with it. But in terms of this mix between time deposits and demand deposits. Obviously, as interest rates have come downwards the pressure to move from side deposits to demand deposits is more or less disappeared. We're also seeing to some extent, the balances invested outside like T bills and others, generally in the systems that are coming back to the balance sheet. But clearly, there is potential to do better there. This year is -- it has been the case. But anyhow, Javier knows this inside out. Javier Pano Riera: Well, on customer behavior, I think that basically, we are being successful on 3 fronts here. So first thing we are being able to pass on lower market rates to our -- to the cost of our interest-bearing deposits. You know that almost 50% of that is indexed, so it's pretty much automatic. So there's not much commercial effort on that front. While we do that at the same time, we are growing nicely on noninterest bearing. And that growth on noninterest-bearing is not because is flows coming from interest-bearing so it's not like we are parking, let's say, whole money on noninterest-bearing that eventually will move from to another part of the balance sheet or even to outside the bank. So it's not the case. So it's basically operational balances, more clients, well, close to 400,000. As you could see in a year, more clients or more payrolls, more everything. So at the end of the day, you have more operational balances at 0 cost. And while we do all that, at the same time, we are being able to grow on off-balance sheet solutions, on wealth management solutions being mutual funds or being savings insurance. So the pace of inflows into those products is approaching EUR 1.5 billion per month, which is quite significant. While at the same time, we keep growing on noninterest-bearing and keeping our interest-bearing pretty much stable. So I think that we have -- we are mastering honestly, this -- all that. We have the right incentives internally, obviously, client first and the right fund transfer pricing system and is working nicely, honestly. And we think that this trend is going to continue. So we are quite a bit on this business. On the customer spread, yes, we are above 300 basis points. I think that eventually, we're going to be slightly below 300 in early part of '26. That does not mean that we are going to have NII pressure because you know that there are other parts volumes plus ALCO that are more than compensating that. And you asked about differences with Portugal, it's a different dynamic because first, you have a larger percentage of interest-bearing balances on deposits. It's approaching, now its circa 45%. It was 47%, now it's 45%. In the case of Spain, it's below 30%. Also there is a clear difference and as such, also considering that on the asset side, Portugal has a larger percentage of floating rate loans or mortgages, for example, in Portugal are fixed rate to maturity is not that commonly used as in Spain. So you have, at the end of the day, a little bit more NII sensitivity in Portugal than in Spain. Hence, the impact on the customer spread are not exactly happening at the same time. But in any case, Portugal NII is set to stabilize and set to grow soon also. Keep in mind also that in terms of our ALCO activity, although we have an ALCO in Portugal, we tend to manage our NII sensitivity more at group level. Hence, all strategies and ALCO hedging, et cetera, is more thinking about the broader view, not particularly in the case in Portugal. So thank you, Paco. Operator: The next question is from Ignacio Cerezo of UBS.. Ignacio Cerezo Olmos: First one is on -- I mean, the indication Javier has been given around the NII in 2027 based on volume and yield curve developments, if you can do a mark-to-market or update us on that number? And the second one is kind of a recurring question. Actually, we ask you every now and then. But is there any possibility of artificial intelligence investments kind of creating a bit of a cost angle emerging at some point in the next 2 to 3 years? Or you think the cost growth actually is going to remain around that mid-single-digit region for good? Gonzalo Gortázar Rotaeche: Thank you, Ignacio. I'll take on the second one, maybe and Javier can provide an answer for the first one. AI definitely. We have now increased our investment spend significantly in this plan that you're seeing with, as you say, mid-single digits growth this year and also a faster than sort of trend growth next year. We start to see clear benefits from 2027 onwards. The main emphasis now for us is to make sure there is wide adoption of the technology, which at this stage, I would say, we're doing very well, every single area I wouldn't say every single employee, but almost. But certainly, every single area has a number of projects, and some of them are finalized. So those are in design stage. Others are in work in progress. And we have a team centralized that sort of prioritizes make sure that we are sort of doing products that are compatible that I can't talk among themselves and benefiting, obviously, from the scale that we have and from working with certain providers like Salesforce or Gemini or CoPilot, Microsoft, et cetera. So this is working at full speed. I have the sense that we're moving forward very well. We have a wide adoption in the organization. And we clearly have sort of use cases where the productivity impact is very obvious. Others are going to take some time. Very often, what we will aim to is to be able to do things internally rather than outsource them. And hence, we will capture a very efficient cost saving in due course. But this is not going to happen. Certainly it's not happening this year, where we're having more spend and savings. And I think you're not going to see that start until 2027 and then onwards. But generally, obviously, this is something that is very much debated everywhere, whether AI and the productivity gains from AI, who is going to appropriate them. A lot of these opportunities are going to be appropriated by clients, is -- is the nature of sort of business loss that obviously, as we become more productive and more competitive, our competitors will, at the same time, clients will be more demanding in terms of what they can expect from banks and banks, the good banks will be offering it. And hence, the appropriation of these sort of economies and productivity gains is going to be, to a large extent eventually running to clients, no. Like it has been in the past, if you think of mobile, et cetera. But we feel we are sort of at the vanguard. And hence, we will certainly be able to keep some of these gains and what is more important as long as we are a step or 2 ahead of others. I think we're going to be giving a better customer experience, bringing innovation faster to the market. And hence, also gaining in terms of additional revenues, which is, to me, the name of the game long term, the market share and the number of clients that we keep and the ability for us to sell them the services we're selling now and others. Javier Pano Riera: Well, in terms of 2027 NII. Well, first '26 where we are now very clearly seeing that it's going to be above fiscal year '25. So this is our view currently on the back of what volumes. But I would say that it's important also to say listening yesterday to the ECB press conference. It looks also that ECB is more a bit in terms of downside risk from the macro point of view. So I think that clearly the bottom and rates is also here to stay. And well, that makes us also more confident to give you guidance. We were mentioning that EUR 11.5 billion mark for NII for '27. We see really very clear upside to that currently. So we are quite a bit for '27, honestly. Probably we'll have to wait until our resource presentation in January to be more specific on that, but our view is that we have very, very clear upside into that figure. All in all, substantial upside compared to our initial views on over the strategic plan view. Remember that we were envisaging EUR 11 billion NII in '27. And now we clearly see this figure coming much earlier than expected. Operator: The next question is from Alvaro Serrano of Morgan Stanley. Alvaro de Tejada: A couple of really follow-up questions. On mortgage pricing, everyone is complaining about the pricing, but it obviously remains very competitive. The question is more, have you seen any sort of changes in behavior lately, obviously, the merger is not happening anymore between BBVA and Sabadell. We have seen some sort of banks saying they're raising pricing but have you observed that in the last few weeks is one question. And second, also a follow-up maybe for you, Javier. You -- I didn't fully follow the logic as to why you've increased the NII sensitivity now to 7.5%. Is it your -- do you think the next move in rates eventually will be up? Or are you just looking for a better moment to increase the hedging because you continue to create a lot of liquidity. So -- or maybe this is another reason that I missed? Gonzalo Gortázar Rotaeche: Thank you, Alvaro. On mortgage pricing and generally pricing in the market. With respect to the impact of the failed takeover. I think it's too early to say. I haven't seen any particular change from that point of view, but I wouldn't expect it necessarily. These things take time, even mortgages from sort of making an offer to actually getting the mortgage close. It's a long period, sometimes 2, 3 months. So we will have to see generally when the market is so competitive and so intense in terms of price pressure, I think eventually it tends to -- even if it will stay very competitive, it usually tends to at some point, sort of lean towards a more sort of rational pricing, we'll see. I think, the impact of rates coming down and now the sort of the general core being steeper than it was 12 months ago. And as all these things stabilized and credit growth continues to take place, and hence, there's impact on liquidity and particularly on capital as -- and I'm not talking only about mortgages, you may see that actually margins on the asset side get a bit more rational. But it's not easy to forecast. This is not anyone in control. This is a market, it's a very competitive one, we'll have to see. Javier Pano Riera: Well on NII sensitivity, we are allowing for some small additional hedging flexibility to accommodate a faster volume growth. So that's basically the message. Think about that. So this is a forward-looking measure. So in order to estimate your sensitivity 1 year from now, you need to work with assumptions -- your best assumption on volumes going forward, which is going to be the composition of your balance sheet 1 year from now, okay? What is happening is that we are outperforming those views constantly. So we are -- what we simply do is to get a little bit more latitude in order to have some more room to decide on our hedging as we are having this outperformance constantly. So it's very simple. In practical terms, nothing is changing. Keep in mind that this is an asset view of NII sensitivity because it's the sensitivity 1 year from now. It's not usually what other peers are reporting that are reporting the sensitivity as from today for the next year. And if what I am providing today you is that the sensitivity is circa 4% as we speak. So pretty much in line with what everyone is disclosing. Operator: The next question is from Britta Schmidt, Autonomous Research. Britta Schmidt: Just coming back to the volumes. They are generally ahead of the plan also for wealth management and protection insurance. So do you have any view as to whether in principle that could be positive for the CAGR for revenue from services included in the plan. My second question will be on operational risk. Is there anything that you would track for RWAs in Q4? And how you're thinking more broadly about the development of operational risk also in the P&L with regards to more digital risk and cybersecurity risks? And then the last question is on Portugal. What expectation do you have regarding tax rates in Portugal? And any view on the discussion around a potential sector contribution to the budget? Gonzalo Gortázar Rotaeche: Thank you, Britta. On the latter one on tax rate in Portugal, obviously, we'll have to see how things develop. And Obviously, it won't have a material impact on the group, given the relative weight of Portugal, but we'll have to see what is eventually done. On volumes, obviously both, on balance sheet, off balance sheet protections everything in terms of volumes is running ahead of the strategic plan. I would be very inconsistent if I wouldn't say that should translate into better CAGR over the 3-year period. As long as we continue to sustain these levels, we should be doing better than the strategic plan on both fronts. So how much better obviously is the question and -- there will be time to discuss certainly expectations for 2026 and then 2027. And at some point over the next few months, most of you will start looking into 2028, and we will discuss in 2028. And that I'm sure Javier can develop looks good as well, particularly on NII because we'll have a similar trends. Operational risk, a general question is, is it going to be increasing? Obviously, I don't think so. But whether -- what's the impact on the fourth quarter, that's more rather than trend specific, which Javier will explain. Javier Pano Riera: Well, for operational risk, you know that we have this impact on risk-weighted assets for the fourth quarter. We think that it's going to be in line with last year. It's going to be less than 15 basis points in our view. And I have to say also that as we are talking about the fourth quarter risk-weighted assets, we are have in the pipeline a few SRT transactions that will settle into this quarter. So this is going to have a positive impact probably more or less offsetting that impact on risk-weighted assets from operational risk. To be -- yet to be confirmed as we are finishing those transactions, but broadly in line with the impact from operational risk. Operator: The next question is from Borja Ramirez, Citi. Borja Ramirez Segura: I have 2. Firstly, on corporate loan growth. If I understood well, you seem to be preparing your balance sheet for stronger loan growth. I would like to ask this is mainly related to higher corporate investment and opportunity for corporate loans. So that will be my first question. And then my second question would be on NII, please. If I calculate the Q4 NII for this year, based on your guidance, it seems to be around EUR 2.7 billion. If I analyze that assume 4% balance sheet growth. For next year, I get to EUR 11.3 million of NII for 2026. This is above consensus, and this does not include the benefit from repricing of ALCO or deposit hedges. I would like to ask if this calculation makes sense from a technical point of view. And also, if you could indicate what is the benefit in NII for next year from repricing ALCO or the deposit takers, please? Gonzalo Gortázar Rotaeche: Thank you, Borja. On loan growth, we have, obviously, the ability to grow our loan book because we were very liquid. You know that both from LCR, but particularly net stable funding ratio among the highest. Structurally, we're very liquid. And Spain generally is not very levered. And when you've seen, for instance, the numbers for these third quarter GDP, the 2.8% growth behind those numbers. As I mentioned before, you have an investment component of GDP growing at 7.6% and year-on-year. And of this part equipment was up 11%. So now somehow we have this CapEx cycle going on. We've been talking about whether this would happen for many years. And now it is happening. And hence, there is a very significant opportunity here. It is also an opportunity in consumer lending. I mentioned that SME and consumer lending are the 2 areas where we're gaining market share in a large -- or a relatively large amount case 30, 40 basis points, so there are 120 basis points in consumer lending. And also precisely the more juicy parts, not necessarily the ones that require more funding in terms of size, but the ones that have the best returns. And on the corporate front, more sort of a larger enterprise and CIB business, the reality is that we're being very active. This is a place where we have been and I don't think we've mentioned it today. But obviously, you know that our CIB fee business has been doing very well or Javier mentioned it indeed. And we see an opportunity there as well going forward. So it's good across the board today and somehow previous days because of various comments here and there, the headlines are being taken by the mortgages and the pricing, the realities were we're growing most and certainly where the returns are more attractive is in these 2 parts of the business, consumer lending and SMEs, together with CIB. So that is something that we expect to see because once you unleash this CapEx cycle, this has some pretty good inertia. Javier Pano Riera: Hi Borja. Well, we are refraining today to give you a specific figure for 2026 NII guidance. What I said is that it's going to be clearly above '25. That's pretty clear. How much needs to be seen. So we are still working on our budget. We have to fine-tune a few things and we'll come up with more specific guidance in January. As per your numbers, first thing, keep in mind that still the first half of the year we have some negative repricing on floating rate loans in general. This is going to be more than compensated by other parts of basically volumes and also ALCO, but keep in mind that this is why we say, okay, there is an acceleration from the second half because that repricing process will already be ended. And consequently, we have a clear acceleration on NII. Keep in mind also that there is some seasonalities in first quarter last day. So I will not say that you can extrapolate exactly the same quarterly evolution for every quarter. So let's see, honestly, I think that there is not -- there are not many banks already giving guidance for 2026. In our case, we are giving already plenty. So let's reconvene on in January. Operator: The next question is from Miruna Chirea, Jefferies. Miruna Chirea: I had 2, please. The first one was on customer spreads, which you were guiding that you expect in the first half of 2026 to stabilize somewhere around -- somewhere below 200 basis points. Could you please discuss if you think that there is some scope for the spreads to expand into the end of the year as maybe you are growing high -- you are growing stronger in higher-margin corporate loans and consumer credit than in mortgages. And then my second one, please, was on margin. Could you please give us a sense of what the returns are in the margin versus the traditional bank? So any sort of color that you could give us in terms of the difference in margins, the cost to serve clients and the cost of risk between margin and the traditional bank would be helpful. Gonzalo Gortázar Rotaeche: Thank you, Miruna. You want to start with... Javier Pano Riera: Yes. Well, as I was saying to the previous question, we still face some negative index resets on floating rate loans on the first half of next year. So this is adding some pressure on customer spread. It's going to be slightly below 300 basis points but not much. And yes, eventually, over time, this may recover. We have to see lending but also deposits to what extent also we can keep pushing down our average funding cost as we have not probably because we push down our interest-bearing yields, but probably because we have a larger wave of noninterest-bearing deposits. And as a consequence, we can slightly bring down our average customer funds, funds costs. So we have to see, so, I would say, conceptually, you are right. So over time, we should marginally gain on the customer spread. But it's going to be in any case hovering around 300 basis points. So that would be my best guess. The back of the envelope numbers are approximately 150 basis points coming from the loan book, EUR 150 million from deposits. So if you assume like 2% rates, market rates, so this is 350 yield on assets and, let's say, EUR 50 million on deposits. So this is back of the envelope, we can fine-tune that once we give you guidance for next year, but this is the broad message. Gonzalo Gortázar Rotaeche: Yes. And [indiscernible], I would highlight the following. Cost to serve is definitely much lower you would guess that I have to say it's different than other pure neo banks because we are increasingly putting together let's say, people and assigning relationship managers to the top of the pyramid because we have them and we have them to give service from our what we used to call in touch, the remote service, now we call it connector, to clients that are mostly digital of CaixaBank and we started about a year ago, something to offer a relationship manager to imagin clients, sort of experiencing how that would go, and we found that or inviting our emerging clients loved it. So they would call and answer the call and when we would offer that we would assign a relationship manager they would love it. And then you have all these call me, call back, et cetera, follow up that we're doing also remotely to imagin clients. But all in all, it's very much more efficient cost to share on the bank. But again, we're trying to make sure that the clients of imagin, if they want to they also have a physical remote always. And obviously, they can visit a branch if they want. That's by the finish in the case. And our branches obviously are very keen to bring imagin clients on board. So imagin benefits from the fact that we have a branch network, it works nicely. So all in all, cost of service is lower and client and business acquisition is faster. And that's why we have a much more sort of well-balanced and grounded set of products and services and our balance sheet looks much more like a bank than rather just I'm selling a time deposit that's very high or some of the things, as you've seen in many of the new entrants in Spain and elsewhere. So it's very different. The returns of the whole operation are attractive because the margins are not generally very much in line with the operation at CaixaBank. It's about a better sort of -- or a better -- it's a more specific sort of way of serving clients that is more appreciated by a certain part of the population. And that look and feel of being part of our community, which we are -- which we're doing. But as a result of similar margins and a lower cost of share, obviously, the profitability is very attractive, and it has nothing to do with some of the neo banks that have been sort of losing money for a while. We obviously spend time -- spend money and time and effort in client acquisition with a very significant success, but we actually monetize that relationship very quickly. So it's a very sustainable and growing business model and one that I think it's fairly attractive. Remember that we are not -- imagin, is not incorporated as a separate subsidiary, so we do not have proper sort of financial results in P&L. What we have is internal management accounting, which we follow very closely. And to a large extent, also finally, it depends on what do you do with the excess funds because even if we have a significant part of our activity on the asset side, imagine it's still very -- sort of has a very large surplus of customer funds and rather than having an ALCO run at the margin level, which will make any sense. Obviously, those funds are investors as part of the global ALCO group and how you do all these assignment of pricing and margins would enter the bottom line. So that's why we're not getting into that. But the qualitative is lower cost to sales, same margins, obviously very attractive business. Operator: The next question is from Sofie Peterzens at Goldman Sachs. Sofie Caroline Peterzens: This is Sofie from Goldman Sachs. So basically, a follow-up on the volumes. I mean the volume outlook is good, but are there any restrictions or a limitation for CaixaBank to do grow volumes and -- what I mean is, basically, are there any kind of funding restrictions, you have too much market share in some products that you can't grow any further? Or if you have any capital constraints anything that we should be kind of mindful of around the volume growth and anything that could limit that? And then my second question would be around kind of the competition from fintech players we're seeing, press articles that some of the fintechs want to grow very significantly in Spain. I know you commented just on imagin, but how do you see competition from fintechs? Gonzalo Gortázar Rotaeche: Right. On volumes, I would say, no limitation. On second part, you mentioned about index plans or -- fintech, sorry. Sorry, the sound here is not to some reasons it wasn't great. Fintech, obviously, this is great to have them. They are obviously forcing traditional banks to rethink the way they do things, and it's for the benefit of the client. So as a society, I think we should be very happy. As a bank we love it in the sense that our business is much more interesting because we need to keep constantly reinvent and rethink what we offer to clients and the way we offer our products to clients. So I'd say it's a welcome development. Obviously, it's welcome as long as you think you have the tools and the ability to compete and we certainly think we are. When you look at the penetration of neo banks, you'd see some of the statistics on particularly Revolut and Trade Republic growing strongly this year, it used to be in '26, now it's not growing, it will depend. But the other one that is growing very nicely is imagin. We have 9% share of payrolls and imagin and when you look at the others, I'm not going to get into the detail because obviously, we don't like to mention names and figures of competitors but the others are -- none of them is any close to 1% on the latest figures of primary banking relationships. So they will obviously try and gradually, and I'm sure, to some extent, they are already doing it, try and gain clients to become their primary bank rather than start with 1 or 2 or 3 products, and that's the name of the game. And the name of the game for us is to make sure that we offer the same experience, the same kind of relationship, and there's no reason why we shouldn't be doing it. And I don't usually refer to awards. But again, at this Qorus Banking Innovation Awards globally, again, imagin won the gold, so the first position in customer experience accounting, for instance, which and the beating and this was a category for neo banks. So we have -- obviously, we have things that others do better. We're not better in every single product services, et cetera, where we're not, we are very realistic. We follow the market. We try to obviously make the necessary adjustments to what we do to get there. And this is constant. We have a huge advantage. When I was referring previously to imagin and the fact that we now have relationship managers that you can rely on. And you have real people you can talk to if you have a customer service complaint or problem, you can even walk into a branch. If this works well, as long as you want to stay digital, 100% digital, you stay and you have a great digital experience. But if you need something else or somebody else do something else that works, sort of, in the right way. I think we have a huge advantage. And imagin is -- but precisely now starting to position itself and say, it's a digital bank, but those people, there's heart behind us and you have a problem, you need to talk to someone or you would need to upscale on certain products, you don't understand and you don't want to talk just to the robot AI. We're going to have all of this. It's not the word saying this is not important. This is critically important. We're going to have all of this. But we can have all of these and more. And hence, we think we're in the long run going to be winners, but it's a nice and intense sort of competitive battle which we're doing. With imagin and obviously, when I talk to imagin, I talk about imagin, CaixaBank is doing the same things with a different, sort of look and feel, but the reality, is positioning is very strong and actually imagin has now the highest relevance in as a brand in Spain and, huge loyalty and hence, we have, I think, a pretty relevant competitive advantage now vis-a-vis other incumbent traditional banks, thanks to having the ability to play in 2 ways. Operator: The next question is from Andrea Filtri, Mediobanca. Andrea Filtri: Yesterday, the ECB de facto approved the launch of the digital euro. How do you envisage this new entrant to impact you? And how would you factor it in your next business plan? Do you think you can actually make money out of it as well? And could you also give us your reasons for not having pursued by Novo Banco? Finally, just a very quick follow-up. How long do you think you can maintain overlay provisions for? Gonzalo Gortázar Rotaeche: Okay. Well, let me start with digital euro. We've been following this closely as many of you know, we actually were the sole bank that cooperated with the ECB in the first sort of work around the prototype for the digital euro in a P2P solution, and we'll continue to have an open line because we have a conviction that this digital euro is very likely to go ahead. And obviously, it has the potential to transform a number of areas. It has the potential, we don't have perfect visibility. We don't know exactly how much it will impact, if there is still some time, as you know, the plan is now for some time in 2029, probably the summer. This has been delayed as we, I think, discussed our view was it will happen, but it will take place later. So that's why -- we didn't discuss that much in this business plan or 3-year plan that will finish in 2027. Obviously, in the next one, it will have some implications. What is eventually going to be the role of the digital euro, we'll see, obviously, the limits that finally deciding on it are important, are important because obviously, there will be more or less sort of liquidity moving on to the digital euro, depending on the limit. How successful it is going to be, it depends to a large extent on the private sector as well. If the private sector develops real cross-border payment initiatives like Pan-European Bizum, where, obviously, now there's a lot of cooperation we are now in -- already with Italy and Portugal together and there's sort of discussions with Nordics and with Vero. And I think we should have an equivalent sort of instant payment mechanism that works well across the union -- and this could -- and probably should leave together with, at the same time, digital euro public, which has other benefits. What would the role of the stable coins be by then, programmable money. I would guess that certainly, they would be using more business applications as the digital euro as of today is focused on the retail front. And fortunately, because we've been speaking about the strong case uses for a wholesale digital currency, the Central Bank digital currency, the wholesale euro. Now we have the Pontes and Appia project, both mid and long term to develop those initiatives. And again, we are actively cooperating with representatives of us in one of these initiatives. So overall, over this, how exactly it will play out. We'll have to see, Andrea, I think it has the potential to be very relevant. It may not be that much if the private sector has developed other alternatives. We cannot run the luxury of getting it wrong and thinking this is not going to be relevant and then finding it is. So, it's so critical and core to our strategy that we will are going to be there. And there is certainly -- our hope is that we're going to be making money, obviously. There's no question we're going to be able to do things differently and obviously offer also a different client experience. There will be if, in the case of the digital euro, some costs associated to it. So be it. I think at this stage, even if it's not final, it looks like we're moving in the right direction in terms of using the current infrastructures and positioning the digital euro as a payment initiative mostly, which is where I think it makes more sense. But again, there are even broader and I think larger users in the wholesale side, those will be also a significant component. So we'll see. And obviously, for the next 3-year plan, certainly, we'll have further discussions about what's happening in the payment space and the digital euro. With respect to a question on acquisitions, we do not comment on acquisitions names. We didn't do it. We're not going to do it past the situation. It is our duty to assess opportunities when they appear in our core markets. But we always say the bar is very high for us. We have a great business. We have a great business in Spain and in Portugal, and looking at our results this quarter is a good proof of that. So when we do any analysis the bar needs to be very high. And obviously, that means what is the opportunity attractive. Does it have synergies, can we execute? And then what's the price where this is a real return because we have plenty of things to do in Spain and Portugal organically. And obviously, any M&A is always a distraction. So you need to make sure that it's a very clear case for that to happen. If there's no very clear case, then obviously, you're not going to be seen as there. Javier Pano Riera: And then there was a final question on overlays. Well, eventually, it will be used. Honestly, we don't have an exact time line for that. But over time, that's the base case. But we don't have a specific calendar honestly. Operator: The next question is from Pablo de la Torre Cuevas, RBC Capital Markets. Pablo de la Torre Cuevas: The first one is a follow-up on loan growth in Spain. And I know it's a smaller portfolio for you, but public sector loans are growing above 14% year-on-year and one of your peers have actually recently noted how it expected growth in this segment to accelerate from here. So I was wondering if you could help us understand your expectations in this segment and how we should think about the loan growth there in the context of your Investor Day loan growth targets of around 4% as well. The second one is on fees. And overall, the trends there seem pretty positive and in line or better with your targets, but it seems like growth in banking fees, specifically continues to lag other areas. So could you please just elaborate on when you expect the loan growth -- the fee growth there to converge towards your target growth rate? And what, in your view, needs to happen for you to achieve this? Gonzalo Gortázar Rotaeche: Thank you, Pablo, on maybe briefly, and Javier, you take it from there, but loan growth of the public sector, margins are very low, usually -- and this gets usually moved by fairly large transactions. Very often as a result of auctions and sort of public solicitation, et cetera. We do not think of us like coming a specific target there, we're going to be there if the numbers work out. And there's very often the alternative of public debt, which is traded and hence, liquid and you obviously want a pickup for that lack of liquidity than usually maybe there's a difference in rating. And if you move to the sort of regions or to the local council. So I don't think it's going to make a lot of difference or numbers. And we're not going to be particularly pushing, but we're not going to be away from it either. We need to take decisions on a more opportunistic basis for the large transactions. And for the more sort of relationship based, I think those are going to be more stable. Javier Pano Riera: Yes. Thank you, [indiscernible] just to add that on that front is to some extent, like an alternative to ALCO in some cases because it's public sector, so it's alternative to fixed income. And well, at least in our case, we have like a strong, let's say, common view with CIB that usually takes care of the new origination, also from the ALCO in order to assess whether it's a good opportunity and actually may go in the same direction as our ALCO decisions. On fees, on banking fees, I think that we have been commenting already from -- for quite a long time that there is like an underlying pressure on that path. On recurring banking fees, basically, pressure on maintenance fees on current accounts, on debit cards, some areas, some areas in payments also to some extent, subject to some pressure. Now we have instant payments. So the key here is to be able to more than compensate that with our usual strengths that you know very well, which is wealth management, protection insurance and well, and lately, I would say that we have been commenting that also this year with an increase, let's say, regularity of the CIB business. So I think that's the key because at the end of the day, this is kind of underlying pressure on those, let's say, fees related to products with low added value. And our view is set to continue. Obviously, we try to defend ourselves as best as possible but I would not say that this is going to bring us a big turn around anytime soon. But the key I insist is to be able to compensate -- more than compensate clearly because we are targeting -- this is why we put together all that, what we call revenues from services now that includes wealth, insurance plus, let's say, traditional banking fees because you need to get the broad picture of the 3 big buckets. And you know that we are targeting mid-single-digit growth for the combined but probably the part that is going to be lagging is going to be recurring banking fees. Operator: So the last question is from Cecilia Romero Reyes, Barclays. Cecilia Romero Reyes: My one was on capital. At your Capital Markets Day, you mentioned that your CET1 target will increase to 12.5% from the current 12.25%. The difference between your target and your MDA level of SREP or SREP is above the European average. Could you consider maintaining the CET1 target at 12.25% next year, taking into account your current view on capital requirements, growth needs, et cetera? Gonzalo Gortázar Rotaeche: Thank you. Javier, do you want to take it? Javier Pano Riera: Well, the short answer is no. So we are moving our target to 12.5%. What is behind that is the is basically the countercyclical buffer that is kicking off next year in Spain, Portugal. So we had a clear view on that. We want to be conservative on our capital targets. And in any case, we think it's quite a good buffer, as you mentioned, but comfortable one. So I think that also investors appreciate that. So no, there are no plans to keep that at 12.25%. Marta Noguer: Thank you, Cecilia, and thank you all for joining us. That's all we have time for today. Have a nice weekend and Happy Halloween. Gonzalo Gortázar Rotaeche: Thank you very much. Javier Pano Riera: Thank you.
Operator: Greetings, and welcome to the Park Hotels & Resorts Third Quarter 2025 Earnings Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded. It is now my pleasure to introduce your host, Ian Weissman, Senior Vice President, Corporate Strategy. Thank you. You may begin. Ian Weissman: Thank you, operator, and welcome, everyone, to the Park Hotels & Resorts Third Quarter 2025 Earnings Call. Before we begin, I would like to remind everyone that many of the comments made today are considered forward-looking statements under federal securities laws. As described in our filings with the SEC, these statements are subject to numerous risks and uncertainties that could cause future results to differ from those expressed, and we are not obligated to publicly update or revise these forward-looking statements. Actual future performance, outcomes and results may differ materially from those expressed in forward-looking statements. Please refer to the documents filed by Park with the SEC, specifically the most recent reports on Form 10-K and 10-Q, which identify important risk factors that could cause actual results to differ from those contained in the forward-looking statements. In addition, on today's call, we will discuss certain non-GAAP financial information, such as FFO and adjusted EBITDA. You can find this information, together with reconciliations to the most directly comparable GAAP financial measure in yesterday's earnings release as well as in our 8-K filed with the SEC and the supplemental financial information available on our website at pkhotelsandresorts.com. Additionally, unless otherwise stated, all operating results will be presented on a comparable hotel basis. This morning, Tom Baltimore, our Chairman and Chief Executive Officer, will provide an update on Park's strategic initiatives, third quarter performance and outlook for the remainder of the year. Sean Dell'Orto, our Chief Financial Officer, will provide additional color on third quarter results and 2025 guidance as well as an update on our balance sheet and dividends. Following our prepared remarks, we will open the call for questions. With that, I would like to turn the call over to Tom. Thomas Baltimore: Thank you, Ian. And welcome, everyone. Park remained laser-focused on our strategic priorities during the third quarter, fortifying our strong and flexible balance sheet, recycling capital to enhance the quality and growth potential of our core portfolio and driving operational excellence by minimizing cost in a challenging operating environment. Through disciplined execution, we continue to transform Park into an owner of high-quality iconic hotels with compelling growth profiles. We believe this ongoing portfolio refinement combined with unlocking embedded value across our assets, positions us to deliver stronger performance in the years ahead. Because we continue to be proactive with respect to our balance sheet, we successfully extended and upsized our corporate credit facility in September to provide us with committed debt capital that increases our total liquidity to $2.1 billion to address our 2026 debt maturities. I want to thank our bank partners for their continued support and confidence in Park and for giving us the flexible capital to execute our business plan. Turning to our capital allocation initiatives. Our strategy over the past several years has been and continues to be focused on unlocking significant embedded value within our core portfolio to maximize returns for our shareholders. With development returns far exceeding acquisition yields, we continued to lean into high ROI reinvestments, deploying over $325 million across our best-performing assets at returns approaching 20%, including the meeting space expansion and renovations at our Signia and Waldorf Astoria, Bonnet Creek complex in Orlando, the renovation and repositionings at our Casa Marina and Reach Resorts in Key West and the renovation and upbranding of our Santa Barbara Resort. In May, we launched our 6 major hotel redevelopments in 7 years, a $103 million renovation and repositioning of the Royal Palm located in the heart of South Beach, Miami. This transformational project is expected to generate a 15% to 20% IRR and more than double the hotel's EBITDA from $14 million to nearly $28 million upon stabilization. Importantly, construction remains on schedule and on budget, and we are targeting a reopening ahead of the 2026 World Cup matches in Miami next June. We also have several other major renovation projects underway, including the final phases of guestroom tower renovations at both of our Hawaii hotels expected to be completed in early Q1 2026. as well as the second phase of guestroom renovations at our Hilton New Orleans Riverside Hotel, upgrading another 428 guestrooms in the 1,167-room Main Tower. The remaining 489 guestrooms at New Orleans are expected to be completed over the next 1 to 2 years. In total, we expect to execute approximately $220 million in strategic renovation projects this year, further enhancing the quality of our core portfolio. We remain confident that reinvesting in our assets represents the highest and best use of capital. Since 2018, we have invested approximately $1.4 billion in our core hotels, upgrading nearly 8,000 guestrooms and fully repositioning several of our most strategic assets. We continue to be disciplined and deliberate with our capital recycling efforts, particularly as the transaction market remains episodic. Our goal remains crystal clear to divest our remaining 15 non-core consolidated hotels and concentrate ownership across 20 high-quality assets in markets with strong growth fundamentals and limited new supply and that account for 90% of the value of our portfolio. Successful execution of this strategy will position us with one of the highest quality portfolios in the sector and among the strongest same-store growth profiles. In line with this plan, we recently closed the 266-room Embassy Suites Kansas City a property on an expiring ground lease that generated minimal EBITDA. And by year-end, we will exit 2 additional non-core hotels on expiring ground leases, the DoubleTree Seattle Airport and the DoubleTree Sonoma, which are expected to generate a combined EBITDA of just $300,000 this year. Exiting these 3 lower-quality assets will meaningfully enhance our portfolio metrics, increasing nominal RevPAR by nearly $6 and expanding margins by approximately 70 basis points. Despite a challenging environment, we remain laser-focused on executing our strategic objectives with several non-core assets currently being marketed and active discussions underway on multiple transactions, including 2 potential deals under letter of intent. Turning to operations. As we disclosed on our second quarter call, third quarter results were impacted by a meaningful decline in group demand driven by tough year-over-year comparisons following last year's strong citywide calendars across several of our markets, incremental disruption from the second phase of our Hawaii renovations, which began in August, a month earlier than last year and further challenged by softer leisure and government demand. Overall, RevPAR declined 6% or approximately 5% when excluding Royal Palm South Beach. Despite these headwinds, several of our core markets performed exceptionally well, further demonstrating our ability to unlock value at our hotels. In Orlando, the Bonnet Creek complex delivered nearly 3% RevPAR growth with both the Signia and Waldorf Astoria hotels achieving their highest third quarter RevPAR and GOP in the complex's history. Looking ahead to Q4, the complex is set to benefit from multiple group buyouts with group revenue pace up 28% and RevPAR growth expected in the mid- to upper single digits. In Key West, RevPAR growth outperformed the broader portfolio, increasing 1% for the quarter, while Casa Marina's RevPAR index reached 110, up nearly 800 basis points year-over-year, driven by very strong group demand. Overall, group room nights increased 28%, driving higher occupancy and stronger overall results. For Q4, we expect continued outperformance supported by ongoing leisure transient strength as we head into peak season translating to mid-single-digit RevPAR growth. In New York, RevPAR rose nearly 4% with meaningful share gains across all segments. Meanwhile, in San Francisco, the JW Marriott Union Square delivered RevPAR growth of nearly 14%, supported by strong group and transient demand. Both hotels are expected to maintain strong momentum through year-end, driven by very strong group trends with the group revenue pace up 14% in New York and 160% in San Francisco. Finally, at the Caribe Hilton in Puerto Rico, Q3 RevPAR increased nearly 12% with incremental leisure demand driven by the Bad Bunny residency, which added roughly 1,300 basis points of lift to the quarter. Looking ahead to the fourth quarter, we expect a significant rebound led by a broad-based recovery in group demand coupled with easier year-over-year comparisons in Hawaii as we lap the 45-day labor strike, which began late September last year, the impact of which was endured throughout the fourth quarter last year. Group revenue pace for the fourth quarter is currently up over 12% year-over-year with double-digit increases for several of our largest group houses, including our Bonnet Creek complex in Orlando, our JW Marriott in San Francisco, our Hiltons in New York, New Orleans, Chicago and Denver, our 2 Hawaii resorts and the Caribe Hilton Resort in Puerto Rico. That said, the extended government shutdown has impacted both group and transient demand in several of our core markets and more pronounced in Hawaii, D.C. and San Diego, placing additional pressure on fourth quarter results. Through the end of October, we estimate that the shutdown has reduced expectations for room revenue by approximately $2.5 million, resulting in a roughly 180-basis-point drag on this month's RevPAR performance. October RevPAR is now expected to be relatively flat year-over-year for the total portfolio or up approximately 1.5% when excluding the Royal Palm in Miami. Based on our current forecast, which reflect the impact of the shutdown through October only, we expect fourth quarter RevPAR growth to range between negative 1% and plus 2% or positive 1% to positive 4% when you exclude Royal Palm. Sean will provide more detail on our updated full year guidance in just a moment. Finally, as we turn our attention to 2026, I am confident that the strategic investments we have made will position Park to outperform during reacceleration of the lodging cycle. While some macro uncertainty persists, particularly for the lower-end consumer facing economic pressure from higher rates, we see the foundation forming for the next cycle of expansion. A more accommodative Fed and easing financial conditions, resulting in lower rates and taxes should support a rebound in business investment. At the same time, sustained public sector and private sector spending, particularly around AI infrastructure and the anticipated productivity gains from AI adoption, together with a modest pickup in inbound international travel, particularly from Japan, should further strengthen lodging fundamentals. Looking ahead, we remain optimistic about 2026 and beyond, supported by expectations for lower interest rates, a more favorable regulatory environment and a renewed investment cycle, all of which should drive stronger economic and travel growth, along with a meaningful boost from major events, including World Cup events in multiple cities, the Super Bowl in the San Francisco Bay Area and New York and Boston's 250th anniversary celebrations. With industry supply growth remaining at historic lows, we see a clear path for RevPAR acceleration and sustainable long-term growth, particularly across the segments and markets where our portfolio is concentrated and additional growth from the capital investments we are making in the core portfolio. And with that, I'll turn it over to Sean. Sean Dell'Orto: Thanks, Tom. For the third quarter, RevPAR was $181, representing a 6% decline over the prior year or down 5% excluding the Royal Palm South Beach, which suspended operations in May for its full-scale renovation. Total hotel revenues were $585 million, and hotel adjusted EBITDA came in at $141 million, translating into hotel adjusted EBITDA margin of 24.1%. Despite the softer top line results, continued cost discipline by our team and hotel partners held expense growth relatively flat for the quarter, marking the third consecutive quarter with expense growth of 1% or less. Adjusted EBITDA was $130 million and adjusted FFO per share was $0.35. Turning to the balance sheet. As Tom mentioned, we made significant progress toward addressing our 2026 maturities by amending and upsizing our corporate credit facility. The facility now includes a $1 billion senior unsecured revolver with a fully extended maturity in 2030, a new $800 million senior unsecured delayed draw term loan facility with a fully extended maturity in 2031 and a $200 million senior unsecured term loan maturing in 2027 that was entered into in May of last year. We expect to draw on the new term loan next year to fully repay the $122 million mortgage on the Hyatt Regency Boston and together with a subsequent financing transaction expected in the first half of 2026, fully repay the $1.275 billion mortgage on the Hilton Hawaiian Village by the middle of next year when the par prepayment window opens. With respect to the Hilton San Francisco and Parc 55 hotels, which were placed into receivership in November 2023, we now expect the hotels to be sold by the receiver on or before the 21st of next month as the purchaser has exercised its onetime extension right outlined in the executed purchase and sale agreement. Turning to dividends. On October 23, we declared a fourth quarter cash dividend of $0.25 per share to stockholders of record as of December 31, translating to an annualized yield of approximately 9%. To preserve liquidity for our strategic initiatives to reinvest in the portfolio and deleverage the balance sheet, we do not expect to declare a top-off dividend for 2025, preserving over $50 million based on the midpoint of our updated FFO guidance. And finally, on guidance, based on third quarter results and known impacts from the government shutdown, we are adjusting our full year outlook. We now expect full year RevPAR growth to be down around 2% at the midpoint of a range between negative 2.5% to negative 1.75% or down 1% at the midpoint, excluding the Royal Palm South Beach. Our revised guidance reflects weaker-than-expected third quarter results and continued softness in leisure demand expected for the fourth quarter, further compounded by the impact of the government shutdown in October. Accordingly, we are also lowering our full year adjusted EBITDA forecast by $12.5 million at the midpoint to $608 million, within a tightened range of $595 million to $620 million, resulting in a hotel adjusted EBITDA margin range of 26.3% to 26.9%, a 20-basis-point change versus prior guidance. Adjusted FFO per share is now expected to be $1.91 at the midpoint within a range of $1.85 to $1.97 per share. This concludes our prepared remarks. We will now open the line for Q&A. [Operator Instructions] Operator, may we have the first question, please? Operator: [Operator Instructions] Our first question today is coming from Duane Pfennigwerth of Evercore ISI. Duane Pfennigwerth: I wanted to ask you about the expense performance. Given kind of the lower outlook on 4Q RevPAR, it feels like you're pulling expenses down to a surprising degree to offset that. Can you just talk specifically about where that's coming from and what the planning cycle for those expense pull-downs looks like? How much lead time do you need to do that? It just continues to be a bit surprising given the variance in RevPAR and the lesser variance in EBITDA. Sean Dell'Orto: Sure, Duane. This is Sean. I'll take a first stab at that. We talked about this last quarter. Clearly, aggressive asset management is a key pillar of ours, and we work with the hotel partners looking to reduce costs in this environment that we're experiencing. We talked about deep dives last quarter. We did that in over a dozen properties, definitely some key properties of ours, looking at both revenue and cost opportunities on the cost side. It's been anywhere from productivity elements, staffing, full -- FTE type staffing, procurement, think about how you might look at certain brand standards and certain assets that don't necessarily fit or make sense in challenging those. So a number of initiatives, experimenting with a few ideas to ultimately drive costs out of the operating model. So this is something that we've been working on throughout the year. And we've noted that some of the deep dives we did in a batch of properties, we started in Q1 and Q2, and we're expecting to see the benefits of that as the year went on. So some of that is there embedded in kind of what we see in Q4. I think on the other side, too, we continue to benefit from the renewal we did in the insurance side with 25% reduction in premiums. We continue to fight on tax appeals in certain markets, especially where real estate valuations are lower than they were pre-COVID and seeing effects of that as well. So that's all kind of getting layered in. Clearly, there's a focus even more intently as you see some of the expectations of Q4 come through. And that's, I think, more kind of real-time adjustments that you make in terms of staffing levels to what you might see in occupancy drops. I think in the end; it's yielded results here. I mean when you adjust out Royal Palm, which obviously is closed and you adjust out Hawaiian Village, which had some anomalies and other things related to with the strike on the cost side we've seen and other anomalies that we've had lapping over year-over-year, we've seen expense growth decline each quarter from the start of the year. We were up 2.7% in Q1 and we're down ultimately just below flat, about 50 basis points down expected for Q4. So I think it's just -- it's a lot of hard work being done, a lot of good work being done to execute against this. Operator: The next question is coming from Smedes Rose of Citi. Bennett Rose: I just wanted to ask you a little bit on the dividend side. You noted that you don't have to pay, or you won't be paying the special dividend in the fourth quarter. And is the remaining quarterly $0.25, is that really just to reflect the required sort of payout from a tax perspective? Or is there anything you could do there on the dividend side sort of as you think about sort of cash retention going forward? Thomas Baltimore: Yes. It's a great question, Smedes. Obviously, we're a little perplexed by the number of calls that we've gotten regarding the dividend. And if I could sort of frame for a second, if you look over the last 3 years, we've returned about $1.3 billion in capital to shareholders, both through dividends, obviously, through buybacks. We bought back about 38.5 million shares. That's about 20% of our float. And if you think about that $1.3 billion, I mean, our equity market cap today is somewhere around $2 billion, plus or minus, at obviously a depressed low and somewhat ridiculous number. When you think about that and we're 60%, 70% of that, we've already returned. And we're already paying a dividend that's 9%, 10%. So there was nothing -- there's no liquidity issues at Park. If anything, based on what we've just done and incredible work led by Sean and by the team and with our credit facility, we've got $2.1 billion of liquidity. So there are no issues at all. And I also remind people, if you think back to the pandemic when we virtually had no revenue and all the discipline and the moves that we made and that we got through that. So clearly, no liquidity issues at all. This was just a conscious effort that we thought a 9% to 10% dividend yield, far in excess of any of our peers was really the right threshold. We do have depreciation. We do have the ability to be able to shield and we really thought that we could deploy that incremental quarter, $0.25 plus or minus, back into strategic investments and/or having it available to pay down leverage. So it was really nothing more than that. And I just want to reinforce, we are very disciplined about our capital allocation. I think we've demonstrated that time and time again, and we'll continue to have that focus and that discipline. And we thought the incremental $0.25 and reallocating that was the right business decision at this point. Bennett Rose: Okay. I guess just switching gears for just a minute. I wanted to ask you just as we -- obviously, a lot of focus is turning to 2026. Could you just talk about kind of what you're seeing on the group side for next year for sort of pace of bookings or revenue? And any particular kind of submarkets where you're seeing significant strength or weakness? Thomas Baltimore: Well, if we look at '26 group pace, and I think it's important to sort of -- given Hawaii is still ramping up, take if you exclude Hawaii and excludes Royal Palm, which will reopen and complete in May, early June of next year, you're essentially flat in '26 right now. '27, as we look out, I think we're up about 4.1% plus or minus. So we think about markets, clearly strong markets Signia, Bonnet Creek, up probably 9%. Our Hyatt in Boston double digits; Caribe probably up another 39%; Santa Barbara up a significant amount, certainly north of 50%; Casa Marina, up low to mid-single digits. So certainly feel very good about that right now as we look out. We fully expect that we'll continue to see more activities with our operating partners to continue to build the group base for '26. As we think about 2026, we're pretty encouraged. I mean there are a number of data points out there that I think are interesting. Clearly, as you think through with the Fed, we certainly expect a more accommodative Fed, lower rates, clearly lower tax rates, deregulation, certainly more public and private investment. And as we all know the kind of dollars that are being invested right now in AI and infrastructure and certainly the expected productivity gains there. But you've got also special events. You've got the impact of World Cup, which we all -- we certainly believe is going to be significant. Obviously, the Super Bowl out in the San Francisco Bay Area. Obviously, the anniversary celebrations, 250 years, which will be largely anchored in New York and Boston. We expect, obviously, Park is going to be very well positioned to take advantage of that. So as we look out, we're certainly encouraged. It would be nice to have some of the tariffs and some of the other matters, geopolitical sort of calm down, less of an impact would certainly be helpful and I think provide incremental tailwinds as well. But we're very encouraged as we look out to 2026. We're also very encouraged by really the strategic investments that we continue to make as you think about what we're doing in Hawaii, both properties there, if you think about New Orleans, what we're doing, obviously, just incredibly bullish about our transformation in Miami. We think that's just going to be an extraordinary success and really excited about the progress that we're making there and fully expect that, that will open, obviously, in May, early June of next year. Operator: The next question is coming from Chris Woronka of Deutsche Bank. Chris Woronka: So my first question, Tom, you mentioned asset sales and you got 15 non-core assets. You may have other things with land and such. I guess the question would be, what's your conviction level? What's your confidence level maybe now versus a year ago or 6 months ago in some of these same assets? What needs to happen to get some of these over the finish line? And do you think we start seeing an acceleration in that as we move through into the new year? Thomas Baltimore: Chris, it's a great question, and thank you for it. I mean we -- I can tell you, as a leadership team, and we are laser-focused. Let me just set the stage for a second. Really, our top 20 assets account for 90% of the value of the company. And if you really focus on sort of the core and the core metrics, of those 20 assets. It's really as strong as any portfolio in the sector. We remain laser-focused on selling the non-core and recycling that capital. I think it's important to remind listeners, I mean, we have sold or disposed now of 47 assets for north of $3 billion since the spin. So we have -- in the worst of times, even during the pandemic, keep in mind, we had 6 assets in San Francisco. We now have 1 asset, and we sold 2 of those in the worst of times during the pandemic. It is challenging in this environment. It's not an issue of debt. There's plenty of debt capital. There's plenty of equity capital. I think if you can get really just better visibility and less volatility, that certainly will help. There are 2 additional leases. Obviously, we gave back the Kansas City asset, which is we mentioned, obviously, in our prepared remarks, we've got 2 other assets that we made the decision last year that we would not extend those ground leases, short-term ground leases. We'll give those assets back at the end of this year. We've got 2 other assets under letter of intent, and we've got several others at various stages of the marketing process. We are very confident we probably would lean more towards the low end of our guidance than the high end. We've said $300 million to $400 million this year. And it is conceivable that some of that could bleed into early next year from a closing standpoint. But please rest assured that we are laser-focused, committed, experienced in selling and disposing of these non-core assets. We've done it. We've done it with assets that have been even more complex. Every asset has got a story, whether it's a legal or tax or some other matter. But the team is working their tails off to make progress and get this matter behind us. The sooner we can get closer to those 20 hotels, we think that's really going to improve our optionality, but I think allow investors to really look through with the core assets and really the incredible work that we're doing within that core. That's where we're spending significant dollars. We believe passionately that we can generate higher returns on our -- from development yields than we can from acquisition yields. Chris Woronka: Okay. As a follow-up, I think we heard Hilton last week talking about lower expenses to owners and franchisees and some of that is coming from the, I guess, what you call the share -- I don't know the exact term, but some of the chargebacks. Is there more that can be done there? How do you guys view that? Is that a material or tangible benefit to you next year? And just maybe where you sit with respect to maximizing what can be done with -- through the franchise agreements to keep your costs down from the parent companies? Thomas Baltimore: Yes. It's another great question, Chris. We are spending a lot of time with our partners at Hilton and our other operating partners. As Sean so eloquently pointed out, when you think about expenses and what we've done 3 quarters in a row, if you look at insurance, if you look at the deep dive analysis that you mentioned, we are as good as anybody at really in this environment where you haven't really had the top line growth across the sector, doing everything humanly possible to take cost and really reinvent the operating model where we can. You're going to see that continue, and you're going to see us continue to push and encourage and partner with Hilton, with Marriott, Hyatt, et cetera, trying to find ways to continue to take cost out of the business. There are huge opportunities there, and I have to think candidly, with the advancement of AI as that continues to expand and that we've got to believe that there are going to be significant savings and productivity gains there as well. I don't think those occur necessarily this week, this month, but I certainly believe over the intermediate and long term, there are going to be real opportunities there. Operator: The next question is coming from David Katz of Jefferies. David Katz: What I would love some help with having gone out there earlier this year with yourselves and your peers, Hawaii is still just a confusing market for me. Can you just sort of give us as much insight on sort of what the puts and takes or the drivers, the headwinds are out of Hawaii at this point? Thomas Baltimore: Yes. It's a fair question, David. I think you've got to kind of step back a little bit and just think about Hawaii. If you think about over the last 20 years, Oahu's RevPAR growth has really outpaced the U.S. by at least 120 basis points. I think Key West in Hawaii is sort of lead a CAGR of about 4.5% versus the U.S. average of about 3.3%. If you think back over that period of time, we've had negative supply growth, I think 0.3% or less than that. Think about the next 5 years, we're thinking about supply growth in Hawaii at 0.3% again. So that backdrop to us is very, very encouraging. Domestic airlift has also increased 20% since 2019. And a lot of the owners in Hawaii own their assets underground leases. I mean in our case, in both of our world-class resorts there, -- we own those, obviously, fee simple. And we just think that's a huge advantage. And obviously, there's a little bit of a concentration issue. Ideally, we wouldn't want to have 25%, 30%. But if you're going to have it anywhere, having it in Hawaii certainly gives us comfort. Clearly, from a demand standpoint, if you look historically, it's about 10 million visitors -- 9 million to 10 million visitors, 60% plus or minus coming out of the U.S., 17% historically coming out of Japan over the last 30 years. And to get to your point, it was about 1.5 million in Japan. I mean, we're going to end this year probably somewhere in the 720,000 to 750,000. So you're clearly seeing less visitation from Japan. It's been a slower ramp-up, there are reasons for that, the stronger dollar versus the yen, and there have been some fuel surcharges. There have been some cheaper alternatives. So clearly, that Hawaii ramp-up with Hawaii participation today is about probably 3% to 4% of the international demand at our assets versus probably 19% plus or minus where it was in 2019. So we are encouraged by recent discussions. Sequentially, Hawaii has gotten better. Obviously, we had the strike. It was a very challenging environment for 45 days and the lingering effects of that. We were down 18% first quarter, 13% second quarter, 9% plus or minus third quarter. And we expect we're going to be somewhere north of 20% here in fourth quarter, even with sort of the revised guidance that Sean outlined. So it's certainly taking a little longer, but we are bullish and passionate and still believe, obviously, the investments that we're making, Tapa Tower, huge, huge benefit, Rainbow Tower and what we're seeing there. We're excited, obviously, what we're doing at Hilton Waikoloa. Hilton Waikoloa, a little more complex, the second phase of that renovation. So more rooms out of service that certainly is contributing to a little bit of the more disruption there and certainly contributing to some of the softness there. But -- and Canadian travel. Canadians, as we all know, account for and Mexican travelers about half of the inbound international travel into the U.S. And Canadians have been frustrated, and they have been voting with their dollars and their travel has been down in Hawaii, and it's certainly been down in other markets as well. So we're certainly feeling the effects of that as well. Once some of those matters on the trade front get normalized and get resolved, we certainly expect that they will be back and certainly think that Hawaii will accelerate in terms of its ramp-up. David Katz: A lot going on, but you still like it. Thomas Baltimore: Yes, very much so. Operator: The next question is coming from Patrick Scholes of Truist Securities. Charles Scholes: Sorry if I missed this in the prepared remarks. You had noted in your guidance and expectations only expecting the government shutdown through today. It doesn't look like it's going to get resolved today. Why not continue that expectation in your guidance beyond today? Thomas Baltimore: Yes. It's another excellent question. Look, at the time we were preparing the guidance, and the situation has been so fluid, we wanted to include for investors and analysts and all the listeners what we knew. And what we knew as of the end of October was about $2.5 million of impact. So we've included that. But we also were conservative in our guidance, and that reflects sort of the midpoint. So if this were to continue, and none of us know how this is going to unfold, and everybody has probably got an opinion. The reality is that if you look at the low end of our guidance, we believe that we are adequately covered if this were to continue. And I'll reinforce that. We centered our -- obviously, our guidance on that midpoint and recognize that if it were to continue, we believe that we're covered through that guidance range. I would also tell you my own opinion, growing up and living in this market for my life and talking and watching my strong belief is that this will be resolved in the near future. I don't think either party can allow for this to continue much longer, particularly with the impact with 40 million people not having food benefits among other benefits. And so I hope that our leaders in Washington on both sides of the aisle will resolve it in short order. And -- but we think that we are covered for the guidance that we have provided. If we get more information, if it were to extend and have more of an impact, we certainly will provide that on either side of that. But we wanted to provide and be transparent for what we knew and what we were seeing in our portfolio. Operator: The next question is coming from Stephen Grambling of Morgan Stanley. Stephen Grambling: I just wanted to follow up on the reallocation of the top-off dividend to investment. Is that something that you'll have the opportunity to do in the future? Maybe I missed this. And if you did have that opportunity, maybe any thoughts around thinking through that capital allocation? And is there -- are there big projects that you try to pull forward that you have on your horizon? Thomas Baltimore: Yes, it's a great question. Thank you for it. Listen, we've -- as I said earlier, we've been very thoughtful about capital allocation. And again, returned $1.3 billion to shareholders here over the last 3 years. And we really concluded, Sean and I and the team that obviously, a 9%, 10% dividend, which is where we are today was -- and certainly sector-leading was certainly enough and made sense. We will have the flexibility in the future to certainly manage that dividend, and we will be thoughtful. We just didn't think we thought reallocating that $50 million for either debt reduction and/or continued strategic investments in our portfolio makes a lot of sense. I mean if you take Bonnet Creek as an example and just the success that we're having there, we've taken EBITDA from there approximately $55 million. We think we'll be somewhere north of $95 million this year. We're generating significant returns and higher returns through our development and strategic ROI activities than we can generate through acquisitions. So strong believers in that and strong believers that there's a lot of embedded upside within this portfolio. Stephen Grambling: Got it. And just to be clear then, so I guess the answer in some ways depends on where the dividend yield shakes out and valuation. Is that fair? Thomas Baltimore: Yes. Yes, that certainly plays. I mean we've always targeted kind of 65% of AFFO. And obviously, we've managed that a little more this year, but it's not -- again, it's not a liquidity issue. We've got plenty of liquidity. We've got -- when you -- we have no issues there, and we have our 2026 maturities addressed appropriately and are very thoughtful, very creative and huge credit to Sean and the team and what we've done there. So we are very thoughtful, and I think we've been as disciplined as anybody on the capital allocation front. But we also know a respectable solid dividend makes sense. And clearly, we're way in excess of all of our peers on that front. Operator: The next question is coming from Chris Darling of Green Street. Chris Darling: So Tom, thinking about the impact of the government shutdown, in the past when these events have been resolved, do you typically see demand come back fairly quickly? Or is there historically a lagged recovery? I'm not sure if you have any experience thinking back to draw on. Sean Dell'Orto: Yes. I mean I think there's certainly a possibility of that, Chris. I mean, clearly, it depends. We haven't seen -- while we've seen some group cancel related to government, it's been certainly more so on the transient, kind of seeing how that -- how that's -- the pickup of that has been more impacted. But groups -- a lot of these groups tend to have to -- are required to meet in a way. And so we certainly expect that those will rebook. Now the question will be, will it be within the quarter or will be kind of into the next year? It's the kind of question. So it might be a little bit more spread out over a number of months that may be hard to tell really a true impact on it. I mean we did some looking in a way back at the last long one, the first Trump term, and it straddled both December and January. And so you certainly saw some impact in government spend in transit in January, but did only see dramatic pickup in February, but it was also a good time, a good macro environment, too there. So it's kind of hard to look back in the past and try to draw any conclusions. But just from a standpoint of the fact that a lot of people have to make these trips, have to do this travel in a way. And so there's probably a thought that you're going to rebound some of that, just matter of when. Thomas Baltimore: Chris, I agree with everything that Sean said. The other point I'd make here on our portfolio, obviously, a strong fourth quarter group pace of about 12%. Surprisingly, November and December were double-digit increases and certainly stronger than October. So if we are all lucky and our leaders on both sides of the aisle resolve and reopen the government, we could see increased activity here based on what's on the books already in November and December. So it could be a bit of a green shoot for us there. Chris Darling: Okay. Yes, those are all helpful thoughts. I realize it's a fluid situation, certainly. Maybe just one quick one going back to capital allocation. As you work to sell some of these non-core assets in the coming quarters and you think through use of proceeds, to what extent are you thinking about share buybacks, just given the frustration with where the share price has been relative to, of course, needing to retain some amount of capital for the different redevelopments and expansions that you've talked about? Thomas Baltimore: Yes. It's a great question, Chris. I would say, look, as I mentioned, I've said it a few times on the call, we've returned $1.3 billion, and we bought back 20% of the float. So with that backdrop, it is important to us. We've always had a guiding principle of leverage in that 3 to 5x. We're certainly above that. And obviously, a little bit of that's artificial right now because you've got major renovations underway in New Orleans, 2 assets in Hawaii and of course, Royal Palm. But we certainly would like as a team to use some of the excess proceeds to pay down debt and continue to invest back into our portfolio. There are opportunistic times when going in and buying shares will make sense. But I'd say right now, the 2 priorities would be really paying down debt and reinvesting back into the portfolio. Operator: The next question is coming from Jay Kornreich of Cantor Fitzgerald. Jay Kornreich: I just wanted to ask a question about the 4Q outlook. RevPAR is roughly flat, which is a change from the expectation last quarter where 4Q would be, I guess, up 3% to 5% and recognizing there are some new dynamics such as the government shutdown. But are there any other points or markets that you would relate to that maybe led to some of the deceleration for the 4Q expectation? Sean Dell'Orto: Yes, Jay, I'll jump in on that one. In our last call, we talked about a 3% to 5% up for Q4. So as you spoke to as you're noticing about a 350-basis-point drop relative to that expectation. It's kind of a mix of macro trends and near-term disruption as well as a little bit of Park specific sprinkled in there. But when you kind of start from just a more macro level and just some of the transient softness we've seen, whether it's through this -- through inbound international travel that Tom talked about, just seeing a continuation of that and kind of looking at certain markets and seeing a little bit of the trend line there. I'd say that there's about 150 basis points of impact to Q4 based on just kind of more general trends and then mostly on transient because group remains strong, pace is up 12%, and within our largest 15 group hotels, it's up 17%. So we feel good about the group setup. It's just more the transient side being impacted relative to our previous expectations. Going from there, government impact, about 100 basis points. It obviously continues to be a challenge since the beginning of -- earlier in the year with DOGE and everything else. We've certainly seen the weakness there, but now more pronounced with the government shutdown, which we've talked about. Chicago, we've seen pickup trends deteriorate materially there with the National Guard deployment into that market. So it's been, again, more of a transient impact in terms of pickup there. Group position there at Hilton Chicago is up 12% for the quarter and is holding. So -- but it's more about -- it's about a 50-basis-point impact to Q4 there from that market. And then Waikoloa [indiscernible] on the renovation scope there, just kind of a little more disruption than planned due to some schedule shifting. We're doing a little bit kind of -- as part of Phase 2, we're doing a little bit of extra work from Phase 1 brought into Phase 2. So it's a little bit of an adjustment there. It's about 50 basis points. So general softness, 150 basis points, government-related 100 and then another 100 between the Waikoloa renovation and the Chicago disruption. Operator: The next question is coming from Cooper Clark of Wells Fargo. Cooper Clark: I appreciate the earlier comments on the dispositions. Curious if you could speak to the bidder pools and buyers you are actively seeing, looking for product in the transaction market today. Wondering what markets, products or yield a buyer is looking for to step in today with what should be a better '26 and '27 demand picture despite some uncertainty? Thomas Baltimore: Yes. I mean, look, there's plenty of liquidity out there. And I think the buyer pool is mixed. I mean you've got from owner operators, certainly family offices. You've got small private equity to larger private equity. You've really got the normal menu. And as I think about assets, we are -- we've had -- and our team has had great success in really finding that buyer for a particular opportunity and we continue to come through and have discussions. I think the hesitation with some buyers is debt markets certainly have improved. But if you believe that rates are going to continue to come down, you might be a little more hesitant on that front. And then certainly, just better visibility on the demand front and probably candidly, just clarity on some of the geopolitical and trade and inflation, I mean, all the things that all of us are working through right now. Uncertainty really is the enemy of decision-making. So I do think that there are some buyers out there that are being a little more hesitant. And in some cases, we certainly understand that. From my own experience, periods of dislocation really create the best opportunities to be buyers, particularly if you've got an intermediate and longer-term hold period. Obviously, we continue to work hard. Again, we've got the track record. And I just -- I can't emphasize that enough and how we've been able to reshape this portfolio since the spin here. And now we're 47 assets that we've sold or disposed of and 2 more in the queue and several more at various stages, whether LOI or the marketing process. So we are confident we'll get it done, and no one is going to work harder than the men and women at Park as we continue to pursue our objectives. Cooper Clark: Okay. That's helpful. And then I appreciate it's still early and there's some uncertainty but wondering how you're thinking about the balance of group, BT and leisure into '26, just given some of your earlier comments on group pace and also a strong '26 event calendar in various markets. Thomas Baltimore: Encouraged. I mean, listen, part of this, if you -- if we can -- obviously, the President's return and the discussions in China, if you can begin to just provide clarity both on tariffs and trade matters and you look at the backdrop of the just inordinate amount of capital that's being invested through AI, but you start seeing and obviously, on the public investment side, just the CHIPS Act, I mean probably 30%, 40% of that or more remains to be spent as well, coupled with the special events that I've mentioned and you mentioned as well from the World Cup, the Super Bowl and obviously, the 250th anniversary. And I think the animal spirits, getting more clarity and just getting broader participation in the broader economy, we know that both in the lower end and certainly parts of the middle that people are hesitant and perhaps a little more stretched. If those issues can be addressed, and I do think that the recent tax bill helps with that, you'll get a tailwind that I think '26 and certainly '27 as we look out, we see are very, very encouraging. The other thing that gives us great comfort is the fact that you've got muted supply. If you look at the Park portfolio, we're 0.7% supply growth versus the long-term average of about 2%, and that's over the next 5 years. So we find that very encouraging as we look out. And as you look at our portfolio, you can't replicate. You can't replicate what we have in Hawaii, what we have, obviously, in Bonnet Creek and what we have in Key West and those barriers to entry. So we're very, very encouraged as we look out over the near term. I want to get through this year, Obviously, we want to get beyond the government shutdown and some of the other matters of uncertainty. But I think as we look out '26, '27, we are very, very encouraged. Operator: The next question is coming from Dan Politzer of JPMorgan. Daniel Politzer: I wanted to go back to the capital allocation this year, obviously, notwithstanding the dividend, there was some CapEx that I think came down. As you think about preserving more capital to reinvest in the portfolio, the CapEx coming down this year and maybe there's some timing there. Directionally, is there maybe any inkling on how we should think about CapEx for next year, just given it seems like you're focused on reinvesting in the portfolio? Thomas Baltimore: Yes. I think I'll let Sean give you the math, but we are not lowering CapEx. I mean if anything, we have been crystal clear. And I think if you look at what we've done in Bonnet Creek, what we've done, obviously, in Key West, obviously, what we're doing right now in Miami, what we're doing in Hawaii with 2 of the towers near complete, you think about Hilton Waikoloa, which will be done this year. If anything, we sort of -- if anything, we accelerated and expanded scope slightly. And part of that is some things that we needed to go back and some other things we felt we needed to expand. So we are all in. We think we're making the right decisions. And obviously, I think the results are showing that. We're seeing the incremental lift in rates, IRRs that are in the 15% to 20%, think about what we did in Santa Barbara. So we think high better returns for us through the development side than what we're seeing on the acquisition side. Sean Dell'Orto: Yes. I'd just add, it's more so timing. We're probably about $190 million or so through the third quarter on spend, and we certainly expect that to be more ramped up with Royal Palm well underway here for the Q4. But I think in total for the year, we just felt like it's probably a more appropriate range for the actual spend out the door. Projects still remain the same, more going into next year. Daniel Politzer: Got it. And then just on Hawaii, maybe another one asked differently. I think you're pacing about 70%, 75% of the EBITDA relative to 2023. As you think about the glide path and trajectory into 2026, do you think you can fully close that gap? Or do you think it's going to take a few years? Thomas Baltimore: I think you're back in '27. I think you're still ramping in '26 and you're looking at what's probably low 150s number this year versus 177 and keep in mind that we are finishing the second phase of the Palace Tower in Hilton Waikoloa and then, of course, we've got the Rainbow Tower that we're finishing up here in Hilton Waikoloa, which obviously is 1 of the premier towers. So we remain steadfast and very confident and certainly believe that those continue to ramp up. And we're also making a number of other operational changes. We are spending a tremendous amount of time with our partners at Hilton, looking at both from a leadership, sales and marketing, all of the commercial engines. It's terribly important to us, but it also is a big fee generation for -- generator for our partners at Hilton as well. Operator: The next question is coming from Robin Farley of UBS. Robin Farley: Just 2 small clarifications at this point. One is just trying to understand your comments about the -- because the release says your guidance includes just the strike through sort of today -- I mean, sorry, the government shutdown through today. It sounded like you said that the lower end of your range includes the shutdown continuing through the quarter. But just if I heard you right about the impact in October, it seems like the range wouldn't be wide enough if it continued. Is it just that is government business less of a factor in November and December than in October? I mean that would make sense if that's the case. Or do you think it would be a similar impact when we think about how the next 2 months could look? Thomas Baltimore: Yes. We think it would be less of an impact, Robin, as we look out. And look, as I said, one person's opinion, I just don't believe that they can allow this to drag out much longer for all the reasons we all know, all of the families and kids and others that are being impacted. And we're all hearing rumors that certainly this should be resolved, hopefully in the very near future. But we also believe that the lower end of that guidance will largely protect us based on the guidance that we've provided. Robin Farley: Understood. But just even if it were solved today in theory, right, there'd still be some November impact, but I totally understood. And then the other clarification was just on Hawaii, and I just wasn't sure if I -- when I caught your comments about forward group bookings. I think when you said group pace for the company overall was flat in '26, I think you were excluding Hawaii. And just wanted to -- it seems like Hawaii; you're comping the strike. You have the benefit of some room renovations. I know the convention center in Hawaii will close at the end of '26. So I know that, obviously, the '27 -- that would make the '27 sort of timing off. But for 2026, is your group Hawaii, the pace benefiting from those strike comps and things? Thomas Baltimore: Robin, our understanding is that the convention center will be closing at the end of '25. Robin Farley: So the Hawaii down is primarily just the timing of that and not so much... Thomas Baltimore: Correct. Yes. And keep in mind, group is also a small percentage of Hawaii, but it will be closing here in '25. Operator: The next question is coming from Aryeh Klein of BMO Capital Markets. Aryeh Klein: I had a bit of a bigger picture question. I think historically, non-residential fixed investment has been relatively highly correlated with demand. But now perhaps with AI, that relationship is seemingly not holding up the same way and maybe even distorting the relationship. Curious what you think about that. And if that continues, how does that impact your ability to forecast? And what else are you looking at in terms of helping with things? Thomas Baltimore: Yes. We all spend time trying to figure out what's going to be the right correlation. If you think historically, right, it was GDP growth. And then if you think about certainly the last decade or so, it's been huge emphasis on non-residential fixed investment spending. I have to believe, candidly, on both sides. I think that both remain important. I just think it's the level. If you think about just GDP, they have been disconnected here in the short term. I have to believe that, that will change, and we'll continue to see as GDP gets in as Westin and others want to get it in that 3% range, we certainly think that's going to be a huge tailwind for our sector. That's one point that I would make. And if you think about just the amount of investment spending in the adjacencies, both in energy, both in data centers, both AI, both in all the things that have got to be done from certainly the electrification side, I have to believe that, that will continue to benefit lodging as well as we sort of look out. And if you get non-residential fixed investment spending in that sort of 3% to 5% range, you get GDP in that 3% range. Think of both the operating leverage and the benefit that we think that's going to accrue to lodging will be significant. And candidly, we'll have an industry that we hope will be certainly more attractive to investors from that standpoint where you can get the kind of operating leverage, which is just more difficult to get when we -- at these lower RevPAR numbers. Aryeh Klein: And maybe just on the dividend. I understood you're not paying the top off. But as you think about the yield in that 9% to 10% range, when it comes to next year, is there a thought to maybe reduce that yield. Thomas Baltimore: Yes. Look, we obviously haven't decided that for next year. Historically, we've been in that 65% of AFFO. If anything, we -- you could see us certainly consider moderating that a little. But at this kind of run rate, $1 dividend, we think, is very healthy and certainly a 9% to 10% for anything we hear from most investors, they certainly appreciate that. This has gotten a lot more interest than we would have thought and hoped to be candid. And I know some, I want to reinforce again, there are no liquidity issues, 0 with Park. If anything, we've got significant liquidity. We just decided that we wanted to allocate. We thought that there was an opportunity both to pay down some debt and also reinvest back into the portfolio. So it was really a strategic decision made by the leadership team. Operator: The next question is coming from Ken Billingsley of Compass Point. Kenneth Billingsley: My question is regarding comparing total RevPAR to RevPAR growth on a year-to-date basis. A number of markets call smaller total RevPAR growth versus its comparable RevPAR such as New York, Boston, D.C. My question is, is this all group and banquet related? And how is 2026 shaping up in the group business Will a bump in leisure travel to some of those cities for the 250th anniversary actually negative impact kind of our total RevPAR expectations for those markets? Sean Dell'Orto: I think we certainly continue to see strong out-of-room spend. And certainly, that goes hand-in-hand with group here with banquet and catering. And those patterns have kind of held up even with Q3, we had certainly a weaker group quarter and a little bit weaker than expected despite that, banquets amongst our urban resort properties have held up pretty well on the banquet revenue side. The outlet side was down about 6%, 7% relative to expectations, again, more so because I think as you have a little bit weaker group, you pivoted to more discount channels. So kind of higher -- lower price point guest who is not necessarily going to spend as much in the outlet. So we certainly saw that dynamic go on there, but I think when you look at the mainstream guests and consumers, on the group side, people continue to spend on their events, AV and the like and guests that are kind of more on the transient side, leisure side and even business are spending in the outlets. So I think that's led to what we've typically seen is about, I think, predicting about 100-basis-point benefit differential between total RevPAR and RevPAR this year. We certainly expect that to continue into next year as you think about some of these -- some of these events. I think there's certainly a nice benefit and pop you expect on rate in the rooms for things like the World Cup. But you see a lot of -- you expect a lot of people being around these markets as part of the -- not going even going the games as part of the celebrations and really being promoting restaurants and certainly other things and outlets inside the hotels themselves. So I think we certainly expect to see a continuation of strong spending patterns outside the [indiscernible] to help promote total RevPAR growth above room RevPAR growth. Operator: Thank you. At this time, I would like to turn the floor back over to Mr. Baltimore for closing comments. Thomas Baltimore: On behalf of the Park team, really appreciate everyone taking time today. We are available for follow-up questions and look forward to seeing many of you in Nareit in Dallas. Safe travels. And please know that Park team is laser-focused on continuing to create shareholder value. Operator: Thank you. Ladies and gentlemen, this concludes today's event. You may disconnect your lines or log off the webcast at this time and enjoy the rest of your day.
Operator: Ladies and gentlemen, thank you for standing by. My name is Desiree, and I will be your conference operator today. At this time, I would like to welcome everyone to the Omega Healthcare Investors Inc. Third Quarter Earnings Conference Call. [Operator Instructions] I would now like to turn the conference over to Michele Reber. You may begin. Michele Reber: Thank you, and good morning. With me today is Omega's CEO, Taylor Pickett; President, Matthew Gourmand; CFO, Bob Stephenson; CIO, Vikas Gupta; and Megan Krull, Senior Vice President of Operations. Comments made during this conference call that are not historical facts may be forward-looking statements, such as statements regarding our financial projections, potential transactions, operator prospects and outlook generally. Factors that could cause actual results to differ materially from those in the forward-looking statements are detailed in the company's filings with the SEC. During the call today, we will refer to some non-GAAP financial measures, such as NAREIT FFO, adjusted FFO, FAD and EBITDA. Reconciliations of these non-GAAP measures to the most comparable measure under generally accepted accounting principles are available in the quarterly supplement. In addition, certain operator coverage and financial information that we discuss is based on data provided by our operators that has not been independently verified by Omega. I will now turn the call over to Taylor. C. Pickett: Thanks, Michele. Good morning, and thank you for joining our third quarter 2025 earnings conference call. Today, I will discuss our third quarter financial results and certain key operating trends. Third quarter adjusted funds from operations, AFFO, of $0.79 per share and FAD funds available for distribution of $0.75 per share reflects strong revenue and EBITDA growth, principally fueled by acquisitions and active portfolio management. Our dividend payout ratio has dropped to 85% for AFFO and 89% for FAD. We again raised and narrowed our 2025 AFFO guidance from a per share range of $3.04 to $3.07 per share, up to $3.08 to $3.10 per share, which reflects our strong third quarter 2025 earnings. The $3.09 per share midpoint of our 2025 AFFO guidance range represents 8% year-over-year AFFO growth versus 2024 AFFO of $2.87 per share. Turning to the portfolio. Our occupancy and coverage metrics continue to improve with EBITDAR coverage at its highest level in 12 years. Furthermore, as expected, the below 1x rent coverage bucket has dropped to 4.3% of total rent, with the expectation of further improvement and all but one below 1x operator paying full contractual rent. I will now turn the call over to Matthew. Matthew Gourmand: Thanks, Taylor, and thanks to everyone for joining the call today. I'd like to take a few minutes this morning to discuss some of the ways in which we're looking to further enhance shareholder value. At Omega, our primary goal is to allocate capital primarily to health care real estate with a focus on growing FAD per share on a risk-adjusted basis. Historically, this has almost entirely involved acquiring health care real estate and entering into triple net leases at a yield above our cost of capital. This has been a very successful investment strategy, returning over 1,200% in total shareholder returns over the past 20 years, and it will likely continue to be a significant part of our capital allocation strategy going forward. However, as the elder care industry embarks on an expected period of burgeoning growth that is likely to last for the next 2 decades, we have made a conscious decision to expand our investment structures to align ourselves with operators with the aim of achieving higher returns over time. There are multiple ways in which we can structure such deals from joint ventures and minority interest investments to back-end participation in value creation upon a sale or recapitalization as well as RIDEA-like structures. With decades of experience of prudent capital allocation and our platform of sophisticated operators, we believe we are extremely well positioned to enhance shareholder returns by acquiring underperforming assets at prices meaningfully below replacement cost and partnering with proven operators to significantly enhance the cash flow and hence, value of such assets. We have been making such investments selectively on a small scale for approximately the past 12 months, primarily through investments in the capital stack of real estate that provide an immediate yield in excess of our cost of capital with an ability to participate in incremental returns upon the sale or recapitalization of the assets. And Vikas will give you a recent example of such an investment in a minute. Our targeted returns for such investments is for an unlevered IRR of at least the low to mid-teens, not assuming any cap rate compression upon exit in our underwriting. Another example of such an investment is the 9.9% equity investment in Sabre's operating company announced last night. Sabre has been an operating partner with Omega for over a decade. And during that time, we have grown to understand their corporate culture with a fundamental focus on strong clinical care that drives sustainable financial performance. While our investment will receive a minimum quarterly cash distribution equivalent to an annual 8% yield, we believe over time, this investment will yield an IRR that will meaningfully surpass our low to mid-teen target. We are grateful to the principals of Sabre for trusting us to invest in their operating company and look forward to continuing to support the further growth of Sabre while adhering to the key resident-focused tenets that we believe are primary drivers of their success. Going forward, we will continue to look at all opportunities and investment structures to potentially align with our operating partners and sustainably grow FAD per share. This includes RIDEA structures, which we are evaluating in both the U.S. and U.K. We will continue to be highly disciplined in our underwriting. And given the competition for such assets, there's no guarantee that this will become a meaningful part of our business in the next 12 to 24 months. However, we do believe that this approach will provide a high level of conviction as to the value creation opportunity for each investment we make. More importantly, we believe the business decisions we are making, be it in capital allocation, active portfolio management or our balance sheet interest rate and currency management will be made prudently and diligently using all salient available data with the primary goal of sustainably growing FAD per share on a risk-adjusted basis. You've seen this in recent quarters as our efforts have started to create traction in our FAD per share growth, and we are hopeful that this will continue over time as our capital allocation decisions bear further fruit. And with that, I'll now hand the call over to Vikas. Vikas Gupta: Thank you, Matthew, and good morning, everyone. Today, I will discuss the most recent performance trends for Omega's operating portfolio, including an update on Genesis and Omega's investment activity in the third quarter of 2025, including the subsequent closing of the Sabre JV transaction, an update on Omega's pipeline and market trends for the remainder of 2025. Turning to portfolio performance. Our core portfolio consists of 1,024 facilities, of which 60% is comprised of skilled nursing facilities and transitional care facilities in the U.S. and the other 40% is U.S. senior housing and U.K. care homes. Trailing 12-month operator EBITDAR coverage for our core portfolio as of June 30, 2025, increased to 1.55x compared to our first quarter 2025 reported coverage of 1.51x. Core portfolio coverage continues to trend in an increasingly favorable direction, above industry average coverage levels and as discussed in prior quarters, provides us with confidence that our operating partners have sufficient means to continue to provide a superior clinical service to residents even in a fluid regulatory and reimbursement environment. In addition to the strong credit supporting our existing investments, these coverage levels enable Omega and our operating partners to continue to grow our respective businesses with the support of the existing free cash flows produced by our current portfolio. As reported on our last call, Genesis filed for Chapter 11 bankruptcy protection in July 2025. As a reminder, Omega leases Genesis 31 facilities for annual rent payment of $52 million. Additionally, Omega has a $125 million term loan with Genesis, which is secured by a first lien on the equity of Genesis' 4 ancillary businesses, which we believe fully secured the loan and has subordinated all assets lien from the overall business of Genesis. Based on our lease coverage and collateral, we believe our credit position in this portfolio is strong. The bankruptcy process is progressing with a few milestones approaching, including the auction of the Genesis assets and the sale approval hearing. We expect this will result in our lease being assumed by Genesis and assigned to the winning bidder. As previously reported, Omega committed to support Genesis by providing an $8 million in debtor and possession financing as part of a total $30 million debtor and possession loan. We have now fully funded our $8 million commitment. Genesis has paid Omega full contractual rent each month since filing bankruptcy. The bankruptcy process is anticipated to conclude in Q1 or Q2 of 2026. This time line, along with all elements of the bankruptcy filing process is subject to the approval of the bankruptcy court. There are no material open issues with any other large operators. Turning to new investments. We are very excited to announce Omega's 2025 transaction activity through the end of October, with over $978 million in total new investments, of which over $850 million or 87% were real estate investments added to our balance sheet. During the third quarter, Omega completed a total of $151 million in new investments, not including $24 million in CapEx. The new investments include $67 million in real estate acquisitions via 2 separate transactions to acquire 2 facilities, 1 CCRC and 1 U.K. care home and lease them to 2 existing operators. Both transactions have an initial annual cash yield of 10% with annual escalators ranging from 2% to 2.5%. In addition, Omega invested $84 million in real estate loans via 4 separate transactions, where the 4 loans have an interest rate of 10% as well as an option for Omega to acquire an ownership interest in the underlying real estate upon the refinancing of the loans. Regarding real estate loans, we would like to highlight that while we place a focus on allocating capital to own real estate investments that grow our balance sheet, we have and continue to see the opportunity to make strategic loan investments that provide Omega the ability to capture a portion of the upside in the underlying real estate. By way of example, in 2024, Omega made a loan investment for an assisted living facility in Connecticut, which provided for Omega to realize 50% of the value creation above the original cost basis. Since that time, our operating partner was able to dramatically improve performance and refinance Omega's loan in October 2025 for triple the original basis, providing Omega with a material return in excess of our loan repayment, resulting in an IRR of 74%, this transaction is an example of how certain loan structures can provide for outsized returns in the absence of permanent real estate ownership. Turning to subsequent events. Subsequent to quarter end, in October, Omega invested $222 million to acquire a 49% equity interest in a portfolio of 64 health care facilities under a real estate joint venture, which is majority owned by affiliates of Sabre Healthcare. All 64 facilities are leased to Sabre under long-term triple net leases with 2% annual fixed escalators and underlying portfolio rent coverage of over 1.46x. Omega anticipates receiving an initial annual return on its investment of 9.3%, escalating thereafter. The investment represents a total portfolio value of approximately $900 million for the real estate, which is encumbered with $449 million of mortgage debt. This is a loan to value below 50%, which provides the joint venture with ample equity value to utilize for future acquisitions. Sabre is a long-standing operating partner of Omega, where in addition to the 64 joint venture facilities, Sabre operates 51 additional facilities owned by us and leased under a consolidated triple net master lease. The entirety of the $222 million consideration was paid via the issuance of Omega operating partnership units. The ability to utilize Omega OP units as currency for a new investment is another powerful tool Omega has at its disposal to provide sellers with a tax-efficient vehicle and to also create alignment with us as the value of those OP units is tied to the continued performance of our share price. As Matthew mentioned, in conjunction with the closing of the Sabre Real Estate joint venture, Omega and Sabre entered into a definitive agreement for us to invest $93 million to acquire a 9.9% equity ownership interest in Sabre Healthcare Holdings, Sabre's parent operating company, which operates 139 facilities, 126 skilled nursing facilities and 13 assisted living facilities. The closing of our ownership interest in Sabre's parent operating company is expected to occur in January 2026 and will represent a unique structure in the skilled nursing industry, creating a strong alignment between Omega as a major capital partner and Sabre as a best-in-class operating partner. With our geographic scope and access to capital and Sabre's operational expertise, both companies will be in an elevated position to evaluate further growth as a team, where real estate and operational success benefits both partners. It is our expectation that the Omega Sabre relationship will continue to grow meaningfully in the years ahead with the added benefit of having the ability to transact under various deal structures, our own triple net portfolio, the Sabre Omega Real Estate joint venture and the Sabre operating company. We are very excited about this new partnership and look forward to sharing that growth story in the years ahead. Turning to the pipeline. Our pipeline transaction outlook for the remainder of 2025 and into 2026 continues to be very favorable. Market opportunities both in the U.S. and the U.K. continue to be substantial, and we are witnessing an increase in our ability to secure off-market opportunities that our operating partners and other relationships bring us. We are seeing individual and regional clusters of senior housing assets, many of which are underperforming or non-stabilized that can be acquired at prices meaningfully below replacement cost and the ultimate stabilized value. Transaction activity for skilled nursing opportunities in the U.S. and care homes in the U.K. also continue to be robust, and we are evaluating numerous opportunities from individual owner operators and regional sellers, most of which Omega has sourced from existing relationships. We continue to evaluate and consider all asset types with increased flexibility on deal structure to ensure that Omega and its shareholders are able to benefit from improvements to the underlying cash flows of our facilities, whether that be through variations on triple net lease structures, RIDEA for senior housing assets or strategic joint ventures as exemplified by our new partnership with Sabre. I will now turn the call over to Bob. Robert O. Stephenson: Thanks, Vikas, and good morning. Turning to our financials for the third quarter of 2025. Revenue for the third quarter was $312 million compared to $276 million for the third quarter of 2024. The year-over-year increase is primarily the result of the timing and impact of revenue from net new investments completed throughout 2024 and 2025. Our net income for the third quarter was $185 million or $0.59 per common share compared to $112 million or $0.42 per common share for the third quarter of 2024. Our NAREIT FFO for the third quarter was $242 million or $0.78 per share as compared to $196 million or $0.71 per share for the third quarter of 2024. Our adjusted FFO was $243 million or $0.79 per share for the quarter, and our FAD was $231 million or $0.75 per share and both exclude several items outlined in our NAREIT FFO, adjusted FFO and FAD reconciliations to net income found in our earnings release as well as our third quarter financial supplemental posted to our website. Our third quarter FAD was $0.014 greater than our second quarter FAD with the increase primarily resulting from incremental revenue related to the timing and completion of $678 million in new investments completed during the second and third quarters, incremental Maplewood revenue as they paid $18.7 million in rent in the third quarter, an increase of $1.1 million compared to the second quarter. These were partially offset by $81 million of asset sales, representing $1.2 million of revenue recorded in the third quarter and the issuance of 9 million common shares of stock over the past 2 quarters. Our balance sheet remains incredibly strong, and we've continued to take steps to improve our liquidity, capital stack and maturity ladder. We entered into a new $2.3 billion credit facility consisting of a $2 billion senior unsecured revolver and a $300 million delayed draw term loan. We intend to draw on the term loan on or about November 25 and use the proceeds to repay the $246 million secured mortgage loan we assumed in the acquisition of the Cindat JV last summer. Additionally, we both extended the maturity date of the existing $428.5 million term loan 1 year to August 2026, amended the term loan to improve the pricing grid by 35 basis points. At September 30, we ended the quarter with $737 million in cash on the balance sheet. On October 15, we repaid $600 million of the 5.25% senior unsecured notes at par. Our fixed charge coverage ratio was 5.1x, and our leverage reduced to 3.59x. Given our strong equity currency, we have the flexibility to accretively fund investments with equity as we have for the past several quarters, including funding the Sabre PropCo JV using Omega operating partnership units. In addition, next week, we plan to put in place a new $2 billion ATM program. We are excited as our balance sheet and cost of capital have positioned us for significant adjusted FFO growth as we opportunistically look to the capital markets to fund our active pipeline. Turning to guidance. As Taylor mentioned, we raised and narrowed our full year adjusted FFO guidance to a range between $3.08 to $3.10 per share. This is a $0.035 increase over the midpoint of our August guidance. The increase was due primarily to the completion of $374 million of new investments that closed post our second quarter earnings call. The key assumptions in our revised full year guidance are on the revenue and expense side, we're assuming no other changes in our revenue related to operators on an accrual basis of revenue recognition. Genesis continues to pay full rent and interest payments pursuant to the terms of the DIP financing agreement. Maplewood continues to pay $6.3 million per month, which is consistent with our October payment. Derivative instruments reduced the impact of foreign currency fluctuations on income generated by our U.K. investments for the fourth quarter. We project our fourth quarter G&A expense runs between $13.5 million to $14.5 million. On the investment side, we've included the impact of the new investments completed as of October 30 and did not include any additional new investments. On the balance sheet, of the $209 million in mortgages and other real estate-backed investments contractually maturing in 2025, we're assuming $56 million will convert from loans to fee simple real estate with the balance of the loans being extended. We repaid our $246 million of secured debt on or about November 25, using proceeds from the $300 million delayed draw term loan. Although we didn't end the quarter with any facilities classified as assets held for sale, we are always pruning and strengthening our portfolio, which has historically led to between $10 million to $20 million in asset sales in any given quarter, and we assume no material changes in market interest rates. Our 2025 adjusted FFO guidance does not include any additional investments for asset sales as well as any additional capital market transactions other than what I just mentioned or that was included in the earnings release. I will now turn the call over to Megan. Megan Krull: Thanks, Bob, and good morning, everyone. While there is no telling when the federal government shutdown will end, it thankfully has largely no impact on funding mechanisms to the long-term care industry. That said, given the current state of affairs, the automatic 4% cut in Medicare to occur in early 2026 as the result of the deficit caused by the OBBBA has not yet had a chance to be dealt with legislatively. As I noted last quarter, historically, legislative action has been taken to avoid this type of reduction. However, even without legislative action, netted with a 3.2% increase in Medicare effective October 1, the overall impact to our portfolio would be minimal. We continue to be grateful for the carve-out of skilled nursing from the Medicaid reductions in the OBBBA, but we are also carefully watching the landscape as the hospital systems deal with the reductions coming their way as this could cause states to reassess their allocation of funds amongst the various provider groups. The state associations and our operators work closely on the local front to ensure an understanding of the necessity of long-term care. And that, coupled with our strong fundamentals and demographic tailwinds continues to make us feel well positioned in light of that potential headwind. While the staffing mandate was all but dead given the loss in 2 federal courts surrounding its key provisions and the 10-year moratorium imposed on its implementation by the OBBBA, HHS has now also withdrawn its appeals in court. And as a final nail on the coffin, CMS has drafted an interim final rule under review by the Office of Management and Budget labeled Repeal of Minimum Staffing Standards For Long-Term Care Facilities. We applaud the continued efforts by industry associations, partners and operators to educate the legislative and executive branches on the importance of the long-term care industry as well as the continued support by the administration. We also look forward to the potential for regulatory changes signaled by the request for information in the skilled nursing proposed payment rule earlier this year on ways to streamline regulations and reduce administrative burdens. I will now open the call up for questions. Operator: [Operator Instructions] And our first question comes from the line of Jonathan Hughes with Raymond James. Jonathan Hughes: I was hoping you could share some more details on your pursuit of higher growth shop or RIDEA opportunities, maybe investment volume we could expect in the next 12, 24 months? And then I think you mentioned low double-digit IRRs, but maybe what about initial yields that you're looking for? Matthew Gourmand: Sure. Thanks, Jonathan, and Happy Halloween to you too. I think in terms of investment volumes on a quarterly basis or on an annual basis, it's just really going to depend on what opportunities present themselves. But I think as we look at it, we think back to the way we entered the U.K. market a decade ago. Initially, we dipped our toe in a little bit and really took some time to understand the industry, the operators within the industry. I think we have a much, much better understanding of a lot of that today within the U.S. senior housing side of things. But you saw us effectively aggressively grow that portfolio to $2 billion of assets when the opportunities present themselves over the last 24 months. And so I think it's really just going to come down to that. We are looking extensively at all different options, both in terms of structures and in terms of assets. And then in terms of your second question, going in yields, we clearly like to have a decent positive yield out of the gate. But again, I think it's just going to really depend on the long-term opportunity for value creation there, understanding that sometimes the best opportunities don't necessarily have a very good return today. I think there are ways in which we can structure that where we can have some level of accretion participation if we don't want to take on the entirety of the risk. But at the same time, with RIDEA, we're willing to take on a lower yield going in if it ultimately means a meaningfully higher yield than we're able to achieve in our triple net over the longer term. So I think we're relatively agnostic in just looking at each deal on a deal-by-deal basis to the long-term value creation for shareholders. Jonathan Hughes: All right. That's great color. I appreciate it. I've got just one more for -- maybe for Taylor. I think at the start, you mentioned dividend coverage is now below 90% of FAD and you were able to successfully maintain that dividend through the pandemic. Can you just talk about the potential for future dividend growth and how the Board views that dividend versus retaining funds for external growth? C. Pickett: Yes. And you're exactly right. It's a Board decision, Jonathan. From our perspective, we start to bump up against tax limitations in the low 80s. So -- and we're moving rapidly through the 80s towards the 70s. So I think every quarter, we'll look at that. There's a pathway in the near term to get to a dividend increase. And I would just say, if you look back, not only did we not cut dividends during COVID, if you look back to the period of growth a number of years ago, we were able to increase the dividend every quarter for 5 straight years. I think we have the setup in terms of our balance sheet and the team deploying capital in a way where returning to that type of growth is certainly a possibility. That's what we're aiming to do. Operator: Our next question comes from the line of John Kilichowski with Wells Fargo. William John Kilichowski: Maybe if we could start with the Sabre portfolio. I think you, in the opening remarks, you made a comment that it was 1.46x covered. I'm curious how that's trended recently and then also the underlying occupancy of the portfolio and just sort of what you're forecasting for the next 12 months. Vikas Gupta: Yes. This is Vikas. So the coverage is trending above the 1.46. Sabre continues to do very, very well. And the occupancy is in the low 90%. So overall, Sabre is just outperforming budget and just doing a great job overall. William John Kilichowski: Okay. That's helpful. And then maybe just looking at the quarter holistically, you did a CCRC deal, you did an OpCo/PropCo deal with Sabre. I'm just curious what the opportunity set looks like here going forward. Maybe it feels like a little bit of a diversion from maybe your typical triple net SNF's senior housing, some care homes, there's only one care home in the quarter. What does this mean for the go-forward pipeline? Are we likely to resume maybe to more of that? Or do you think that there's a lot more opportunities out here with operators like a Sabre that you have a lot of respect for how they operate and also are willing to participate in a structure like this? C. Pickett: Yes. A couple of comments around that. I think you've -- not I think. We've expanded the toolkit pretty broadly because we just have a deeper bench. We have a better team. We can look at a lot more types of transactions, particularly where the yields are higher than our traditional triple net with escalators. That being said, we're still finding plenty to do in the triple net side here and in the U.K. And then Sabre in particular, and that's pretty unique. People should think of Sabre, they're essentially the private Edson. And they're set up to grow really significantly in a very accretive way over the next 5-plus years. We're really excited to be part of that because I think the upside there in our investment plus the yield we're getting on that investment is really remarkable, and we'll see how that plays out. That being said, are there a lot of Sabre out there? No. We're happy to partner with them. And we're excited at this point in their growth progression. I think that transaction for us is likely unique to the SNF industry. Operator: Next question comes from the line of Seth Bergey with Citi. Seth Bergey: Just a little bit more on Sabre. Can you kind of talk about what the geographic focus is of the assets that are in the JV? And then obviously, this transaction allowed Sabre to kind of monetize some of the real estate kind of -- and you've talked about the growth opportunity with them. Can you kind of touch on maybe their motivation for monetizing the real estate and how they're thinking about deploying that capital? Vikas Gupta: Yes. This is Vikas. I'll take the first part. So these are 64 facilities, 58 are skilled nursing facilities and 6 are assisted living facilities. They're located in 6 states, Delaware, Indiana, North Carolina, Ohio, Pennsylvania and Virginia, and I'll turn it over to Taylor. C. Pickett: Yes. In terms of motivation, the executives that own and run Sabre are relatively young, and they've created a lot of value in wealth. And they just -- I think from their perspective, it is a good time to take something off the table. But more importantly, to partner with a capital partner who can drive meaningful growth from here. So they retained obviously, 51% of their real estate. They retained 90% of their operating company. That operating company generates substantial cash flow. They're setting themselves up for future growth, and we're lucky enough to be partnering with them. Seth Bergey: And then just one more kind of as you kind of expand the toolkit of opportunities doing this type of structure, how are you kind of weighing shop for skilled in the U.S. versus other markets? And as you kind of think about all that, how do you kind of see the '26 pipeline shaping up as it compares to kind of the level of transaction activity you've done year-to-date in '25? Matthew Gourmand: So we don't normally give guidance in terms of what we expect the pipeline to look like. But if you look at the opportunities presenting themselves today, we've done nearly $1 billion of deals year-to-date. It feels like we're in that kind of cadence where we could allocate a similar amount of capital. And then in terms of the opportunities that present themselves, it really is going to come down to the risk-adjusted returns on everything. A couple of years ago, we were -- the vast majority of what we did was in the U.K. because that's where the opportunity presented itself. My suspicion is that next year is going to look like a good year for U.S. SNF, U.K. care homes. And I think we'll also be able to augment that with a decent amount of U.S. senior housing on top of that, predominantly in a non-triple net format. So I think the pipeline looks good on all of them, but it's really just going to be determined by what opportunities present themselves and provide a risk-adjusted return that looks compelling to us. Operator: Next question comes from the line of Juan Sanabria with BMO Capital Markets. Juan Sanabria: Just hoping we could talk a little bit more about Sabre. I guess one of the questions we've gotten, which I think is fair is just the investment in the OpCo, the going-in yield is lower than what you are getting on traditional triple net low-risk real estate investments. So if you could just talk about the strategy of why accepting a lower yield for that theoretically riskier OpCo investment. C. Pickett: Yes, Juan, I would tell you that our 9.9% of the projected 2026 cash flow is far more than 8%. But we're happy to have the operating company retain significant cash to build on their growth. So from our perspective, risk-adjusted returns, likely very high teens. This is a business where, from my perspective, I look at their equity value today and I think about the Ensign trajectory and a very similar platform, just smaller. I look at our equity investment, I'd be very disappointed if we don't double or triple that investment over time. Juan Sanabria: And then just on the investment, again, just if you could help us frame how you thought about valuing the OpCo and if there's any EBITDA being generated outside of your prior existing lease in this kind of new lease joint venture you set up? C. Pickett: Well, as I mentioned earlier in my question -- or in my response to your last question, the cash flow generated by the OpCo is very substantial. Our 9.9% share of that cash flow is far more than the 8% yield that they're paying on our investment. But they're a private company. So beyond that, I can't disclose much more other than to say that stands on its own. It's got lots of cash flow. There's lots of opportunities. We think there's going to be great growth there. Operator: Next question comes from the line of Omotayo Okusanya with Deutsche Bank. Omotayo Okusanya: Just wanted to push a little bit more along Juan's line of questioning. In terms of the Sabre OpCo, just kind of give us a general sense of, again, what kind of growth profile did you guys kind of underwrite for that entity? Is it kind of similar to some of the stuff we've seen on the shop side on senior housing where these things are growing 15%, 20% same-store NOI? We're just trying to get a better sense of kind of what the growth profile of that entity could be over the next few years. C. Pickett: Yes. So again, similar to Ensign, you can look at publicly how they've grown. It's not inside the -- it's not same-store inside the box growth. It's the platform finding opportunities, additional facilities that tend to be underperforming where you can be additive. So there's huge opportunities there. And it's really just -- it comes down to how fast do they grow. But again, I would point you to the public peer that I think is the best comp, and that's Ensign. And you can look at their growth quarter-over-quarter, it's really meaningful. And you don't have to rely on pushing rates. You don't have to rely on cutting expenses. It's really just taking underperforming assets in this industry and turning them around. And we've seen Sabre do that for the last decade. Omotayo Okusanya: Got you. On the PropCo side, any opportunities to refinance the 6.1% debt to kind of a lower rate? Robert O. Stephenson: Yes, absolutely. The majority of the debt is HUD debt today, which is long-term good rates, but the plan is to further refinance the non-HUD debt into HUD debt and then continue to just keep looking at the debt profile to lower rates as that becomes available. Operator: Next question comes from the line of John Pawlowski with Green Street. John Pawlowski: I just have 2 questions on the labor backdrop. First, maybe compare and contrast the U.S. versus U.K. When you talk to your operators, what type of wage increases are folks budgeting for next year in the U.S. versus U.K.? Megan Krull: I mean I think the wage increases are still pretty much matching inflation at this point in time. I don't know if that's different between the U.S. and U.K. The U.K. doesn't quite have the same staffing issues that we have here in the U.S., although those have eased a bit, but the expectation is as demographics increase that there's going to be always an issue there. John Pawlowski: Okay. Final question, maybe to follow on there. In the U.S., Megan, are you seeing -- I guess, where are you seeing any pockets of labor availability issues resurface in certain states, are you seeing certain operators have to pull the temp agency, temp labor lever a little bit more? Megan Krull: We really haven't seen agency increase anywhere. It came down after COVID and has pretty much stayed down. Obviously, you're going to see it in a building here or there, right? People can't get 100% out of agency. That's a really tough thing to do. The rural areas tend to be the toughest. But really, I think what people are doing is rather than bring agency on, they just don't take the additional resident on until they have staff in there, and it's a big culture push for all of our operators to really change the way that they hire people and make sure that they retain them. John Pawlowski: Okay. But you haven't seen any -- in recent months or quarters, you haven't seen any glimpses of issues stemming from just slower migration? Megan Krull: No, we haven't. Operator: Next question comes from the line of Farrell Granath with Bank of America. Farrell Granath: This is Farrell Granath. I wanted to go back to Sabre. I know that you just outlined the deal had a mix of SNF's and ALF. And I was curious on Sabre's acquisition front or at least their strategy going forward. Are they aligned with you of also expanding into senior housing itself? Or they want to maintain more of a skilled mix? Vikas Gupta: Yes. And just to repeat my numbers, there's 50 SNF's in this portfolio and 6 ALF's, and they're in 6 states. And the plan is to keep growing the SNF portfolio in those states and other states. So we are very much aligned with them with that plan. C. Pickett: And Then talk about the -- that's within the JV, but then overall. Vikas Gupta: Yes. I mean, overall -- I mean, the portfolio consists of 126 SNF's and 13 ALF's. So once again, Sabre is a very SNF-focused operator, as Taylor both Matthew mentioned. We think of them as best-in-class. So again, the idea here is to keep growing the SNF portfolio. If an occasional ALF is picked up in that, that's okay. Sabre can handle it, but they are a very SNF-focused operator. Farrell Granath: Okay. And then also when it comes to your coverage levels, you made a comment that you've reached almost new highs currently. And where are you seeing that trend going forward? And do you think we're reaching a point of leveling out when it comes to coverage? C. Pickett: I will tell you the trend is still up. And I think to the extent that occupancy continues to grow, that will be the trend. And we know from demographics. We've seen it. We can model it. We know that occupancy is going to continue going up. We may, for the first time in a while, begin to see some seasonality in occupancy. We haven't seen that for a while coming out of COVID with the COVID lows in terms of occupancy. But driving -- the occupancy will keep driving coverage. So I think 1.55x is not a baseline, and we'll keep growing. Operator: Next question comes from the line of Wes Golladay with Baird. Wesley Golladay: I want to go back to the opportunity that -- where you said you could do some loans with back-end recaps. Are you seeing a lot of competition for these types of deals? Does your position as an existing landlord give you a little bit of an advantage there? Vikas Gupta: Yes. So I mean, this product started when the debt markets were extremely tight in the U.S. And we've partnered with many sponsors and operators to create a $300 million portfolio. And as I said in one example, we created a lot of IRR with that one transaction. And we see a lot more of this coming potentially with our portfolio. But no, we're not seeing a ton of competition in the space because what we've proven to our operating partners is we're there for them for these turnaround opportunities. And they've proven good they can turn them around. So we continue to keep growing that segment of our business meaningfully, but only if we believe in the upside. Operator: Next question comes from the line of Michael Carroll with RBC Capital Markets. Michael Carroll: How should we think about the opportunity set to do more of these OpCo type deals? Do you have any more in your pipeline? I guess, what's the outlook on that front? C. Pickett: I'd say that opportunity set is very narrow in terms of the type of transaction we did with Sabre. They're a uniquely fantastic operator. That being said, it wouldn't be out of the question to see this again, but there is absolutely nothing in our pipeline today to repeat this transaction. Michael Carroll: Okay. And then when you underwrite these types of transactions, I mean, should we think about the potential focus more on your existing tenant roster where you have, I guess, close knowledge of their business model? Or could you go outside of the tenant roster if you can get comfortable with that? Matthew Gourmand: Yes. I mean, obviously, the more knowledge you have of an operator and experience you have of an operator, both from a financial standpoint, but more importantly, from a clinical standpoint and understanding the sustainability of that business model, the more comfortable you are going to be taking that alignment of interest by taking an operating exposure. And obviously, that aligns more likely with our current operator portfolio. But as Taylor said, there's nothing imminently on the horizon even within that portfolio today that would suggest this is going to be something we're going to be executing on in the next 6 to 12 months. Operator: Next question comes from the line of Richard Anderson with Cantor Fitzgerald. Richard Anderson: I'd like to ask a much larger picture question. You talked about sequestration risk being pushed into -- well, we know it will happen in 2026 if the government ever gets its act together. But on the Medicaid side, obviously, SNF's were spared. But what is your comment about Medicaid cuts and state budgets and just an indirect concern about how states may be able to operate in the future with the Medicaid cuts, even though your specific business wasn't targeted. Are you concerned at all about just state profitability or something? I'm just curious where you stand on that. Megan Krull: It is definitely something that we're keeping an eye on and monitoring, and there have been a few states who have started to bring up OBBBA issues. I will say that in most of those states, there's very strong support for skilled nursing and not cutting skilled nursing rates, which has been a positive. We've seen some of those cuts come through, but we've seen that people are very supportive of maybe pulling back some of those cuts that have already occurred like in Idaho and North Carolina. But the reality is when we look at our top 10 states, I think we're pretty well positioned. We've got -- Texas and Florida aren't expansion states. They won't be touched at all, and then all of the other states really fall into, we haven't heard any concerns or they have higher coverages than our average coverage. So any cut would probably still keep them above that average coverage. And that's the case in North Carolina and Idaho right now or they are very much so in multiple states, and so they're a little bit insulated from any one given state having an issue. And then couple that all with the fact that our coverages are where they are, we feel pretty well insulated that we can weather that going forward. Richard Anderson: Okay. Great. Second question, I'm not going to ask about Sabre. It's been beaten to death. On Maplewood, I think it was $18.7 million of rent. That's $74 million, $75 million annualized. Is there an idea that you can ever get to the full $89 million in any kind of reasonable period of time? Or is it starting to feel like it's approaching that? Because a couple of years ago, I didn't think it was ever in the radar. But is it getting in the radar in your mind? Matthew Gourmand: I mean we have a lot of faith in that management team, and they have been able to already demonstrate meaningful growth, right? You've seen it over the last couple of years where that number is moved up into where it sits today. So you look at that trajectory, they have very high occupancy, which obviously limits their opportunity to push occupancy, but it increases their opportunity to push rate. These are highly, highly desirable properties in very wealthy affluent communities. So I think that as they're able to push that rate with the 30-plus percent margins they have, you see an opportunity for meaningful cash flow improvement continuing in that portfolio, and so I don't want to put a time frame on it, but absolutely, I think there is a visibility into that number at some point in the not-too-distant future. Richard Anderson: What would you say about Second Avenue progress lately? Vikas Gupta: Well, the occupancy there is 96%. So things are -- the building is basically full. As residents move out and more residents move in to Matthew's point, they can push rate. So we just -- we expect further cash flow growth there. Operator: Next question comes from the line of Vikram Malhotra with Mizuho. Vikram Malhotra: I guess just first wanted to clarify, you had mentioned that there was a loan that got repaid in October with an upside kicker that got you to high return. Just maybe give us a bit more detail how big was the loan? What was the gain above the interest rate? Vikas Gupta: Yes. It's a smaller deal, but I'll detail it a little bit. It was a $6 million transaction. Omega funded the majority of the money, and then the operator was able to improve performance and refinance the building for $18 million. Omega is able to put $6 million in that buck. So once again, this was -- and then -- sorry, on top of that, we maintained a contractual agreement that if the building is refinanced again or sold, we also share 50% of the upside. So again, it's a small example with a meaningful IRR. I'm not saying we will achieve that in all deals, but we want to show an example of the potential of the upside in these type of transactions. Vikram Malhotra: Okay. So just to be clear, the gain you said was $6 million? Vikas Gupta: Correct. Yes. On that large transaction. Vikram Malhotra: On that one, okay. And then just going back to the broader opportunity set. I know you said they're very limited Sabre-type deals, but just 2 clarifications. You referenced Ensign. Should we assume the Sabre margins, EBITDA, operating net income margins are like Ensign, number one? And number two, just can you clarify the comment about senior housing RIDEA in the U.S. In the past, I think you've said you'd prefer more triple net like deals where you can get higher yields over time. I just want to understand like what types of RIDEA senior housing U.S. would you be looking at? And kind of what's the pipeline look like? C. Pickett: Sure. Sabre margins are very strong, Ensign like margins. And then on the RIDEA front, I will tell you, we have a U.S. deal and a U.K. deal in the pipeline today, and we're working on documents. Does it mean they'll close? I don't know. But we're prepared to do your traditional RIDEA. We spent a lot of time making sure we have the tools here to handle that, and we do. So will those deals close? I don't know, but we'll keep looking at those and others. Operator: Next question comes from the line of Omotayo Okusanya with Deutsche Bank. Omotayo Okusanya: Yes. I wanted to go back to some of Megan's commentary just around CMS initiatives looking for inputs into how to streamline regulation within the skilled nursing industry. Just kind of curious what suggestions Omega may be making, what suggestions the industry as a whole may be making? And how does that end up whether improving the bottom line of skilled nursing facilities, improving operational processes and kind of whatever kind of you may make, whatever the potential impact could be if these recommendations are taken up by CMS. Megan Krull: Yes. I mean, look, all the various industry associations are really pushing this pretty hard. And the idea is sort of surround -- how do you make the survey process a little bit more rational and reasonable where that if you go in and you see an operator that's -- they've had something that you could call for a tag, if they've already corrected it and they've done all the work to make sure they're in compliance and that it can't happen going forward, maybe don't have a system where you call that tag and you have financial repercussions when they're clearly showing that they're doing the right thing. So more rationalization around the survey process, more rationalization around the rating process as well, some of the maybe redundant reporting that's going on. I mean all of these things, especially on the survey side would have a major impact. And I think they're looking at ways that they can just take that system, look at other systems, see if they can just, again, make it more rational in general. And I think that will all fall to the bottom line if they can fix some of those things because we really find that the survey process can really penalize unnecessarily good operators. So that's what we're looking forward to. Operator: [Operator Instructions] there are no further questions at this time. I would like to turn the call back over to Mr. Taylor Pickett for closing remarks. C. Pickett: Thanks, everyone, for joining the call today. As always, the team is available for follow-up. Have a great day. Have a Happy Halloween. Operator: Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.
Operator: Good morning, and thank you for holding. Welcome to Aon plc's Third Quarter 2025 Conference Call. [Operator Instructions] I would also like to remind all parties that this call is being recorded. If anyone has an objection, you may disconnect your line at this time. It is important to note that some of the comments in today's call may constitute certain statements that are forward-looking in nature as defined by the Private Securities Reform Act of 1995. Such statements are subject to certain risks and uncertainties that can cause actual results to differ materially from historical results or those anticipated. For information concerning these risk factors, please refer to our earnings release for this quarter and to our most recent quarterly or annual SEC filings, all of which are available on our website. Now it is my pleasure to turn the call over to Greg Case, President and CEO of Aon plc. Gregory Case: Thank you, and good morning, and welcome to our third quarter earnings call. I'm joined today by Edmund Reese, our CFO. The financial presentation, which Edmund will reference in his remarks is posted on our website. To begin today, we want to recognize the great trauma and suffering resulting from Hurricane Melissa. We're thinking about everyone affected by this terrible catastrophe, and we feel very, very humble and hopeful that the work Aon undertook with the World Bank to arrange a cap bond for the government of Jamaica will help accelerate and support recovery. Turning now to Aon. Our third quarter results reflect another quarter defined by continued acceleration of our Aon United strategy, great progress executing our 3x3 Plan and financial model and ongoing momentum as we head into the final months of the year. Our focus on execution is translating into value delivery to our clients, while at the same time, producing results for our firm and strong financial performance. We're winning more in the core by deepening relationships with existing clients through data-led solutions, capturing demand in existing markets by developing new capabilities for emerging risks and creating demand in new categories by innovating unique capital solutions. And we're strengthening our clients' insurance programs to ensure they're positioned well for the future with enhanced coverage and limits. Let's start with a look at our third quarter highlights. We delivered another strong quarter of financial results, highlighted by 7% organic revenue growth, a 26.3% adjusted operating margin and 12% adjusted EPS growth, which keeps us on track to achieve our full year objectives. Our continued success in winning new business and deepening client relationships reflects the strength of our risk capital and human capital capabilities powered by ABS. Simply put, our analytic capabilities enable smarter and faster decisions for clients, which when coupled with our advisory expertise, helps clients capture greater opportunity. And while any firm can point to client wins, 2 highlights from this quarter truly demonstrate the impact of our differentiated strategy. The first example demonstrates how our advanced analytic capabilities were critical in securing our appointment as the captive insurance partner for a leading global logistics company, replacing a competitor relationship that spanned decades. Our ability to deliver global expertise with local leadership provided the client with relevant insights into captive management and their risk capital structure, making Aon the clear choice. In the second example, by demonstrating our distinctive client service and enterprise mindset to the enterprise client group, we not only retained but expanded our benefits work with a long-standing financial services client in an intensely competitive process. We leverage deep industry knowledge in governance, risk management and employee experience. And this resulted in securing global benefits across new and existing geographies, U.S. H&B and total benefits administration. Our proactive approach, combining innovation, analytics and advisory continues to deliver measurable impact and position us for sustained success as our solutions have never been more relevant for clients. Our latest 2025 Global Risk Management Survey revealed a significant shift in the risk landscape and how decision-makers are thinking about risk. Trade and geopolitical volatility entered the top 10 global risk for the first time in nearly 2 decades, reflecting growing global uncertainty. At the same time, climate risk and natural disasters also reached their highest ever rankings, underscoring the need for resilience in a world where severe weather events are driving up costs. And workforce-related risks continue to have a growing impact on how employers manage affordability, access and productivity. In addition, advancements in AI are surging demand for cloud infrastructure and are fueling unprecedented investment in data center construction with CapEx estimated to exceed $2 trillion globally over the next several years. These technological developments are not only reshaping physical infrastructure but also amplifying cyber and operational risk. Active risk management in this area has become a strategic necessity and traditional approaches alone aren't sufficient to cover this risk. With connected risk capital and human capital capabilities, we're truly uniquely positioned to guide clients through a complex environment, access capital, unlock value and build resilience. As we review our performance this quarter, several strategic milestones demonstrate progress on our 3x3 Plan. These achievements are the direct result of our team's dedication, collaboration and focus on advancing priorities. First, talent remains a significant driver of sustained growth and the competitive environment for attracting and retaining top performance is as intense as ever. No company is immune, which makes it essential to stay focused and deliberate in our approach. In this environment, our platform is a unique advantage in attracting talent and helping client-facing talent win more business and retain clients, especially in priority areas like construction, energy and health. Revenue-generating talent is up 6% net year-to-date, reflecting our strong position and differentiated capabilities. We have a great team, and we remain focused on continuing to strengthen it. Second, our enhanced capital strength gives us greater flexibility to execute our capital allocation strategy with discipline and precision. We divested the NFP Wealth business, an asset better suited to an owner prepared to make the capital investment required for long-term growth. At the same time, we remain highly committed to our core wealth and retirement offerings, which represent key components of our human capital value proposition. Also during the quarter, NFP closed more than $10 million in acquired EBITDA as part of programmatic M&A. We have a great pipeline of high-return middle market opportunities, and our improved capital position reinforces our commitment to long-term strategic investment and shareholder returns. And finally, equipped with better data and analytics built from years of investment, we're mobilizing capital into the industry, particularly to address the rapid expansion of data center construction driven by AI and cloud infrastructure adoption. As highlighted earlier, the opportunity here is monumental. Data center CapEx increased 50% in 2024 and is expected to increase significantly over the next several years as trillions of dollars of CapEx go into the construction of these facilities. Near term, we estimate data center demand could generate over $10 billion in new premium volume in 2026 alone. Our globally aligned risk capital and human capital teams are helping clients navigate this transformation and support stakeholders across the value chain from technology companies to contractors and operators to capital providers, each with unique insurance needs given their role in the data center development. While still early days, we're excited by the specific accomplishments that showcase our ability to help clients navigate this transformational opportunity. We recently became the risk partner for a leading global engineering-focused insurer with a mission to work with them to build significantly greater level of insurance capacity. This work complements the launch of our data center life cycle insurance program, a proprietary multiline insurance facility that consolidates coverage for construction, cargo, cyber and operational exposures and offers clients end-to-end risk management and insurance solutions. We're also working to support resilient design and engineering from the outset of these projects to optimize the industry's ability to provide the limits necessary for hyperscaler, data center development and management of accumulation risk. Another example of how our global distribution analytics and expertise in both traditional and alternative risk transfer is already delivering results is a recent client win where we placed nearly $30 billion in coverage for a top global hyperscaler data center developer for operational data centers and data centers under construction. And this is just the beginning. Overall, we accomplished a lot this quarter and there's a lot to be energized by going forward. Our results and the momentum we have going into the final months of the year give us confidence in reaffirming our 2025 guidance. Let me conclude with 2 points. First, our Aon United strategy accelerated through the 3x3 Plan and the strength of our financial model are generating strong results today and building momentum for future success. Our unique capabilities and integrated solutions have never been more relevant to clients as we help them reduce volatility, protect their assets and grow their businesses. We're attracting exceptional talent to strengthen our great team, delivering innovative new solutions with unmatched data and insights and building and deepening client relationships. And we're winning more in core markets, capturing new demand in existing markets and creating new demand in new categories. And finally, and most important, to our over 60,000 colleagues around the world, thank you. Thank you for your commitment to our clients, to each other and to our Aon United strategy. Your dedication is the driving force of our firm. Now let me turn the call over to Edmund for his reflections on the quarter and outlook for the year. Edmund? Edmund Reese: Thank you, Greg, and good morning, everyone. I'm excited to be here to discuss our third quarter results, which marked another quarter of disciplined execution on our 3x3 Plan and financial model. To frame our discussion, let me highlight the most important factors shaping our third quarter performance. First, our Q3 performance demonstrates continued momentum across the key drivers of sustainable top line growth. Our investment in revenue-generating talent enhanced by ABS and our continued expansion in the middle market is translating into strong organic growth. Organic revenue growth of 7% in Q3 serves as another proof point in our ability to execute on each of these drivers, keeping us in line with or ahead of industry performance. Second, we continue to deliver scale improvements and operating leverage through ABS while also investing in talent and capabilities that deepen client engagement and drive new business. We again delivered in Q3, expanding margins over 100 basis points and increasing our revenue-generating hires by 6%. Third, our enhanced earnings power, disciplined portfolio management and strong free cash flow generation, up 13% in the quarter have strengthened our capital position. Through 3 quarters in 2025, we have reduced debt and remain on track to achieve our leverage objectives, closed $32 million in EBITDA from middle market acquisition and returned $1.2 billion in capital to shareholders through dividends and share repurchases. Our strong capital position empowers us to pursue high-return inorganic investments, further accelerating and supplementing our organic growth momentum. Collectively, these 3 components momentum on the growth drivers, accelerated scale benefits through ABS and a robust capital position are delivering growth today and setting the foundation for future performance. We continue to invest in capabilities and innovate capital solutions that create even greater value for our clients. And this gives us confidence not only in achieving our 2025 guidance, but also in the upside potential of sustaining top line growth and delivering double-digit free cash flow beyond 2025. Turning to the quarter's results. Organic revenue growth was 7% and total revenue increased 7% year-over-year to $4 billion. Adjusted operating margin expanded by 170 basis points over last year and reached 26.3%. Adjusted EPS was $3.05. And finally, free cash flow increased 13%. Let's get into the details of these results, starting with organic revenue growth on Slide 6. Organic revenue growth was 7% in the quarter, in line with our mid-single-digit or greater guidance range. Growth was broad-based, 5% or better in each solution line with 2 of our solution lines delivering 7% or greater, a strong result achieved despite pricing pressure in certain products and geographies, underscoring the contribution from new business and continued high retention. In Commercial Risk, 7% organic revenue growth reflected strong performance in our core P&C business globally, including double-digit growth in the U.S. with meaningful contribution from the middle market through NFP and continued strength in EMEA. M&A services continued to grow at a double-digit level, and its contribution provided an incremental lift. Construction also delivered double-digit growth, driven by demand from large-scale global infrastructure projects, including data center builds for major tech companies, reinforcing this category as a strategic priority. Reinsurance delivered 8% growth driven by treaty placements and double-digit growth in facultative placements and the Strategy and Technology Group. Insurance-linked securities also had significant growth, but off a smaller baseline. While July 1 treaty property renewal rates were softer, this was balanced by higher limits and ongoing strength in international facultative markets, especially in EMEA. Demand for STG analytics remained high, underscoring our platform's increasing importance in supporting clients as they navigate volatility and match capital to risk. Health Solutions grew 6% this quarter, benefiting from data analytics-driven sales in our talent business and new business in our core health and benefits offerings across the U.S. and EMEA. As Greg mentioned, we continue to leverage our analytics and advisory capabilities to support employers as they navigate rising health care costs and achieve better outcomes for their workforces. And finally, Wealth generated 5% growth, the performance reflects strength in advisory work in the U.K. and EMEA related to ongoing regulatory change, partially offset by softer advisory demand in the U.S. Additionally, the NFP contribution was meaningful, driven by asset inflows and market performance. Importantly, for modeling purposes, I will add that we expect Wealth growth in Q4 to be 1% to 2%, impacted by delays in U.S. advisory work and the sale of the faster-growing NFP Wealth business, which closed yesterday. Let me take a moment to walk through the key components of our Q3 organic revenue growth on Slide 7. In Q3, we extended our consistent track record of strong new business generation to drive organic growth. For the second consecutive quarter, new business contributed 11 points to organic revenue growth with balanced contributions from both expansion with existing clients and new client wins. Our investments in revenue-generating talent, particularly in high-growth sectors like construction and energy continue to deliver measurable impact. We remain proactive and on the front foot in attracting top talent. Our revenue-generating hires are up 6% year-to-date. Importantly, we're already seeing these new colleagues make contributions to new business growth. As the 2024 hiring cohort continues to ramp, we are confident this group will contribute 30 to 35 basis points to full year organic revenue growth, leveraging advanced analytics and client engagement tools through Aon Business Services. The 11-point contribution from new business this quarter underscores the effectiveness of our investment in client-facing talent, and we expect continued momentum as the 2024 cohort seasons and the 2025 hires continue to onboard. Q3 '25 retention remains strong year-over-year, reflecting the continued strength and stability of our client relationships, supported by investments in enhanced service delivery, innovative capabilities and Aon client leadership. Net new business contributed 5 points to organic revenue growth in the quarter. Net market impact, which captures the impact of rate and exposure, contributed just over 1 point to organic revenue growth, consistent with our 0 to 2-point estimated range. Rate pressure on property within Commercial Risk was offset with limit and coverage increases across cyber and other financial lines. Reinsurance net market impact was flat as rate declines and higher retentions were mitigated by increased limits and facultative growth. Health Solutions continued to benefit from our ability to support clients managing rising health care costs, providing a significant contribution to net market impact. And one final point on revenue. Third quarter fiduciary investment income was $75 million, down 12% versus the prior year. While average balances increased, lower interest rates more than offset that benefit. On Slide 8, adjusted operating income increased 15% to $1.1 billion and adjusted operating margin expanded 170 basis points to 26.3%. These results reflect strong top line growth and the operating leverage in our business powered by ABS, giving us capacity to fund growth investments in client-facing talent and middle market while still expanding margins. When we provided full year guidance, we highlighted 4 components that would impact 2025 margin expansion: NFP, fiduciary investment income, restructuring and operating leverage, all 4 remain fully in line with our expectations. We have now fully lapped the headwind on margin from NFP, and we are on track to meet our $30 million OpEx synergies target, resulting in a net 20 basis point headwind from NFP for the year. While the outlook for U.S. interest rate cuts has shifted from 2 at the start of the year to 3 in the latest dot plot, the delayed timing of the first rate cut from June to September effectively offsets the additional reduction and the margin impact from fiduciary investment income remains unchanged at 20 basis points. Restructuring savings totaled $35 million in the quarter, contributing approximately 90 basis points to adjusted operating margin. We remain firmly on track to deliver $150 million in restructuring saves for the full year and advancing toward our $350 million run rate savings target by 2026. With ABS-driven scale improvements and strong execution year-to-date, we remain confident in delivering full year margin expansion of 80 to 90 basis points, aligned with our long-term financial model. Moving to interest, other income and taxes on Slide 9. Interest income was [indiscernible] negligible in the third quarter and $4 million lower than last year. Interest expense came in at $206 million, $7 million lower than last year, primarily due to lower average debt balances. We expect Q4 interest expense to be approximately $200 million. Other expense was $13 million versus a $33 million benefit in Q3 '24, which included gains from the divestment of noncore personal lines and real estate advisory assets, partially offset by the remeasurement of balance sheet items in nonfunctional currencies. We estimate Q4 '25 other expense to range between $25 million and $30 million. And finally, the Q3 tax rate was 19.2%. Our full year tax outlook remains unchanged at 19.5% to 20.5%. Turning now to free cash flow and capital allocation on Slide 10. We generated $1.1 billion of free cash flow in the third quarter and year-to-date free cash flow of $1.9 billion is up 13% year-over-year. As we complete the NFP integration, we continue to expect strong adjusted operating income, including contributions from NFP and ongoing working capital improvements to drive double-digit free cash flow growth in 2025. And turning to capital on the right-hand side of the page. I noted earlier that we closed the sale of NFP Wealth. And with over $2 billion in proceeds, the transaction significantly strengthens our capital position, and we approach the final months of the year in an even greater position of capital strength with enhanced flexibility. Importantly, we remain disciplined in allocating capital, balancing opportunities that meet our strategic and financial growth priorities with capital return to shareholders. This discipline reinforces our commitment to creating long-term shareholder value, and we continue to execute our capital allocation model in Q3 '25. We reduced our leverage ratio to 3.2x in Q3, remaining on track to reach 2.8x to 3.0x by the fourth quarter of 2025, consistent with our stated objective. We continued our programmatic tuck-in acquisitions, including middle market deals through NFP. Through 9 months, NFP has closed $32 million of EBITDA. And following the NFP Wealth sale, we expect to close $35 million to $40 million in acquired EBITDA by year-end. The pipeline remains strong, primarily composed of U.S. P&C opportunities. And finally, we returned $411 million to shareholders in the quarter, including $250 million in share repurchases. With $750 million repurchased year-to-date, we remain on track for $1 billion in capital return through share repurchases for full year 2025. Enabled by our high free cash flow generation. These actions demonstrate our disciplined capital allocation, reducing leverage, investing in high-return growth opportunities and delivering meaningful capital return to shareholders. I will conclude my prepared remarks on Slide 11 with our 2025 guidance and some forward-looking perspective on our growth objectives. We are reaffirming our full year 2025 guidance, including organic revenue growth, mid-single digit or greater, capturing the impact of our growth investments. Second, margin expansion, 80 to 90 basis points, including $260 million in cumulative annual savings from our Aon United restructuring initiative. Next, strong earnings growth, supported by the scale improvements from ABS. I'll also note 2 additional points related to earnings. First, the sale of NFP Wealth is expected to have an immaterial impact on 2025 earnings growth. Second, we continue to expect an effective tax rate of 19.5% to 20.5% for the full year. For modeling purposes, we are estimating 7% to 9% adjusted EPS growth in Q4 '25. Finally, free cash flow, double-digit growth in 2025, demonstrating our ability to consistently convert our strong earnings into capital for investment and shareholder return. We entered the final stretch of the year with strong momentum, executing our 3x3 Plan and financial model to deliver results today. At the same time, scale improvements enabled by ABS, the cumulative impact of our growth investments and our capital capacity are strengthening the foundation for future performance, positioning us for sustainable top line growth and consistently strong earnings growth. This powerful combination gives us high conviction in our ability to create long-term value for shareholders. So with that, let's open the line for questions. Daryl, I'll turn it back to you. Operator: [Operator Instructions] Our first questions come from the line of Robert Cox with Goldman Sachs. Robert Cox: Just first question on talent. The revenue-generating hires were up 6%, and it sounds like you're executing on that 40 basis points contribution to organic growth here in the back half of the year. If we start thinking about stacking the benefits from the 2024 hiring in 2025 cohorts, does that get us to something like roughly 80 basis points in 2026? Edmund Reese: Rob, thank you for the question. Well, before even getting directly to the answer, the first thing, and Greg may comment on this, is that you see the headlines across our industry. It's clear that competitors are aggressive in their recruiting efforts. And given the expertise and attractiveness of our talent, we're not immune to that. So we continue to be super high focused on the investments right now. And as I said in my prepared remarks, I think we're on the right foot. Through 9 months, 6% increase in revenue-generating hires, that's right in line with the 4% to 8% that we communicated during investment days. And to your question, they are contributing right in line with our expectations on the full year, 30 to 35 basis points. There will be a cumulative impact when these 24 cohorts ramp up. And as I said in my prepared remarks, the 2025 hires are also coming on board. We'll give specific guidance on the contribution from those hires when we come back in Q4 and talk about 2026. But the key point for us right now is that, that is a significant contributor to the 11 points of new business contribution to organic revenue growth. They're performing right in line with our expectation in terms of incremental revenue and ramp-up time, and there will be a cumulative impact. We'll give the results of that and an outlook on that when we get into 2026 guidance on Q4. But make no doubt about it, the investments in these client-facing talent is a key part of the growth strategy, particularly in the market that we have now. Robert Cox: That's helpful. And then I just wanted to follow up on Commercial Risk, specifically in the U.S. business, core P&C. It feels like the double-digit growth is significantly in excess of what some of your peers are reporting. So I just wanted to flesh out what you might attribute that excess growth to -- I know you talked about data center construction and talent. And also, I just wanted to ask if that result was flattered at all by multiyear policies. Gregory Case: Robert, I appreciate the question. And listen, we -- think about the growth result, this is continued progress. Continued progress. We're halfway through the 3x3 Plan, fully executed against it. When you think about what we bring to the table with risk capital and human capital and then very substantially reinforced with Aon Business Services. Remember, these are the set of analyzers, risk tools that help clients make better decisions while driving revenue, also retention, obviously, have some benefits from the cost side, too, but really is around client impact. And you're seeing these results. And by the way, you're not just seeing it in the U.S., it's really globally and contributes to Edmund's commitment around what we're going to be able to achieve each and every year around mid-single digit or greater. And so this is really what you're seeing. And I want to be clear, it really is just -- it's part of the day-to-day. There really isn't anything that we would highlight. We talk about M&A services. It was progress, but it did not drive the results. The results were driven fundamentally by what we're doing the day-to-day with clients. And we did it, I would just also highlight in the face of all that's going on in the overall marketplace. So we talked time and time again about the fact that we're -- this is not about unit pricing in specific areas, and I'm sure we'll talk about pricing before the end of the call today. It's not about that. It's really about a client-by-client impact and our ability to take analytics with our great team in place and do things that really have a meaningful impact. And that's really what's driving growth. It's driven the growth in the U.S., but also driving growth in the same respect around the world. Edmund Reese: Greg is exactly right, Rob. We're pleased but not surprised by the strength in the Commercial Risk growth in Q3 because it's being driven by specific actions that we're taking, the durable growth drivers we talked about 11 points of contribution at the company level. But within Commercial Risk itself, it was 11 points of contribution from new business. And the retention was better year-over-year. That's driven by what Greg just talked about, the analyzers helping us win RFPs by ECG, our Enterprise Client Group and the tools that we have in ABS. The outlook and the results in this quarter remained strong as we continue to have the hires in construction and energy as clients increase limit and add coverages. So we're going to continue to be focused on net new business plus retention and the investment in the specialty hires and giving them, equipping them with analytical tools that help them win new business. That's what drove it in Q3 within the U.S., but as Greg said, globally, and that's what gives us confidence in our mid-single-digit guidance going forward. Operator: Our next questions come from the line of Andrew Andersen with Jefferies. Andrew Andersen: Just looking at Health Solutions, 6% organic, really strong and has been for a couple of years now. You listed a few drivers there of the organic input positive market impact kind of last there. But I would think that is one of the bigger drivers. Maybe you could just help us break down between net new business retention and market impact. Edmund Reese: Yes. I mean you're right. There was an impact from net market impact as you continue to see health care costs rising, but make no doubt about it. Health is actually one of the largest parts of our portfolio when it comes to new business contribution. Expansion with existing customers. Greg actually called out an example on the call of expansion with existing customers coming in through new business. So in the quarter, you had the strength from our talent analytics business. Our data continues to be seeing high demand. Our core health business had strong growth in EMEA and U.S. as well. The market is attractive right now for these solutions and the macro factors are having an impact. So you are seeing a positive net market impact. But without a doubt, I have to highlight that it is new business that is driving this primarily expansion with existing customers. Gregory Case: And Andrew, I just might add, if you think about where we are in terms of the continued progression as we began the 3x3 program and thought about the areas we compete in, each one of them had a set of characteristics, which for us suggested our ability to grow and those are going to be very, very strong. Health is exactly in that wheelhouse. Think about it. This is 20-plus percent of the U.S. economy as an example, and growing at 9% to 10% a year. It's tremendous burden on companies as they think about supporting their employees and their families from a health standpoint. And what we bring to the table is unique in content and capability. Just look at -- we recently published a set of analytics never been seen before around overall population health and the impact of the GLP-1 medications in that context, demonstrating that you might be able to say something we've never been able to say before, which is we can potentially improve population health and bend the curve. And so that kind of opportunity for us, we're incredibly excited about, and we're just beginning to sort of tap that thread. And so for us, we love this category like we do across the risk side as well and the retirement side. But you're right, a lot of progress here, and we'll continue to take steps to build the business. Andrew Andersen: And then reinsurance, just as we -- I realize 3Q is a little bit of a lighter quarter, but as we kind of shift towards '26, how are you kind of seeing the reinsurance pricing environment? And maybe just some color on demand changes? Gregory Case: Well, listen, overall, Edmund can comment on '26 a little bit from that standpoint. But listen, again, think about overall demand and supply. Demand, when you think about what's going on in the world these days, greater and greater risk. There is absolute pressure on a unit price basis, as we've talked about, particularly on the property side, and you're seeing that really across the board. But think about how we react. We react on a client level, and we're essentially helping clients understand how to mitigate risk on a much broader -- even a much broader scale. So this isn't just traditional treaty and facultative. Think about insurance-linked securities. I started off with the obvious tragedy and the catastrophe in Jamaica and then talked about how we brought capital in to try to do something about that. We've done now -- we're going to do well over close to 150 or greater cat bonds or parametric instruments for companies in addition to insurers. So this is really the opportunity to bring more capital in to support an environment which is demanding it. What we described on the hyperscalers, this is an opportunity to truly address a level of opportunity that we haven't seen before. It's truly unique. Think about $2 trillion of investment, and that's just the operating investment -- sorry, the build investment doesn't even get to the operating investment or the innovation investment, which happens over time. So for us, the content and capability we have in such an extraordinary group on the reinsurance side in the context of reinsurance and risk capital with our Commercial Risk capabilities is extraordinary, and we see great, great opportunity over time. Edmund, anything else you'd add to that? Edmund Reese: Look, the only thing I'd add is we are seeing pressure on the rate side today. Reinsurance, the net market impact there was flat in the quarter. Clearly, we're seeing pressure in the property side of it. But to Greg's point, the demand is high. Clients are buying more sideways coverage to cover perils. We are seeing a focus on our facultative placements, growth in our STG businesses. So again, we'll come back in '26 to your question in Q4 and talk about '26 specifically. But these pressures come today, and we still are in 2025, growing at a mid-single-digit level because of the demand and the solutions that we're providing for our clients here. Operator: Our next questions come from the line of Bob Huang with Morgan Stanley. Jian Huang: So my first question comes around the thoughts on capital deployment. Obviously, free cash flow increased significantly year-on-year, but your buyback slowed down. I know that we talked about this a little bit. Just curious how you think about that capital deployment going forward between the acquisitions that NFP is going to make versus how you think about buybacks versus dividends? Edmund Reese: Yes. So I appreciate the question on the capital. It's an important point for us. You said buybacks slowed down. I want to just highlight that we were focused this year coming into the year, paying down debt to get back to our leverage -- debt leverage objective. We paid down nearly $2 billion, $1.9 billion last year. We're on track to do something similar this year, continuing to pay the dividend. Acquiring in middle market through NFP, which is over $32 million in EBITDA to date and returning -- we guided to returning $1 billion in capital to shareholders through share repurchases. So we're -- despite sort of where we were from a leverage standpoint, our free cash flow generation has allowed us to do that. When we think overall about capital deployment, we have a set of criteria by which we evaluate the options. We started talking about that previously and emphasize it during Investor Day as well. Those criteria are focused on long-term shareholder value creation. And so we're going to remain committed to balancing investment for growth with capital return to shareholders. And for us, that means paying down the debt, meeting our leverage objective, obviously, consistently paying the dividend. We're very pleased with what we deployed towards middle market acquisitions this year, and we'll be even in a stronger position to do that next year, particularly given the proceeds that we have from the NFP Wealth sale. But those acquisitions will have to meet, as I said during the prepared remarks, our strategic criteria and our financial criteria as well. It's worth emphasizing, I showed some information during Investor Day that showed over 20% IRRs and over 10% revenue growth after owning these acquisitions for 1 year. So that gives you some sense about how we think about the financial return. And of course, we balance that with returning capital to shareholders. So we feel very good about the position of strength we're in and our ability to evaluate the options moving forward. But let me turn it to you, Greg, to add some color to that. Gregory Case: Listen, I think you captured it exceptionally well. Maybe one observation I would just add. Edmund just went through a whole series of actions, a whole series of activities. Bob, hopefully, what comes through clearly is our absolute focus on long-term shareholder value creation. And we're taking specific actions on the balance sheet side, the capital side, the capital deployment side to make that happen. Acquisitions and divestitures, these are difficult things to do. And if you think about just even in the last 18 months, bringing in NFP, which has been phenomenal, but by itself, a monumental effort. The decision to divest of a specific piece of NFP, which is good business, but really not one we're going to invest in and double down from a capital deployment standpoint. So you make the decision to divest against that. That's a hard thing to do, a lot to cover on our finance side with our NFP colleagues, and it went exceptionally well, closed yesterday. The paydown of debt, the buyback, all the different pieces. What I'm trying to highlight here is we have an absolute commitment, and it's not just something we say, you see it in our actions, which is an active management of our balance sheet and our capital position, which happens to be currently the strongest it's ever been against the criteria on long-term shareholder value creation. And the team has done a remarkable job actively managing this, just like we do on the operational side. Jian Huang: Really helpful. And also, apologies for a poorly phrased question there. Yes, you're absolutely right. My second question is going back to the data centers a little bit. Obviously, it's a huge momentum for you and it's likely to be very long tailed. But just curious how you think about the competitive environment now that data center is very much in the front and center of discussions for insurance. Do you see large competitors coming in? Like how should we think about your market share in this expanding pie, so to speak? Gregory Case: So first of all, I really appreciate you asking the question. This is the wheelhouse. When you think about sort of what we have been built to do, think about levels of innovation, what we did on Aon Client Treaty when it first came out, what we did on the GLP-1s I just described, what we've done in multiple other environments, what we did on the retirement on the employment plan, trying to bring 401(k) economics to the middle market from large companies. All these things are innovations that we have driven over time. And they come from a standpoint of truly requiring integrated capability, risk capital and human capital and the ability to bring capital from in the industry and outside the industry to bear on behalf of these challenges. All that's true, and that's a proof point in how we approach the market. This happens to be bigger than anything you've ever seen. $2 trillion, right? By the way, $2 trillion is only the build. It's not the operating or the innovation that comes over time. So it's just the tip of the iceberg. This isn't really about competitive position. By the way, from our standpoint, we have taken a very, very hard, hard look at this, and we've taken a very much an engineering-driven approach. I referenced the partnership we've got with a very unique firm that will be clear over time on how you take an engineering-driven position around where do you position these things? How do you think about where you build them, by the way? How do you think about the actual building? Not the core technology, we'll leave that to the technology companies, but literally, how do you do this in a way in which you can create better business continuity and business resilience. When you think about business interruption in the context of a data center in this world, it is going to be measured in the millions of dollars per minute. It's going to be a completely different scale. So for us, what we want to do is bring a set of solutions, which may be copied by others. It will be difficult, but they might be. And there's enough room for everyone here. The question is how we can increase relevance of our industry to help reduce the volatility of the operating -- building and operating of these data centers. And for us, it's a massive -- it really is unique. It's a massive opportunity for our industry to make a difference in a way that's going to really matter globally and get bigger and bigger over time. But the scale is quite -- we've just never seen it before. We're pretty excited about it. Operator: Our next questions come from the line of Mike Zaremski with BMO Capital Markets. Michael Zaremski: Sticking to the exciting data center conversation. Greg, you gave us some great color, potentially over $10 billion in new premiums in '26 alone for the industry. Any color -- is that -- are those premiums more of like a -- if you do the math and it was commission-based, there'd be a lot of growth. Is this mostly fee-based? And is Aon getting a disproportionate share of this, you think? Or is it most of it going to the E&S market? Just any other color would just be great. Clearly, a great opportunity. Gregory Case: Yes. Listen, from our standpoint, it's still very early sort of in the process. So let's don't -- this is not mid-game or even end game. This is like the beginning of the game. This is all beginning to sort of develop over time. And think about, Mike, from the standpoint of this is around how you build these things, how you operate them and then they evolve and they innovate on a time frame that's measured in a few years. So you're going to continue to iterate this. And for us, this is about accessing capital to connect with risk. Whatever market it goes through, primary admitted E&S or frankly, alternative markets, we're accessing all that capital. And by the way, it's going to require access to all that capital. And then literally, how -- from our standpoint, we're looking to provide value for clients. We always find a way -- we do fine on compensation when we provide value for clients. And ours is always a value-added approach in terms of how we think about it. And so we're, again, excited about the opportunity to make a difference, and we already are. As I mentioned before, we've already done some major programs underway, but we see potential to do substantially, substantially more. And by the way, this isn't just a U.S. opportunity. This is a global opportunity. And for us, again, we see great opportunity. But really, the issue, Mike, is convincing the capital to come in and actually provide the coverage and do what we need to do on behalf of the hyperscalers. And really, it isn't just the hyperscalers, it's also the builders and then the money as well because if you think about sort of funds that are being created, opportunities there as well. So for us, this really cuts across the ecosystem and represents a very unique opportunity. Michael Zaremski: Interesting. And my follow-up is probably for Edmund. On the accelerating Aon United program, can you give us a flavor of how much cash spend remains? And is that kind of evenly spread out over the next 5 quarters? Edmund Reese: Yes. You should be able to -- we'll -- in the 10-Q, you can see what the cash spend has been over the time, we're just over $600 million in cash spend thus far or later this evening, you'll be able to see and I'm getting a signal when the 10-Q comes out. But the key thing about that is we're right on track for what we expected to spend there. We'll continue to assess that as we go into 2026 and more importantly, for us, the savings. We did $110 million last year and on track for another $150 million this year. So we continue to feel good about setting ourselves up for ongoing scale improvements and capacity through that and capacity to invest in our capabilities and in our folks moving forward. So that's where we are in terms of spend and savings. Operator: Our next questions come from the line of Jimmy Bhullar with JPMorgan. Jamminder Bhullar: So I had a question first just on organic growth in Commercial Risk. If you look at your results, they've accelerated over the course of the year, 5% in 1Q to 6% in 2Q, 7% in 3Q. And the change has been more than hiring -- the hiring tailwind ramping up alone. So maybe if you could give us some key drivers of the improvement, things that actually helped you in 3Q that might not have been there in 1Q? I'm just trying to assess what -- which of these factors are sustainable versus might not sustain at 3Q. But just what drove the ramp-up in growth. Gregory Case: Yes. I appreciate the question, Jimmy. Maybe I'll just start at an overall high-level strategic approach, what we've done and then how we've operationalized it. And Edmund -- and I know we will add a lot of color on some of the detail here. But listen, we came into 2024 with a 3x3 Plan. We architected, plotted it, put it in place, locked it down in '23 and announced it and drove it in '24. We said '24, '25 and '26, very straightforward. We talked about this on Investor Day. What are we bringing that's different? What are you doing that's different? Well, risk capital is different. Human capital is different. We're connecting the dots in ways they've never been connected before, not because it's a nice thing to do, but because we can actually take the data that cuts across these theaters and pull it together under Aon Business Services and create better data fidelity so we can actually inject it into our analytics. That drove a set of analyzers. We're going to kick off the Property Symposium early next year. And when we bring our 1,000 clients into the room, we're going to start with our Property Analyzer and what's going on. They're going to see things they haven't seen before with better data than ever before. For us, this is a revenue driver. This is a driver of attracting clients. They see that opportunity. It's also an opportunity to change the retention profile, already a very strong retention business, but really the opportunity to win more clients, do more with them and keep them longer. And that's really all the efforts around the 3x3. And then if you think about risk capital and human capital, really amplified massively by Aon Business Services, and we just continue to build momentum on this and then delivered through enterprise client and all the things we're doing in Aon client leadership. So it's one voice that actually brings the content of Aon on behalf of a client. So that's the 3x3. So Jimmy, we're halfway through that, and we're happy we made progress, but we have high expectations, and we're going to continue to make progress on -- against the 3x3 against that specific piece. And then step back and think about NFP. We've accessed the $31 billion market with a great asset and a great set of capability. And it turns out the content and insight from Aon Business Services is highly applicable in the middle market. You think a CFO in a middle market company doesn't want to see opportunities to change the cyber risk profile they've got or do something about their -- what they pay for their 401(k) on behalf of their employees, all these things sort of come into play that really are part of the 3x3. So what you're seeing here is the progress on the 3x3 and what we laid out in the Investor Day, and we're working diligently to provide as much energy behind that as we can. We call it basically industrial strength execution. And then you're right, we added on top of that priority hires. And Edmund is describing these priority hires, I think, exceptionally well, and they will continue to build on that chassis that I just described. That's -- it isn't complex, hard to do, but not complex. That's exactly what we're trying to accomplish with the 3x3. We're halfway through, and you're seeing some progress. And we'll keep working the ball, but a long way to go here. Operator: Our next questions come from the line of Tracy Benguigui with Wolfe Research. Tracy Benguigui: I'm going to stick with the theme of the data centers. Just one quick one. You mentioned a recent client win that replaced nearly $30 billion in coverage for a top global data center developer. Does that represent any one-offs for the quarter? Gregory Case: It really doesn't. It's really just part of the ongoing piece. All I really wanted to do, Tracy, there, and Edmund can comment on this as well. I just give you an example that this isn't conceptual. It's happening now. It's also an interesting observation. We have an opportunity as an industry to step up and really make a difference here. But irrespective of what we do, these are happening. The investments are being made, and it's quite substantial. So I just wanted to provide a very concrete example of where it's -- where something is sort of ongoing. But also think about the data center that we actually provided coverage on in that specific example. That was, by the way, part build. And in part, they have ongoing data centers in which actually help them understand how to think about the business continuity differently. And so for us, that is an ongoing effort. Again, back to why this is so unique. It's not just the build, it's the ongoing operation and then the innovation. And that means this is not just a monumental opportunity. This is a sustained monumental opportunity, which is one of the reasons we're so excited about it. Edmund Reese: Yes. And Tracy, the only thing I'll just add to it, I'll just be very direct that our growth in this quarter, in particular, is not because of one-off items or nonrecurring business, it really are the durable ongoing sustainable drivers that Greg just talked about, our data through risk capital and human capital, the middle market growth, the analyzers through Aon Business Services and then on top of that, the cumulative impact of the hiring that we're doing right now. So your question is an important one. I just want to make sure I highlight that point. This is not sort of one-off or nonrecurring business. These are the durable drivers of growth that is driving our performance. Tracy Benguigui: Awesome. I'm also going to take a crack at maybe sizing up the market share. You would have better numbers than me. But you announced in July your data center facility has up to $2.5 billion in capacity. And then you talked earlier about $10 billion of new premium volume. Yes. So is there any way you could frame it in terms of is that the only vehicle that you're using to place the business? Or maybe you could just talk about all the ways that you could play in that business. Gregory Case: Tracy, I really -- this is going to evolve over time. I would say we're just at the start line. Maybe the most powerful message that Edmund and I are highlighting here is the work we're doing on what's next and an engineering-driven approach, which really starts fundamentally with how and where you build these and how you start to maintain them. And then asking the question around the analytics on what really is the potential volatility to be covered here and the risk to be covered here. And then with our reinsurance and alternative capital hats on and our core insurance hats on, how do you create the capacity because the capacity here we're describing has never been seen before. So for us, we very much are very much at the start. It's almost kind of like, yes, whatever share we have, it's almost -- it's a nice start. We feel good about it. But really, as these start to come online and the investments are made real time and they're happening, being able to step up to any share of that is going to be meaningful in the conversation we just had about our performance. And then we see tremendous potential. So yes, we believe we've got a unique perspectives. I'm not saying it's the best. They're the perfect ones, but very unique. And by the way, they are integrated, risk capital, human capital. By the way, the talent aspects of this embedded in it as well. All these things sort of come together and we think put us in a unique position to both attract capital into this game on behalf of the hyperscalers, but also help the hyperscalers understand that beyond the technology, there are ways to conduct business with one of these data centers that actually might reduce cost over time and certainly could reduce volatility. So this isn't the core technology, but it's everything around it that sort of makes it more attractive. And so for us, this is just the beginning. Tracy Benguigui: Okay. And also just one quick clarification. So when you talk about revenue-generating talent up 6%, I'm assuming that's a gross number. Could you put context over maybe some talent exits and what a net number would look like? Edmund Reese: It's actually a net number because this question has come up, Tracy. So we've just been very explicit about wanting to ensure that we give all the information that can -- to be transparent on it. So the 6% you should think about is a net number for those hires in the categories that we talked about previously, producers, brokers, account executives, health and benefit consultants. Operator: Our next questions come from the line of Andrew Kligerman with TD Cowen. Andrew Kligerman: Amazing quarter across a lot of metrics. Focusing on the organic revenue growth, 2 areas. Edmund, at Investor Day, you talked about 4% to 8% growth, net talent growth. Is that something you think that you could do going forward into '28 -- '26? And then you've touched a lot on this call about middle market opportunities. Is that coming from NFP people? Is it coming from prior Aon talent. Where is it coming from? I suspect it's your investments in analytics and human capital as you've addressed all along. But I'm kind of curious where in the company it's coming from. Edmund Reese: Yes. So let me hit the first part, Andrew, and thank you for the question because it's an important one. And then maybe I'll turn the second on middle market to Greg as well. On the first one, I will sort of direct you back to what you and I have specifically discussed. Our engine in ABS that allows us to get scale improvements up to 120 basis points, the expense discipline that we have, that gives us the capacity to make investments. And I think I sort of quantified up to 60 basis points in investments. Those investments right now are focused on revenue-generating hires in priority strategic growth areas. They're focused on some of our capabilities within ABS. But the model itself is intended to be able to drive capacity to both invest and have margin expansion. We talked about 70 to 100 basis points as a sort of ongoing model over time here. And so we feel good about continuing to drive that growth engine and having the capacity. It's not a onetime thing for us. We think a continued focus on this, making this ongoing in the right areas because that changes over time as well the growth areas. We're focused on making this an ongoing part of our strategic growth model here. And Greg, maybe to you on the middle market piece. Gregory Case: Yes. And listen, before I get to the middle market, too, again, Andrew, I appreciate the question. Remember back to Investor Day, we talked about the 3x3 and all we are going to accomplish risk capital, human capital, ABS, delivered through enterprise client, all the pieces around that and the investments we're making behind that. And then Edmund described what really is the growth algorithm and what we're trying to do. That piece, go back to the math behind that, really, it truly does kind of capture everything we're doing operationally to a financial outcome, which is really the capacity to improve margin and invest on an ongoing basis. This is a very -- for us, very powerful construct. And that's why we were so committed, and that's why we made the investment on the $1 billion to kind of make that really happen and bring that to life. So I don't want to lose that. That's so important in sort of your question. And then fundamentally, middle market is one aspect of that. It's the $31 billion North American U.S. market that we didn't have access to in the way we do now. NFP, high expectations, as we described at Investor Day, exceeded in so many ways in terms of what we've been able to accomplish, not just as the middle market segment, but also what we can bring to the middle market with our content and capability and what NFP has brought to Aon in their view, so -- and perspectives and their client leadership. So for us, it was one aspect of the entire growth algorithm that's sort of being brought to bear here, but an important one and an exciting one. And we're very pleased to have brought NFP into the Aon family to do this. Andrew Kligerman: Got it. And as we kind of approach the end of the year, it seems like with that divestiture of the NFP Wealth business, you've kind of met your leverage objectives. So as you do look at M&A, and you talked about $32 million of EBITDA for NFP deals in the quarter. Are there potentially big ones out there that you could do? Is that something you're thinking about? And do you feel like 1.5 years in, you're ready to do it now that NFP is assimilated enough that you could do a bigger middle market type deal? Gregory Case: So Andrew, I think Edmund might have answered this earlier in the call. I'll answer it again. He'll do it better than me, no doubt. Listen, you know where we are. We are absolutely focused on long-term shareholder value creation, making the decisions to sort of drive that. That's the capital allocation piece. And as you highlighted, we actively manage this. This is not something we leave the chance, and we'll take the hard decisions, the difficult ones. The divestitures are hard, but they're important because they create capacity to do what we need to do. And then we'll make calls based on what really is the best answer from a long-term shareholder value creation opportunity for Aon. So you're right, we've got great flexibility based on the terrific work of our teams around the world from a balance sheet standpoint and anticipate we're going to do our level best to make sure we're making the right calls on behalf of long-term value creation. Operator: I would now like to turn the call back over to Greg Case for closing remarks. Gregory Case: I just want to say thanks again for joining us, and we look forward to an opportunity to talk with you in the next quarter. Take care. Operator: Thank you. This does conclude today's teleconference. We appreciate your participation. You may disconnect your lines at this time. Enjoy the rest of your day.
Operator: Greetings, and welcome to Lumen Technologies Third Quarter 2025 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded, Thursday, October 30, 2025. I would now like to turn the conference over to Jim Breen, Senior Vice President, Investor Relations. Please go ahead. James Breen: Good afternoon, everyone, and thank you for joining Lumen Technologies on today's call. On the call today are Kate Johnson, President and Chief Executive Officer; and Chris Stansbury, Executive Vice President and Chief Financial Officer. Before we begin, this conference call may include forward-looking statements subject to certain risks and uncertainties. All forward-looking statements should be considered in conjunction with the cautionary statements and the risk factors in our SEC filings. We will be referring to certain non-GAAP financial measures reconciled to the most comparable GAAP measures, which can be found in our earnings press release. In addition, certain metrics discussed today exclude costs for special items as detailed in our earnings materials, which can be found on the Investor Relations section of the Lumen website. With that, I'll turn the call over to Kate. Kathleen Johnson: Thanks, Jim, and thanks, everybody, for joining the call. We had a very productive third quarter at Lumen. First, we reported strong financial results with revenue, EBITDA and free cash flow all coming in ahead of Street consensus. And we're executing well on the essential operational components of our business transformation, including things like a successful phase 1 implementation of our new ERP system, delivering more than $250 million in run rate cost takeout through the end of Q3, on track for $350 million this year, continuing our balance sheet cleanup with an additional $2.4 billion debt refinancing and subsequent term loan repricing, and by making really good progress on our consumer fiber-to-the-home sale to AT&T, now targeted to close in early 2026. But the real headline for this earnings call is the progress we're making to pivot this company back to growth -- revenue growth. We signed an additional $1-plus billion in private connectivity fabric deals since our last update, bringing the total PCF deal value to over $10 billion. We continue to scale the adoption of NaaS, reaching more than 1,500 enterprise customers since the launch of this platform. We launched our latest NaaS innovation, Internet on-demand or IOD off-net, giving us nearly 100x greater market reach to accelerate digital service sales and revenue growth. We're rapidly building a connected ecosystem with dozens of early adopter tech partners who see how Lumen's digital platform can accelerate their time to value with joint customers. And while we still carry the weight of declining legacy telecom revenue, our growing revenue base now comprises 50% of North American enterprise revenue, up from 35.5% just 3 years ago. We're proud of the significant progress our team has made this quarter, and we believe our investment thesis and strategy are showing tangible results, and those results are being recognized in both the credit and equity markets. The advent of AI has created an urgent need for structural change in network architecture, and Lumen is uniquely positioned to take advantage of the moment. So I want to share some quick thoughts on how we see the market to provide context for the rest of my remarks. AI workloads are pushing data center footprint to grow 10x by 2030, and public cloud spend is expected to eclipse $1 trillion in that very same period. Meanwhile, CIOs are on the hook to deliver insight at the speed of thought while efficiently managing explosive data growth across complex hybrid and multi-cloud environments. But traditional network architectures, they were built for simpler times, and they just won't cut it anymore. They're not big enough or fast enough or intelligent enough or secure enough. Simply put, traditional networks led precious GPU investments sit idle, and Lumen is changing all of that, as Dave Ward, our Chief Technology and Product Officer, explained in his recent white paper. He advocates for a fundamental reset in networking to support the new era of Cloud 2.0 and identifies 5 essential networking capabilities required to thrive: extreme bandwidth and low latency, data center interconnect, expansion into AI corridors, distributed cloud on-ramps and programmable API first networks. These requirements are the underpinning of Lumen's 3-part strategy, including the physical layer, the digital layer and the connected ecosystem. And today, I'll translate that into Lumen's evolving business model with some exciting updates starting with building the backbone for the AI economy. Now as I mentioned upfront, we closed another $1 billion-plus in PCF deals, bringing our total to over $10 billion with a healthy pipeline of deals remaining. Based on our current build schedule, the $10 billion of business in hand plus the existing O&M run rate business for PCF, we expect will yield a recurring revenue stream ranging between $400 million and $500 million by the time we exit 2028. I'll add 2 important footnotes regarding this business. First, none of the remaining deals in the pipeline have been contemplated in this revenue guidance. They are purely upside. Second, we remain deeply disciplined in our approach by only inking deals that are value accretive to Lumen shareholders even if this means stepping away from an opportunity. And the teams are doing a great job building that backbone. As of the end of September, we had completed more than 3,200 miles of over pulls on 27 different routes, approximately 130% of our in-year '25 target with a full quarter left to go for the year. But building the backbone for the AI economy, it's not just about over pulls for our hyperscaler and neocloud friends. It also requires massive upgrades to our physical network to support Cloud 2.0 needs of enterprise customers. And for this, we're investing in 3 major fabric infrastructure projects, including rapid routes, data center expansion and metro expansion. Market by market, we're upgrading capacity, increasing data center interconnects and improving service delivery experience and time frames to help our customers address the urgent needs of AI and multi-cloud architecture. These investments are how Lumen is creating a ubiquitous, high-capacity networking fabric that enables our customers to connect everywhere that matters quickly, securely and effortlessly. Okay. Moving on to our digital platform update. We've created Lumen connectivity fabric and NaaS to address the need for programmable API first networks in the world of Cloud 2.0, and I think our growth metrics confirm the market need for what we're offering. The number of active customers in the third quarter grew by 32% since last quarter, and the number of NaaS fabric ports deployed grew by 30% and the number of services sold by 36% in that same period. Across all 3 KPIs, we're showing strong growth. Now I share these metrics with you each quarter because they're central to our new business model, which is different than traditional telecom. I'll share more about that now, so we can all ground ourselves in a common understanding of how Lumen will pivot to revenue growth. At the center of our new PxQ business model is the fabric port. One digital port that delivers many services. And when we say Q, we mean total active ports or the number of net new ports in service. When we say P, we mean average selling price. Average selling price of each service purchase through Lumen connect and deployed on the port. And in early 2026, we're going to extend this model with the launch of Project Berkeley, a pre-provisioned cross-carrier fabric port that lights up first and third-party services on and off-net, AI ready from day 1. Simply put, Berkeley enables intelligent and universal access no matter who owns the pipes. Customers will be able to install the port and light up standard kits of services, including IoD or Internet on Demand, Lumen Defender, voice, VPN on Demand, and a range of cloud on-ramps. Soon through our connected ecosystem work, they'll also be able to light up third-party services. The commercial motions to drive digital growth are simple and repeatable by both our direct sales force and our partner channels. First, they land customers on new port with a mix of starter services and then they expand by attaching more services on installed ports creating a PxQ flywheel of sorts. And at an Investor Day next quarter, we'll share more about what we're learning as this new digital marketplace takes shape. Here's what we know. Growth will come through selling more ports and upselling more first- and third-party services. And that's why I'm so excited to share the next 2 announcements with you. On October 20, we launched IoD off-net, expanding our addressable market by close to 100x and that's just in the United States. Since Lumen NaaS became generally available in January of 2024, the #1 piece of customer feedback has always been, hey, bring Lumen NaaS off to market, and here we are. It's early days, but the feedback so far has been very positive with great customers like Xcel Energy, noting how Lumen's off-net NaaS will help them achieve important business outcomes such as more resilient operations and more intelligent services. Now the second announcement is about the Lumen Connected ecosystem, a major driver of commercial expansion for both ports and services. Last week, we announced a strategic partnership with Palantir where we not only agreed to buy services from each other, but we committed to bring those capabilities to joint customers. I want to call your attention to an article from The Street entitled "Palantir just signed a deal that could shift the AI power balance". The piece does a really nice job explaining how Lumen's network has become critical infrastructure in the AI race. The purpose of the connected ecosystem is to help more technology companies like Palantir gain competitive advantage by leveraging our platform and allowing Lumen to gain commercial reach. We're excited to report that we're working with dozens of other companies that not only understand the power of our new business model, but they also understand that our AI-ready network enhances the delivery of their solutions. Just some of the marquee tech companies we're working with include, of course, Microsoft, Google and AWS, the big hyperscalers, but also data center companies like Digital Realty and QTS, AI platform companies like Palantir and Meter, data cloud services companies like Databricks and Snowflake, security companies like Palo Alto, Zscaler, F5 and Netskope, and backup and recovery and data protection services companies like Rubrik, Commvault and Cohesity and so many more. Together, Lumen Connectivity Fabric and Lumen Connected Ecosystem offer a meaningful source of revenue growth. Our early read on growth from all of our digital capabilities includes NaaS, Edge Solutions, Security and the Connected Ecosystem is somewhere between $500 million and $600 million of incremental revenue run rate exiting 2028. And while it's hard to accurately forecast revenue, when you're creating a new market, we do feel good about these numbers, and we'll continue to be super transparent about all of our assumptions and learnings as we go. To bring our revenue story home, PCF should yield between $400 million and $500 million of incremental revenue exiting '28. Lumen Digital should yield between $500 million and $600 million of incremental revenue in the same period. That's $900 million to $1.1 billion of incremental revenue exiting 2028, and that's the path for Lumen's business segment to achieve revenue growth. We're changing the game in networking by building the fastest open platform mesh network connected to everywhere that matters while delivering a digital on-demand experience so enterprises can quickly, securely and effortlessly move their data. It's what our customers need and it's what our investors deserve. Chris, over to you. Christopher Stansbury: Thanks, Kate. Lumen delivered another quarter of solid execution. We reported strong third quarter financials, implemented phase 1 of our new ERP system and continue to improve the balance sheet. Financially, revenue, adjusted EBITDA and free cash flow results were better than expected. Our total business grow revenue was up 7.7% year-over-year and our total business revenue was only down 3.2% year-over-year, well ahead of the competition. The launch of phase 1 of the ERP system quote-to-cash is a significant milestone for Lumen as we continue to transform the company by simplifying systems to support our future growth. When phase 2 is completed next year, we will be on a unified ledger and will continue to sunset old systems and drive additional efficiencies across the organization. We continue to strengthen our balance sheet with multiple capital markets transactions during the quarter. In August, we successfully priced $2 billion of 7% first lien notes due 2034 at Level 3, which enabled us to extend maturities by approximately 4 years and delivered $48 million in annual interest expense savings. We followed in September with pricing a $425 million add-on to the 7% notes to redeem all the remaining 2030 Level 3 first lien maturities and repriced our $2.4 billion term loan, reducing the rate by 100 basis points. Lastly, in September, we used cash to redeem both the $238 million of 7.25% quest notes and $350 million of 10% Level 3 second lien notes. The third quarter debt refinancing term loan repricing and debt reduction actions further reduces annual interest expense by approximately $135 million. Year-to-date, we reduced annual interest expense by approximately $235 million through proactive balance sheet management. Looking forward on a pro forma basis and considering the early 2026 expected closing of the announced $5.75 billion sale of our fiber-to-the-home business the proceeds will allow for the paydown of approximately $4.8 billion in Lumen super priority debt. This action is expected to further increase Lumen's annual interest expense savings up to approximately $535 million. We will continue to work toward improving our debt profile ahead of the anticipated close of the AT&T transaction in early '26 as we continue to seek opportunities to further delever, extend maturities, simplify the capital structure and reduce our cost of capital. Upon closing the AT&T transaction, we expect to have approximately $13 billion in debt, reducing our overall leverage before 4x adjusted EBITDA. And with that, I could not be more proud of the team's hard work to deliver such impressive results as well as the opportunities that a new financial profile unlocks for Lumen's future. I'm really pleased to say debt is no longer a headwind for Lumen. The balance sheet is quickly becoming a point of strength for us. So let's move to the discussion of financial results for the third quarter. Total reported revenue declined 4.2% to $3.087 billion. Business segment revenue declined 3.2% to $2.456 billion. Mass Market segment revenue declined 7.7% to $631 million. Adjusted EBITDA was $787 million with a 25.5% margin and free cash flow was $1.7 billion. Within North America enterprise channels, excluding wholesale, international and other, revenue declined by approximately 1%. North American enterprise grow revenue increased 10.5% year-over-year, driven by continued strength in dark fiber and IP. We saw expected and typical declines in Nurture and Harvest. Overall, including wholesale, North America business revenue declined 2.8%. As previously communicated, Grow will become a larger percent of our North America enterprise revenue base over time. We're pleased to share that Grow now represents half, I'll say that again, half of our North America enterprise revenue. This was driven by our core network Grow products with non-PCF driving the largest portion of the increase. The emerging growth of digital has yet to materially impact our revenue performance. As Kate mentioned, when we first reported this metric, in early 2022, Grow revenue represented approximately 35% of our North American enterprise portfolio. So to those who are stuck to their thesis that our legacy portfolio will prevent our return to growth, or that our growth is over relying on PCF, the facts show that thesis is increasingly incorrect and frankly, irrelevant over time. Wholesale revenue declined approximately 7.6% year-over-year, in line with our expectations. International and other revenue declined 13% or $12 million, driven primarily by managed services, VPN and voice declines. Now moving on to mass markets. Our fiber broadband revenue increased 18.4% year-over-year and represents over 49% of mass markets broadband revenue. During the quarter, Lumen added approximately 122,000 fiber-enabled homes, bringing our total to approximately $4.5 million as of September 30. We also added 39,000 Quantum Fiber customers, bringing fiber subs to approximately 1.2 million. Fiber ARPU was $64. At the end of the third quarter, our penetration of legacy copper broadband was approximately 7% and our Quantum Fiber penetration stood at approximately 26%. Now turning to adjusted EBITDA. For the third quarter of 2025, adjusted EBITDA, excluding special items, was $787 million compared to approximately $900 million in the year ago quarter. For the third quarter of 2025, our margin was 25.5%. Adjusted EBITDA margins were disproportionately impacted by anticipated declines in public sector Harvest revenue in the third quarter. Special items impacting adjusted EBITDA totaled $216 million. This includes severance, transaction and separation costs and our modernization and simplification initiatives. Lastly, capital expenditures were approximately $1 billion. Free cash flow, excluding special items, was over $1.7 billion. As a reminder, we expect free cash flow to be lumpy quarter-to-quarter as we move through the large PCF builds. I'll now talk about our outlook for the remainder of '25. As we saw in the third quarter, we expect fourth quarter revenue to be negatively impacted by additional declines in public sector Harvest revenue as that revenue returns to more normalized levels, similar to the third quarter of 2024. On a year-over-year basis, I would remind everyone that we had a positive onetime revenue item in the Grow bucket in the fourth quarter of 2024. With respect to 2025 adjusted EBITDA, we reiterate that we expect to come in near the high end of our $3.2 billion to $3.4 billion guidance range despite the previously announced $46 million RDOF giveback in the second quarter. We expect increased costs associated with our utilization of cloud services to continue in the fourth quarter as well as a negative impact on EBITDA from the above-mentioned public sector Harvest normalization. As a reminder, our adjusted EBITDA guidance assumes organic revenue declines similar to 2024 and excludes roughly $300 million in transformation costs to support our multiyear commitment to reduce expenses by $1 billion. We remain confident that we will achieve adjusted EBITDA stability over the next few quarters and see an inflection to growth in 2026 driven mainly by continued M&A savings as well as improving revenue declines. We maintain our 2025 guidance for CapEx spending at $4.1 billion to $4.3 billion. As we previously communicated, we expect to be at the low end of that range, mainly because of build timing and increased efficiency from our team, offset by some strategic investments for growth. As we said, we expect our overall capital intensity to fall over time. Our 2025 cash interest guidance remains at $1.2 billion to $1.3 billion. We continue to expect to be at the low end of the range because of the improvements we've made to our debt profile. Finally, we're reiterating our full year free cash flow guidance of $1.2 billion to $1.4 billion, mainly because of lower-than-anticipated CapEx spending, better adjusted EBITDA performance, lower interest expense and the expected $400 million tax refund. I would note, our free cash flow outlook reflects our expectation of receiving the $400 million refund from recent legislation in 2025. While the IRS has accepted our request for the refund, the receipt of this cash could be delayed by a prolonged shutdown of the U.S. government. Now as I wrap up, I want to emphasize that as we disrupt the market for legacy enterprise telecom offerings with next-generation Cloud 2.0 connectivity digital solutions, we'll change the way we measure and provide insights into our business. The future is about digital scalability and growth, and this requires a different way of thinking, a different way of modeling. As we transform Lumen, we simply won't fit the models of yesterday's telecom. For those of you open to changing your models to track our journey, we appreciate your thoughtfulness and we'll provide as much guidance as we claim, including a deeper dive look at our upcoming Investor Day in February. Kate talked about $500 million to $600 million in digital revenue exiting 2028. Digital includes NaaS, cloud on-ramp security as well as revenue from ecosystem partnerships. We see multiple paths to achieving those digital revenue goals over the next 3 years. We're still testing assumptions. But what we do know is we're seeing great adoption for NaaS as well as immediate interest from industry-leading tech companies as we build our ecosystem partnerships. More than half our North American enterprise revenue is coming from growing products today. And while we're still gauging the timing of the revenue on our new digital products and enterprise buying habits, the early trends we're seeing gives us increased confidence in our return to business revenue growth in 2028. As we learn more, we'll be transparent as we introduce concepts to investors that will be highly correlated to our strategy and distinctly differentiated in the market relative to the backdrop of traditional telecom, but we believe will make sense as our business evolves over time. While there are a lot of moving parts over the next 12 to 18 months, we believe our transformation and innovation will lead to new revenue streams to satisfy the needs of customers in today's Cloud 2.0 environment. Our cost structure optimization and increasing digital revenue helped improve margins and free cash flow, reduce our capital intensity, lower our leverage and borrowing costs and ultimately provide the financial flexibility to invest in Lumen's future growth. We're pleased with our performance this quarter as we make great strides across all 3 layers of the business: physical, digital and ecosystem. We're also pleased with the reaction from the credit and equity markets as our trading multiple is beginning to reflect the impact of our significant balance sheet improvements or improving revenue mix away from legacy to growing products and the early proof points for our digital growth engine. We're excited by what the future holds, especially given the financial impact of our digital future and that they're not materially reflected in our results today. We look forward to providing more updates along our journey. And I'll now hand it back to the operator for Q&A. Operator: [Operator Instructions] Our first question comes from the line of Mike Rollins with Citi. Michael Rollins: Two topics, if I could. So first, on the PCF deals. How does this new $1 billion of bookings compare to the last set of deals or tranches where I think previously, you guided to an unlevered free cash flow margin of like 30% to 31%. Just curious if the margins from these are different from that. And if you can give us an update on how much pipeline is still out there for aluminum to pursue for these types of deals? And then secondly, you mentioned a few times the Grow revenue being above 50% of the NAM business revenue. And the Grow revenue grew over 10% year-over-year in the quarter. So can you unpack a little bit more of what's driving that Grow revenue? And is double-digit growth in this Grow bucket a new sustainable level for Lumen to achieve? Kathleen Johnson: Mike, it's Kate. I'll take the first one and let Chris handle the second one. On the PCF deals, the $1 billion plus, it was more than one deal and the composition of that portfolio of bookings is equivalent in margins to the prior tranches. And I think you can see us kind of approach this business with a very disciplined approach, as I referenced in my prepared remarks. We're only going to do the business that's deeply accretive, and we're in a kind of a -- we're going to remain focused on that. Regarding the pipeline, it's a lot of different hyperscalers and neocloud providers. We're not going to commit to a number anymore. I think we're going to exceed probably our expectations as we said last year, only because this is not going to be an overnight sensation. This is turning out to be a fairly protracted phase of what we see as a 3-phase process hyperscalers and neoclouds connecting their data centers for training and for provisioning of services to their customers. And then the enterprise phase of it, where enterprises start consuming those models through inferencing and they need massive upgrades and to address all the needs of Cloud 2.0. And then there's that third section, which is referenced in the Cloud 2.0 remarks that I made, which is basically AI corridors emerging, and you've got AI talking to AI. So it's a huge amount of data traffic and requires a massive expansion. We're still figuring out what the demand curve look like across all 3 of those cycles. But I think that gives you a sense for it. Christopher Stansbury: Yes. And in terms of the overall growth rate, PCF has started to triple in but I emphasized in my prepared remarks that it's actually not the majority of that growth. So we still see a strong mid- to high single-digit growth in things like dark fiber, IP waves, connectivities -- traditional type connectivity solutions that ultimately will convert to digital. So in the near term, PCF is certainly contributing, but it's not driving the total growth. I also want to remind everybody that over time, PCF is actually not a growth engine because those deals are static. And once completed, they don't increase every year. So when we're talking about getting back to growth, we know that eventually, there's a headwind as those builds come to conclusion and level off. So PCF is a great way to monetize the assets that are in the ground and this tremendous network that we have the opportunity to run. But they really aren't something that we believe are a significant part of our long-term growth trajectory. Operator: Your next question comes from the line of Sebastiano Petti with JPMorgan. Sebastiano Petti: Chris, maybe you could just -- given the run rate that you've outlined for not only the PCF but for the digital revenue buckets, against the backdrop of some of the transition and transformation costs that you're kind of wearing for lack of a better term in '25, can you maybe help us think through the piece parts or the puts and takes as we look out to the EBITDA bridge from 2025 through 2026? Obviously, the mass markets, that's kind of well understood. Maybe some of the other core or remaining part of this? Christopher Stansbury: Yes. So a few different things. As it relates to revenue, you will continue to see that, that Grow bucket becomes an increasing portion of our business over time. So business mix continues to improve, which means the rate of decline continues to improve. So that's obviously a tailwind. The -- but the big driver, I mean, let's be really straight about it. Kate called it out, is the modernization and simplification efforts as we navigate our way through the inflection point of EBITDA. So a lot of modernization and simplification as we close out the year. We've said that we're going to be above what we initially guided for this year and then more to come next year. So those are really the 2 key drivers, reduced rate of decline on enterprise and the modernization and simplification benefits that impact EBITDA. Sebastiano Petti: And if I could ask a quick follow-up, Chris, I think you said that the balance sheet is no longer a constraint, but a source of strength. I mean, is Lumen strategically compete as you think about trying to attack some of these growth areas that maybe legacy telcos are not necessarily having their purview? Christopher Stansbury: So I would say, number one, once we close the transaction with AT&T, that will bring us down to the high 3s, but we're not done yet. And there's a playbook to further reduce leverage over time. But the point is that when you look at the maturity chart and the curve that we've shared in the presentation, this is not the old Lumen. And this is a balance sheet and debt profile over time that allows us to do multiple things. So what I wanted to be really clear about in today's reported remarks and it's exactly what I frankly shared at the Industry Analyst Day is it's time to stop talking about our balance sheet as a headwind because it's simply not true. It's time to start talking about our inflection back to growth. Operator: Your next question comes from the line of Batya Levi with UBS. Please proceed with your question. And we will go to the next question. Your next question comes from the line of Frank Louthan with Raymond James. Frank Louthan: There were 3 announcements this week, you touched on some of them. There was the announcement with the -- you touch of the 10 million business locations in the Palantir and the QTS network. Can you give us an idea of sort of the revenue impact from those items and the timing and magnitude of when those will start to hit? Kathleen Johnson: Yes. I mean, all of them were a part of the connected ecosystem storyline, which if you think about it, has a couple of different tenants. So the first is continued connectivity with the hyperscalers. The second is connecting -- interconnect for all the data centers. That was the QTS deal. And the third being technology partners who are seeing value and integrating networking into the offerings that they bring to customers. So we're starting the flywheel, Frank. It's really about a go-to-market partnership better together. I think networking has always been purchased separately. So you buy a cloud solution and then you go figure out if you have enough network. What we're doing is designing the network solution to support the specific cloud offerings of these companies and making them available in digital marketplaces to make it easy to buy and improve the velocity to value for the customer. And so you're going to see it over time in improved results of all the same things we're selling today. We're just harnessing the power of other people's sales forces to give network a seat at the table for the first time ever. Frank Louthan: And any color on sort of the magnitude and timing of the revenue from those? Or are these just sort of kind of lumped in with everything else in growth? Christopher Stansbury: Yes, I'll take that. Frank, it really gets back to my closing comments, which is we see multiple pathways to getting to our revenue objectives for digital. And the only thing that we're getting really good certainty around at this very early stage is tremendous NaaS adoption. But as Kate laid out in the PxQ map, it comes down to number of ports, number of services per port and price per service. And so as we move through that journey, we'll definitely give investors a lot more visibility to that. And we'll certainly share our prevailing point of view at Investor Day. But no matter what we share, I guarantee, it's going to be different by the time we get to the other end. And so we'll constantly update the market, but the thing that gives me enormous confidence is when you got port services and price, you have multiple pathways to get to that outcome, and we feel really good about it. Kathleen Johnson: Yes. And just to clarify, Frank, the connected ecosystem is a part of the storyboard of how we have confidence in getting to $500 million to $600 million incremental revenue exiting '28. So that's really -- it's one and the same. It's not a separate revenue stream. It is acceleration of the existing digital capabilities in flight. Operator: Your next question comes from the line of Greg Williams with TD Cowen. Gregory Williams: Chris, the stock has been showing some outsized strength in the last call it, 3 weeks. I know it's been volatile recently. But if it sustains up here at these levels, I mean, does it make sense to equitize some of the company and sell some shares and further bolster the balance sheet? Does it change the capital allocation calculus at all? And then second question, Kate, you did mention the 3 phases of AI. Are we in a prolonged training phase 1 right now? And what I mean is a couple of the hyperscalers and AI companies are pushing now more towards AGI models, like bigger, larger models here. And I'm curious if that prolongs phase 1 of this journey. Kathleen Johnson: I think it's a great question as to whether or not phase 1 is prolonged. I think it's definitely intensifying and the amount of capital being deployed is probably bigger than we even imagined last year. So how long it takes? This isn't -- we're building critical infrastructure for the biggest technology shift in the history of mankind. So it's a multi-decade journey. I want to be clear that it's not linear. So phase 1 will overlap with phase 2. Phase 2 being as enterprises start to use all of these models, which is happening right now. I think that what -- it's really interesting to see the proliferation of neoclouds coming into the story to sort of offload a bit of the pressure on trying to find GPUs and commit to buying them. So I think you're seeing the market change. And I don't know that anybody knows the answer or how long this is going to last. But right now, we're just focused on executing. And it's like -- obviously, we're delighted with the commitment of capital that our partners and customers are making to this incredible technology. Christopher Stansbury: Yes. And on the stock price, I mean, look, obviously, tech has had a good run of late, and I want to make sure I say that clearly as a backdrop. But look, if you really dissect what's been going on with Lumen's stock price, there was a significant discount put on our stock price because of a few things. One, perceived risk on the balance sheet side, I mean, again, look at that debt maturity chart. And two, and quite frankly, some of your peers still hold this view that we could never return to growth because of the legacy backdrop. I think what the market now realizes -- and by the way, the credit markets realized this 6, 9 months ago is that neither of those things are true. The balance sheet is getting healthy really quickly and is no longer something to be discussed as a risk. And our portfolio of business today, before we really start to pull in the digital upside associated with transforming enterprise telecom is half of that portfolio is growing. So when you look at the stock price today and normalize the balance sheet post close, which we said today and AT&T said on their call, we expect an early first quarter, you actually get to a multiple that's pretty reasonable and comparable to better performing peers in our space. So I think we're now finally at the point where we're being recognized for what we've done. And we're now more fairly valued than we have been for the last period of time. From here, we've got a lot of work to do, but we feel really good about the upside as we drive digital adoption. On the equity rate side, look, we'll continue to look at everything. And I would never say no, but I also want to be really clear. Our equity holders have stuck with us. We've done a lot on the debt side. Our creditors are obviously very pleased with what the return has been on their investments as we see bond trading values come up. And now it's time to focus on our equity holders, and that's why we're so pleased to see what's happening in the market. Operator: Your next question comes from the line of Eric Luebchow with Wells Fargo. Eric Luebchow: Appreciate the kind of revenue color on the digital and NaaS ecosystems, $500 million, $600 million. Just curious if you could talk about some of the incremental work you have to do internally, investments you have to make to kind of be able to achieve that outcome, whether it's upgrading data centers, additional cross-connects, additional on or off-net locations. And whether that could show up in the OpEx or CapEx line to be able to reach that goal in a few years. And then my second question would just be around disconnects of legacy services. It seems like those have been coming in a little better than expected. Just wanted to check if there's any kind of timing-related things to call out there that we should expect to roll off in the next few quarters? Or maybe you're just performing better than you previously anticipated? Kathleen Johnson: Yes, I'll take the first part, and I'll leave the disconnect timing question to Chris. So the investments required to build the digital platform are definitely significant. They're already contemplated in all of our plans. They're in the operating plan, and we've got a very strong pipeline of innovation. It's just beginning with IoD off-net. We've got Berkeley coming to market in the first quarter and more enhancements to the platform after that. I think it's important to remember that we talk about cloudifying telecom, which really means driving cloud economics for us and our customers. That's about scaled revenue growth with reducing marginal cost of hardware required to deliver these services and -- which is very, very exciting. Additionally, the old way for Lumen to grow was really sort of fixed to a level of capital intensity that I think is changing over time. That capital intensity required to deliver the digital portfolio over time, reduces. And I think that's an important part of our story over the next couple of years. Chris, do you want to take? Christopher Stansbury: Yes, on disconnects. It's really -- last quarter was an anomaly as we said around the public sector side and things that I would say, just returned to normal as we move into the fourth quarter. I think the bigger impact in the fourth quarter is what I mentioned in my remarks, which is, remember, we had a big onetime revenue enablement item and grow last year surrounding the state of California. So that's really the biggest thing that's out there. Operator: Next question comes from the line of Nick Del Deo with MoffettNathanson. Nicholas Del Deo: The first one, Kate, you touched on this in your prepared remarks, but I was hoping you could dig in a little bit more. Can you talk some about the specifics of how you're promoting NaaS to customers and educating out the product and how you're incenting the sales force to sell it versus other services? And kind of related to that, if the off-net opportunity is 100x larger than the on-net opportunity, how are you prioritizing each? How are you resourcing each? Kathleen Johnson: It's a great question and a hot topic for Lumen right now because we're going to relentlessly pursue our digital future. And that means allocating resources accordingly. And when NaaS was a bit nascent, we had to kind of do it as a hobby and now that it's becoming core and showing a very promising adoption curve, which will translate into a very promising revenue growth curve, we've got to dedicate more resource to it. And for any company in transformation, Nick, you have to be ambidextrous. You have to take care of the old and you have to build the new at the same time. The trick is when do you move thing, resources from the old to the new, and we're right in the process of doing that. And there are many examples that I could go through. But at the highest level, we are -- where there's a NaaS capability being offered to customers, we will demote the old-school analog version of that service and prioritize it in terms of engineering resources, marketing resource, sales resource and operations resource. And so you'll see the sales team being more and more incented to go after it and the rest of the company in support of that sales force. I think your other question about the availability of 10 million buildings, we still need to target. We still need to get aggressive in terms of aligning our sales efforts with the massive metro upgrades that we're doing. So our customers can take advantage of everything we're doing at the same time, the on-ramps network as a service, the capital improvements, the rapid routes, all of that stuff as we improve the capacity and bandwidth and performance market by market. And so -- it's also important to note that if you think about most large enterprises, they have a mix of buildings in any geography that are on and off-net. And so we have to be very cautious about how to present this to customers. Now we can ask our entire sales force to talk to every customer about purchasing NaaS and about what the benefits are over agile, digital native experience digitally is going to be fundamentally different and provide a better customer experience to these customers. It wasn't available in totality in the past. Now that it is, it will actually be easier for our sales force to approach customers because they don't have to pick and choose on-net and off-net. They can just do a total network refresh. Nicholas Del Deo: Can I ask one clarification on the PCF front as well? A few minutes ago, you said that the margin on the PCF deals that you signed in this quarter was equivalent to what you previously outlined, the prior deals you signed rather. Last quarter, I thought you were suggesting that the funnel that you had, had some different attributes to it since they skewed more towards new builds rather than leveraging existing assets. Maybe could you just touch on that a little bit? Kathleen Johnson: Yes. I mean, basically, new build construction projects much more complex, and there's pressure for lower margin over those projects as opposed to overpull or lighting up existing dark fiber. And the composition of the portfolio is incredibly important to us. We're not going to do bad deals. And there's an enormous amount of pressure from some of our partners to go back to the old telco ways of 0 margin for the promise of traffic of the future, and we're not really doing that. We're looking for much more creative partnerships with these builds to say, if it's a new build, we will share costs if there's existing traffic there. Chris, do you want to add anything to that? Christopher Stansbury: Yes. And so the $1 billion looks like the deals that we've signed so far because it's primarily existing conduit where we're doing over pulls. So it's a similar economic profile. Operator: Your next question comes from the line of Mike Funk with Bank of America. Michael Funk: So I'm going to butt in your comment during the prepared remarks, I think you said that it does not fit the models of traditional telecom. So can you expand on that for me, if you could, please? Traditionally, telecom kind of being very commoditized from buying the same equipment, same service capabilities. So I guess how do you veer from that more traditional model? And what should you mean by the earlier statement? Christopher Stansbury: Yes. So first of all, let's start with the fact that nobody is doing what we're doing. What I would clarify though is when Kate talked about our digital future, there were key words in there, which is one port, many services. So traditional telecom was a battlefield of every single services requiring its own infrastructure layer, its own set of ports. And so you have multiple players in the ecosystem go chase VPN or Ethernet or whatever it was, and you'd end up with massive amounts of hardware in the system and then everybody says, the only tool we have to compete against each other with is price. That's not what we're doing. What we're doing is we're monetizing what is the most modern, the most high capacity, the fastest network by adding a digital layer in an ecosystem layer, and those are services to, Kate's point, whether they come from us or they come from third parties that allow us on and off-net. Off-net is not a disadvantage anymore because of what we're bringing to market where we can actually, for the first time in enterprise telecom bring scale. So you'll see declining capital intensity because every service will not require its own infrastructure layer. You'll see increasing margins because those services increasingly will be delivered digitally. The whole model is changing. It's the PxQ math that Kate went through. So Lumen is not your mama's telecom anymore. We will not look like and are proud to not look like our competitors in this space. Kathleen Johnson: And Michael, I would strongly encourage you to look at some of the slides that we prepared for today's presentation, specifically the essential Cloud 2.0 networking requirements. I challenge you to come up with another company that is doing the 5 things that we outlined on the page. We are massively expanding, bandwidth and reducing latency with our upgrades of rapid routes and data center interconnect and metro updates. We are connecting to everywhere that matters, especially with the data centers, which means we're bringing that higher level bandwidth and lower latency to all of those locations. We're expanding into AI corridors. We've connected with all of the hyperscalers for these on-ramps and we're delivering everything with a vision that is got to be programmable and it's got to be interconnectable through APIs. This is a complete modernization of old telco. What's remarkable is that new architecture that we're building, not only gives better performance, more secure, higher bandwidth, higher performing, lower latency, all those things, intelligence. It also reduces cost because it takes the intermediaries out. And that's incredibly important when we're starting to talk about commoditization. Things get commoditized because there was a utility mindset and there is no innovation. This company is completely innovating and delivering a fundamental reset in networking in support of AI and making massive capital investments in support of that, and we're already seeing the uptake. So it's very, very different. Christopher Stansbury: The only add that I would make is that when you look at PCF, that physical layer, the reason we're at $10 billion of business, and you're not hearing much from others isn't because they want to walk past $10 billion. It's because they can't do it. So if you were to normalize the underlying physical layer, it would be years and billions and billions of dollars until a competitor could close that gap. That's before we talk about the digital and ecosystems layer where we're making this consumable on demand by the customer. And so that's the differentiation. And that's why you continue to see our profile looks so different to our competitors. Michael Funk: And one more if I could, really quickly. I appreciate all that insight, and I'll definitely review the decks again for those facts. So you've given us some landmarks for the revenue and revenue growth, and I apologize if I missed it from the analyst, event you hosted or today. But what is the cash EBITDA CAGR look like over that same time period? You referenced in the call that the market is not giving you credit for growth rate relative to peers. It'd be helpful to have a thought on that to be able to better frame the valuation on cash EBITDA growth. Christopher Stansbury: Yes. So I'll say 2 things. First, we're going to give you all of that at Investor Day. Second, in preparation for Investor Day, as we look at, again, only the PCF deals that are signed to date, nothing new, and there is more there. And we look at the capital investment to do the things that we're talking about. We have ample cash flow -- free cash flow over the next 5 years to the point where even post the AT&T close, we will continue to delever. So this is a business that will continue to generate free cash flow because capital intensity falls because margins go up and because ultimately, revenue inflects. So we'll give you more at Investor Day. Operator: Your next question comes from the line of Jonathan Atkin with RBC Capital Markets. Jonathan Atkin: Wondered if you could comment a little bit about off-net NaaS capabilities and any -- maybe just repeat or go to more detail on kind of what lies ahead around that capability and demand for off-net NaaS. Yes, that would be my question. Kathleen Johnson: Yes, sure. So the exciting part about off-net NaaS is -- we feel off-net today in existing capabilities, right? It depends on who owns the endpoint. So if one of the other carriers had the endpoint into a building, but the customer wants to do a network with Lumen, we would have a wholesale relationship for that endpoint. The really cool thing about IoD off-net is that we now can offer on-demand Internet services to customers no matter who has the endpoint of the building. So if Verizon or AT&T or anybody else has fiber into the building, that customer can still run Lumen NaaS, and that's a great thing. But what's more, and this is something that we reviewed at Analyst Day in September, we're going to bring a lot more detail when we launch Project Berkeley is we have a fabric port that allows us to make any pipe smart. We turn anybody's pipe into an intelligent and secure Internet connection. And what it does is, it really accelerates our commercial expansion capabilities. What's more is that fabric port, Berkeley specifically, has a Swiss Army knife. So it's a cross-carrier mesh, if you will, that enables fixed wireless, satellite, fiber copper, 5G, whatever service you have can all go into that port, which is really cool because it's kind of like a control point for the Internet. And what that means is not only can we expand, but we can provide more services to our customers over time as they want to manage cross carrier. Finally, the connected ecosystem, part of our story is exciting because our partners want to provide services on our network out of the gate. So just imagine the vision, and this is vision, we still have to get all the pieces together. But imagine that customer says, I want to have a Lumen network, we drop ship a Berkeley device, if you can plug it in Ethernet cable, you can make that device work. It shows a digital twin back in Lumen Connect, the mother ship, the cloud, so that we can remotely provision, we can remotely manage and service it under a single pane of glass. But what's really neat -- and this is what I tried to tease out on the prepared remarks, is that customer can say, okay, I have a new building, I'm going to buy a Berkeley device and to put it in place, and I'm going to get some Internet on demand. I'm going to throw some voice on there. Maybe some Lumen Defender. I want to connect to 2 of the cloud directly without going through carrier-neutral facilities. And I want some of the security service from my favorite security provider. Click, click, click, and they can build that service remotely. It's a very forward-leaning vision, and we're bringing it to market in 2026. Jonathan Atkin: Is there any external investment, tuck-in M&A or whatnot that makes sense either in regard to this direction? Or is there anything else around the broader business? Kathleen Johnson: I'm sorry. Did you ask if there are any tuck-in? Jonathan Atkin: Does [indiscernible] accelerate, does it make sense to do M&A to maybe accelerate capacity that you have going? Kathleen Johnson: I really love questions about M&A. It really shows how different things are. Thank you so much for the question. Of course, we look at everything, constantly, the best use of capital. Is it to invest something new, is it to pay down debt, is it buyback equity, or is it to go buy something to tuck in? We're looking at all of it, and we'll bring it to you as soon as we have any changes in our current trajectory. Operator: At this time, there are no further questions. I will turn the call back over to your host, Kate, for closing remarks. Kathleen Johnson: Thanks so much, operator, and thanks to everybody for the remarkable time and attention that you spent and the great questions. We're so excited to share our progress and our journey ahead, and we couldn't be happier with what's going on at Lumen. A special shout out to the thousands of Lumenaries working so hard every day to make this progress reality. I'm so proud of you. And love working with all of you. See you in the field. All right. Thanks, guys. Operator: That does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your line. Have a great day, everyone.
Operator: Good morning, ladies and gentlemen, and welcome to Vivo's Third Quarter 2025 Earnings Call. This conference is being recorded, and the replay will be available at the company's website at ri.telefonica.com.br. The presentation will also be available for download. This call is also available in Portuguese. [Operator Instructions] [Foreign Language] [Operator Instructions]. Before proceeding, we would like to clarify that any statements that may be made during this conference call regarding the company's business prospects, operational and financial projections and goals are the beliefs and assumptions of Vivo's Executive Board and the current information available to the company. These statements may involve risks and uncertainties as they relate to future events and therefore, depends on circumstances that may or may not occur. Investors should be aware of events related to the macroeconomic scenario, the industry and other factors that could cause results to differ materially from those expressed in the respective forward-looking statements. Present at this conference, we have Mr. Christian Gebara, CEO of the company; Mr. David Melcon, CFO and Investor Relations Officer; and Mr. João Pedro Soares Carneiro, IR Director. Now I'll turn the conference over to Mr. João Pedro Soares Carneiro, Investor Relations Director of Vivo. Please, Mr. Carneiro, you may begin your conference. João Carneiro: Good morning, everyone, and welcome to Vivo's Third Quarter 2025 Earnings Call. Christian Gebara, our CEO, will start us off by commenting on Vivo's connectivity and digital services performance as well as present our main ESG highlights for the period. Then David Melcon, our CFO, will give more details on cost and CapEx management, free cash flow generation, profitability for the period as well as an update on shareholder remuneration for 2025. With that, let me turn the call over to Christian. Christian Gebara: Thank you, João. Good morning, everyone, and thank you for joining us today. I'm pleased to announce that Vivo delivered another set of strong results, presenting real growth across all key lines fueled by a powerful commercial performance and our relentless focus on customer experience. In mobile, our postpaid segment continues to lead the way with access growing 7.3% year-over-year. Postpaid now accounts for 68% of our total mobile customer base, which has reached approximately 103 million connections. On the fiber front, we have 7.6 million homes connected, an impressive 12.7% increase year-over-year, and our footprint covers 30.5 million homes nationwide. Total revenues rose by 6.5%, driven by consistent results in both mobile and fixed services. Mobile service revenues grew 5.5%, while fixed services saw a 9.6% increase. This balanced growth highlights the strength of our diversified portfolio and our ability to meet demand across multiple segments. EBITDA grew 9% year-over-year with our margin expanding to 43.4%. This reflects our continued focus on operational efficiency and disciplined cost management. As a result, operating cash flow reached BRL 11.2 billion in the first 9 months of the year, up 12.4% compared to the same period last year. Net income rose 13.4%, totaling BRL 4.3 billion, while free cash flow approached BRL 7 billion with a margin of 15.6%. These strong financial results enable us to return BRL 5.7 billion to shareholders by the end of September, reaffirming our commitment to sustainable value creation. Moving to Slide 4. We show how our top line continues to grow at a strong pace, driven by an increasingly robust and diversified revenue mix. In the quarter, total revenues reached BRL 14.9 billion, once again led by the solid performance of our postpaid and FTTH segments that grew 8% and 10.6%, respectively. These 2 pillars clearly demonstrate how high-quality convergent services can boost monetization. Our new businesses also continue to gain traction, now accounting for 11.7% of our total revenues over the last 12 months, an increase of 2 percentage points year-over-year. This evolution underscores the success of our strategy to diversify and modernize our revenue base, ensuring sustainable growth in a highly dynamic and competitive market. Now on Slide 5, we highlight the key drivers behind our continuous ramp in mobile. In the third quarter, we recorded our highest ever postpaid net additions, surpassing 1 million net access machine-to-machine and dongles. These outstanding results reflect the success of our value-driven strategy and reinforces our leadership in the mobile market. Postpaid access grew 7% year-over-year, reaching nearly 50 million customers, while 5G adoption continues to accelerate with more than 21 million customers now benefiting from our award-winning technology. In fact, in September, Vivo's 5G network was recognized by Opensignal as the fastest in the world for the second consecutive year. Customer retention remains a top priority. Postpaid churn ex machine-to-machine and dongles reached just 0.98%, a testament to the loyalty of our high-value customer base, though we still see room for further improvement. ARPU rose 3.9% year-over-year, reaching a record high of BRL 31.5, supported by upselling and growing demand for data. These results demonstrate the effectiveness of our customer-centric approach, our ability to innovate and the strength of our mobile platform as a key growth engine. On Slide 6, we explored the continued capabilities of our fiber business and its convergence with mobile. FTTH access once again posted double-digit year-over-year growth, continuing the strong momentum we've seen in recent quarters. This performance is largely driven by our flagship convergent offer, Vivo Total that saw an impressive 52.7% increase year-over-year. Notably, Vivo's convergent base already nears 62% of all fiber access. This reinforces the market's clear shift toward bundled solutions. Our fiber footprint also continued to expand. In the last 12 months, we passed over 2.2 million new homes, reaching a total of 30.5 million. The take-up ratio improved to 24.9%, reflecting stronger demand and better conversion. Churn continues to trend downwards, marking the fifth consecutive quarter year-over-year improvement. For Vivo Total specifically, churn is 50% lower than our already below market fiber churn, highlighting the stickiness and value of the offer. Today, nearly 85% of FTTH sales in our stores are done through Vivo Total. This not only boosts lifetime value, but also drives higher user expenditure with gross ARPU reaching BRL 230 per month for Vivo Total subscribers. On this plan, we have reached 1.7 mobile postpaid lines per fiber connection, a clear demonstration of how convergence supports both lower churn and sustained ARPU growth for mobile and fiber. Turning to Slide 7, we dive into how our B2C segment is evolving with focus on how new businesses are driving incremental value and enhancing customer monetization. Over the last 12 months, total B2C revenues reached BRL 44.1 billion, up 5% year-over-year. This growth is supported by both our core connectivity services and the expanding contribution of new businesses that grew 15.3% and now represent 3.1% of total revenues. Revenue per RGU continues its upward trajectory, reaching BRL 64.6 per month. This reflects our success in deepening customer engagement and expanding share of wallet. Looking at the breakdown of new businesses, we see strong performance across key verticals. Our video and music OTTs remain a major growth driver, with revenues up 19.9% year-over-year. Meanwhile, our -- one of our health and wellness initiative, Vale Saúde Sempre now has around 450,000 subscriptions, up 27% versus last year, with plans starting at just BRL 17.90 per month. In financial services, Vivo Seguros continues to scale rapidly, already counting with 600,000 insured devices, a growth of 42% year-over-year. Today, over 40% of our smartphones sold in Vivo stores are bundled with insurance, underscoring the relevance of this offer. These performances emphasize our strategy of positioning Vivo as a comprehensive digital platform, where connectivity is just the starting point for a broader ecosystem of services tailored to our customers' evolving demand. Heading to Slide 8, we highlight how our B2B segment is increasingly being driven by expansion of digital services. Over the past 12 months, B2B revenues reached BRL 13.2 billion, up 15% year-over-year. This performance was led by digital B2B that grew an impressive 34.2% and now accounts for 8.6% of our total revenues. Connectivity also continued to grow steadily, rising 5.6% in the same period. A major milestone this quarter was the signing of the largest IoT deal in the world with Sabesp. This partnership includes installation of approximately 4.4 million smart water meters in the cities of São Paulo, São José dos Campos by 2029. Vivo will also provide the platform to monitor and process the data generated by these devices, reinforcing our leadership in large-scale digital infrastructure. This combination of robust revenue growth and strategic partnerships positions Vivo as a key enabler of digital transformation across multiple industries. With regards to ESG, on the next slide, we reinforce Vivo leadership now with both new commitment to biodiversity and long-term environmental stewardship. This quarter, we launched the Futuro Vivo Forest, a 30-year initiative dedicated to regenerating the Amazon. This project will preserve 800 hectares of native forest by planting nearly 900,000 trees in the states of Maranhão and Pará, bringing back the local fauna in the region. Beyond its environmental impact, the initiative also brings benefits to the local communities aligning sustainability with social inclusion. The announcement was made during the Encontro Futuro Vivo, an event that brought together acknowledged leaders to reflect on the future life of our planet. It marks a new chapter in our ESG journey focused on long-term regeneration and climate resilience. In governance, Vivo continues to stand out. We ranked first place across all sectors in B3's Corporate Sustainability Index, ISE B3, and received recognition for excellence in Corporate Social Responsibility under the ISO 26000 standard. We were also honored with several awards this quarter. Vivo's Compliance Program was named Program of the Year at the Leaders League Compliance Summit, and we were recognized as the top company in TMT category in Exame Magazine’s Melhores e Maiores ranking. Finally, we are proud to be ranked sixth among the best companies to work for in Brazil by Great Place to Work and to be the only Brazilian company and the only one in our industry featured on Fortune's Change the World list. These achievements reflect our ongoing commitment to creating shared values for society, the environment and our stakeholders. With that, I will hand the floor to David, who will walk you through our financial performance for the period. Thank you. David Sanchez-Friera: Thank you, Christian, and good morning, everyone. Starting with Slide 10, we take a closer look at the evolution of our cost structure and provide an update on the sale of concession-related assets. On the left-hand side, you will see that total cost reached BRL 8.5 billion in the quarter, up 4.6% year-over-year, growing below inflation for the period. This performance highlights our ability to strike the right balance between commercial intensity, operational efficiency and ongoing digitalization efforts. Cost of services and goods sold rose 9%, driven by the increase in service costs. This was due to the accelerated growth of digital solutions, particularly in the B2B segment. On the other hand, the cost of goods sold declined by 5%, benefiting from an improved margin profile in the sale of handsets and accessories. Operating costs grew just 2.6% year-over-year. Personnel expenses increased 3.2%, mainly due to the salary adjustments, which we partially offset with a more efficient management of our benefit programs. Our largest cost line, commercial and infrastructure rose slightly above 4% with higher commercial activity being mitigated by gains from digitalization. This quarter was marked by the acceleration of the sale of assets related to the fixed voice concession, resulting in a net gain of BRL 232 million, up from BRL 95 million in the same period last year. These gains include BRL 199 million from real estate and BRL 34 million from copper. We reaffirm our confidence in delivering BRL 4.5 billion in asset sales over the coming years. As a result, EBITDA grew 9% year-over-year, reaching BRL 6.5 billion with a 100 basis point expansion in margin to 43.4%. Moving to Slide 11, we highlight our operating cash flow performance. CapEx totaled BRL 6.9 billion in the first 9 months this year, up 3% year-over-year. Important, our CapEx to revenues ratio declined 60 basis points to 15.7%, reflecting our ongoing focus on efficiency and prioritization of high-return investments. As a result, operating cash flow before leases reached BRL 11.2 billion, a 12.4% increase compared to the same period last year. After leases, operating cash flow rose 15.2%, totaling BRL 7.2 billion with a 16.4% margin. This performance underscore the strength of our result profile and the effectiveness of our investment strategy. Looking ahead, we see significant potential to further optimize leasing costs. On average, there are 1.4 operators using the same towers as us. But in similar mature markets, this number exceeds 2 operators per tower. This opens opportunities for contract renegotiation and increased infrastructure sharing that will further enhance our ability to generate cash. On Slide 12, we present how our resilient operating performance continues to support profitability and cash generation. Net income for the first 9 months this year reached BRL 4.3 billion, up 13.4% year-over-year. This growth was consistent across all quarters this year, where we have been growing double digit, reflecting our solid execution and financial management. Our net cash position strengthened further, reaching BRL 3 billion at the end of September, a significant increase of BRL 1.7 billion a year earlier. Including IFRS 16 effects, our net debt stands at BRL 11.1 billion with a leverage ratio of just 0.5x EBITDA over the last 12 months, underscoring how robust our financial structure is. Free cash flow generation remains healthy, totaling BRL 6.9 billion in the period. While this represents a slight year-over-year decline due to some phasing effects, the third quarter already shows a 5.5% increase, signaling a positive trend. These results reinforce our ability to consistently generate value even in a recovering macroeconomic scenario. Moving to the last slide of the presentation, we reaffirm our commitment to shareholders' return. From January to October this year, we have already distributed BRL 5.7 billion to shareholders through a combination of interest on capital, capital reduction and share buybacks. In addition, we declared another BRL 2.7 billion in interest on capital to be paid before April 2026, further supporting our guidance to distribute at least 100% of net income for both 2025 and '26. Since the beginning of the year, we repurchased 48.4 million shares, equivalent to 1.5% of our current capital stock. Our buyback program of up to BRL 1.75 billion to be repurchased until February next year remains active and aligned with our capital allocation strategy. It's also worth noting that our share continues to gain market relevance, now ranking as the 34th most liquid share in the Brazilian Stock Exchange, an improvement of 11 positions year-over-year. These actions reflect our strong commitment to value creation and consistent shareholders' remuneration. Thank you. And now we can move to the Q&A. Operator: [Operator Instructions] Our first question comes from Luis Chagas from XP. Luis Chagas: Congrats on the robust results again. So my question regards mobile services revenues. So we saw a slight deceleration in MSR in this quarter. So how do you see the competitive environment in mobile did affect your performance in this quarter? Christian Gebara: Thank you, Luis. Christian, okay, I will answer your question. And we grew 5.5% year-over-year. It's good also to split the mobile postpaid service revenue, we grew 8% and the prepaid minus 7.6%. Starting with the prepaid. The prepaid it's a better performance than we had last quarter that's signaling a positive trend. And even when you compare the quarter-over-quarter growth, there is a positive growth. So we are bringing up revenues in prepaid, while we keep migrating prepaid to postpaid. In postpaid, our growth was 8%. It's also a very strong growth considering the amount of revenues coming from postpaid. Out of our total mobile, we are talking about BRL 8.3 billion coming from the postpaid segment. And we had also the best net add performance of the last quarters. Now if you look back to the third quarter of '24 and we follow every single quarter, it's the first time that we surpassed 1 million postpaid net adds. So that's a strong performance. And the churn, if we keep it in the 1% level. If we exclude machine-to-machine and dongles, it's below 1%. At the same time, we've been able to increase ARPU in that around 4% when you compare year-over-year. So that's a positive result. Of course, there is always small seasonality impact of price increase. If you look back in August '24, we increased price for 40% of our hybrid customer base. And this August '25, we increased for the same segment, the hybrid, we just increased for 25% of the customer base. So going forward, although it's a competitive market, we have positive trends of mobile service evolution in the next quarters. I don't know, Luis, if there's anything else that you want me to address. Operator: Our next question comes from Gustavo Farias from UBS. Gustavo Farias: So 2 on my end. The first one on leasing, if you could comment further on the leasing efficiencies you guys are pursuing on specific measures and possibly, if possible, the timing we should expect them to start to have further impact -- higher impact on the leasing payments? That was my first question. And the second question, if you could give us an updated outlook for the sale of assets related to the concession migration? We saw most of it came from real estate. So how should we expect them to behave going forward in the next several quarters? David Sanchez-Friera: Gustavo, thank you for the question. So regarding the first one on leases. I mean, the evolution of lease depreciation and interest accruals, I mean, remain consistent compared with previous period. In fact, if you look to EBITDA after leases grew even more than EBITDA before leases not in the quarter, but also in the full year. So for the first 9 months, around 2 percentage points, even more, 0.2%. I mean when we look about payments, there is always volatility across the quarters. But I think it's important to look to the number we have this quarter, which is around BRL 1.3 billion and this is consistent and is almost flattish compared to the fourth last quarters. So this is important because that shows positive trend resulting from the negotiation that we are having with the towers company. So for the coming years, it's difficult to talk about any precise quarters. But the information that we also show in this presentation has to do with the current tenancy ratio that in Brazil, we believe is quite low. We are talking about 1.4 tenancy ratio in Brazil. When we talk about other countries where they have the same number of carriers, we are talking about above 2 tenants per tower. So this brings opportunity to negotiate not only in terms of unitary costs, but only -- also being more rational in terms of deployment strategy, but more importantly, increasing the infrastructure that we share with other operators. So all the deployment that we will do in the coming years will be -- our aim is to maximize the compensation with the unitary costs and sharing more. So we are expecting also positive trends coming for the next year in this line. Christian Gebara: Can I go to the second one, Gustavo, if you have any other doubts about leases, David can follow on or otherwise, I go to the copper and real estate. Gustavo Farias: Yes. David was pretty clear. Christian Gebara: So going to the second question, Gustavo. As we stated and now we restated, we -- from the migration, we will capture no benefits coming from the sale of copper, approximately BRL 3 billion positive cash effect, net of extraction costs from the sales of around 120,000 tons of copper and cable coating, okay? That was what we said and restate here again. And then additionally to that, BRL 1.5 billion proceeds from the sale of assets here, the real estate piece net of the mobilization costs, okay? So these are the 2 figures that we stated before. And now for the third quarter, we started delivering that. So we recorded like BRL 232.4 million, and that's divided in sales of copper, BRL 33.7 million and real estate BRL 198.7 million. That compared this BRL 232.4 million compared to BRL 95 million that we had 1 year before in the third quarter of '24. That is also what we anticipated the benefits of the migration are starting now, but it will ramp up and accelerate in '26 and '27 with the project expected to be completed in 2028. So if you compare also what we had in the next -- in the last year, copper was around BRL 63 million and real estate was BRL 32 million, adding to BRL 95 million. Now we had BRL 34 million actually in copper and BRL 199 million in real estate. Copper seems to be like in a positive trend and will be in a trend because we have been able to sell more and more and real estate, it depends on the asset that we sell each quarter. So adding to the BRL 1.5 billion that I described before. Gustavo Farias: Christian, just a follow-up. So is it fair to think that the sale of real estate could be a little volatile based on what you commented, right? Christian Gebara: You are right. Sorry, it depends on what we sell. And some quarters, we're going to see more and some quarters, we're going to see less. So this quarter was a good one to the total of BRL 1.5 billion, we are talking about around BRL 200 million, but we still have another BRL 1.3 billion. Gustavo Farias: Okay. And about the copper, it should follow a more volatile or more stable pace of sales. Christian Gebara: I think it's more positive evolution, positive evolution. We are going up. Starting next quarter, we will be in January that we are going to -- because as you know, we have 1.2 million customers connected to the copper. So what we are doing now, we are replacing to new technology, in this case, fiber and liberating the copper and the extraction will start in full speed starting next quarter. So we're going to see a positive trend in copper and a more volatile in real estate, although out of the BRL 1.5 billion, we talked about BRL 200 million here now. Operator: Our next question comes from Marcelo Santos from JPMorgan. Marcelo Santos: The first question, I wanted to go back to something that was asked first about the mobile, specifically on prepaid trends. I mean you mentioned that you had sequential growth, but actually, that's the second quarter of sequential growth in prepaid. So it looks like a different trend than we have been seeing despite you continue to migrate clients to postpaid. So can you talk a bit what's going on, on the prepaid? Is it something more like Vivo led some initiatives you're putting forward or the market is a bit better? Just want to know if you could throw us a bit some more color on the positive trends we are seeing in prepaid. And the second question is regarding M&A in the ISP space. So I would like to better get a feeling of what's your appetite for inorganic moves, specifically on the ISP space. Christian Gebara: Right, Marcelo, we see a positive trend in the prepaid. Here is each company works in a different way. What we see here is the customer base that we have recharging every month is going up. Also, our ability to offer more data to our customer base is impacting and also digital services is impacting in a slight ARPU increase. So although there is a very challenging landscape for prepaid more competitive and also our strong migration to hybrid that has a negative impact in the prepaid revenue results. We see, yes, a positive trend for prepaid as well. As much as we see also a very positive in the postpaid, as I said before, net adds are in record numbers. Churn is in lowest levels. So the combination of both give us optimistic trend for mobile service revenue for the future. About ISPs, the specific question was how do we see -- can you repeat it, please? Marcelo Santos: I just wanted to get a sense of your appetite for inorganic moves in the ISP space, whatever you can talk about this. Christian Gebara: Okay. Great question, Marcelo. Like we reached like almost 31 million home passed in fiber. The number of customers that we have are also growing. As you could see, net adds of Vivo has been in the highest level and compared to the other players in a very strong gap in a positive gap for us and churn is going down. Also, we highlighted our churn level at 1.46%. But when you go to the Vivo Total fiber churn level is low as 0.7%. as you follow the market, that is a record churn level for any player in our market. So going forward, of course, we believe that considering the size of the Brazilian market that getting more homes passed is in our objectives. Brazil has 90 million homes, maybe 60 million are more addressable to a fiber deployment. And we have, at the moment, a little bit less than half of it. So we want to be in a more strong -- a stronger position in this market. So we could do that organically as we've been doing. We have CapEx for home pass in a very low level. We've been improving that, optimizing that. So we are talking about lower than BRL 200 per home pass. And we need to connect more over our own network. So the first one, deploying more network, we're going to do by our own, although we find a network that follows some of our criteria, technical quality and also not so much overlap with our network and in the right pricing. So far, we haven't found any like this. There is some movement in the market. Some of these assets, we already assessed and analyzed. We couldn't get to an agreement due to maybe failing in one of these 3 criteria that I just described for you. Also, we have the opportunity to penetrate more of our network. We have just acquired FiBrasil and still waiting for the antitrust final approval. Their take rate was around 16%, actually, our take rate over their network. But I do believe now having the full control of the network will allow us to improve this take rate closer to the one that we have in our own network that is around 25%. So it will be a combination of more network organically or if we find an asset that comply with the 3 criteria that I just described and more penetration in our own network. And this penetration will be following this very strong and positive trend that we have. As you could see, net adds are above 225,000 clients. That's the best result that we have this year, and we are in a positive trend because we are acquiring more customers and we are retaining more customers as churn level is in a very low historical situation. Operator: Our next question comes from Lucca Brendim from Bank of America. Lucca Brendim: I also have 2 from my side. So the first one is regarding concessions, a follow-up on the previous question on the migration. Not only talking about the assets that were being sold, but also on the synergies and efficiencies that you mentioned we would be seeing in terms of cost savings. Have you already started to see anything now? And how is the time line for those to be captured and we start to see them in results? And then the second one on B2B digital, it continues to perform really well. And do you guys think you should continue to see this pace of expansion? And what are the verticals within this segment that you think will be the drivers for the coming quarters? Christian Gebara: So going to the first one, Lucca, yes, we're not giving numbers of this like saving related to cost efficiency. Of course, it will mostly impact our commercial and infrastructure line, but it will be captured gradually until 2028. We're not like showing like what's the number quarter-by-quarter. Here now, the focus is in trying to capture as quick as we can, what I just described before of the copper extraction and the sale of real estate that is required for that to migrate customers. We're going to do that as fast as we can, protecting the revenue, protecting the customers. And again, when we do that, of course, we're going to be in the end, capturing a lot of other synergies of people that are dedicated to that and other indirect costs that we have to deal with this concession. For the moment, we're going to be more -- giving more clarity in the number that we gave to the market that is the BRL 4.5 billion. Going to the second question about B2B. Yes, we are very positive about the evolution of the B2B digital services. As you described before, it has a very strong positive trend. If you look at the last 12 months revenues, it is a year-over-year growth of 34.2%. The areas that we see growth are the same. Cloud, important one. Here, we've been doing many things. We bought IPNET. So we're expanding our portfolio, trying to be much more diversified, going -- just not only having a very strong dependency in Microsoft, but adding Google, Oracle, among others. Also going up in the managed services. That's why these acquisitions, Vita and IPNET were essential because we could bring in some talent and certified professionals to help us in managed service, and we are looking to other assets. Then there is IoT messaging. I think IoT, we gave the great example of Sabesp. We see that the beginning of a huge opportunity in IoT. That's in the water business, but we also see in the agribusiness, and we are closing many deals there. So we grew 25% year-over-year in this line as well. Cyber is the one that had a very strong growth, but the volume is still lower, maybe is where we're going to focus in the future as well as a group and as Vivo, we see great opportunity for cybersecurity. And then there are other solutions and IT product sales that we also see a positive trend. So we do believe that the penetration of digital services in B2B through Vivo will grow. Today, on average, we have 15%. It's much higher in the top segments of our portfolio of clients, but we want to increase it much more in the SME segment. And we see huge opportunity to leverage our channel capability. We have 5,000 sales reps and of course, the brand and the combination of connectivity with digital services. Operator: Our next question comes from Vitor Tomita from Goldman Sachs. Vitor Tomita: Two questions from my side. The first one is that you cited the competitive environment when discussing mobile in some prior answers. Could you give a bit more color or a bit of an update on how you are seeing the competitive situation in mobile going into Q4? And my second question would be if you could give a bit more color on the topic also of sales and copper and real estate assets, but more from an operational standpoint in terms of communicating with copper users, as mentioned, moving them to fiber, mobilizing field teams to extract copper, negotiating real estate, et cetera. How has that execution side been going, whether there have been any surprises on that execution side relative to what you expected? Just so we can have a bit more of a qualitative view of how this is going? Christian Gebara: Okay, Vitor, I will start with the second one. Okay, it's a good question. It's important to highlight that we've been doing that for a long time. It's not that we have started doing that. If you look at real estate, even during the concession period in the last years, we were able to get authorization from ANATEL and we sold important assets during the last years and that we needed to mobilize and take out everything related to the concession from the real estate, and we were able to do that. So we sold Martiniano de Carvalho that was an important building for us. We sold others in important neighborhoods of São Paulo. So we had already established a real estate process to analyze and evaluate and demobilize all the assets that we wanted to sell, and we continue doing that now with much more flexibility because we don't need more authorization to do that. Regarding the copper and the customer that you said, that's also a very good question. We did that in the past as well. It's not the first time that we do that. We were already very focused on replacing copper with fiber. But in the past, we needed to get full authorization of the customer. Now of course, we communicate, we explain the benefit of fiber. But in the end, if the customer doesn't want to, we have also the possibility to say that we are running out of any type of assistance to this technology that give us the right to replace it. Mostly what we see in most cases is that customers want to have the migration. We put in place a very robust process. We have a dedicated team in a PMO focusing on doing that. And what we see here is not only we migrate customers, but we also can see opportunities to upsell. An example of a pure corporate client that we offer fiber to the voice and we can also offer broadband and ended up having a much better ARPU with these customers. In other cases, copper plus fiber in a very low speed offering, we could also be able to offer upsell and also Vivo Total. So it's working pretty well. That's why it's giving us opportunity to sell important assets in important neighborhoods where we were like finishing, concluding the migration to fiber to all the customers that we have. I think -- I don't know if I answered it. Otherwise, I go Vitor, to the first question. Vitor Tomita: Yes, that was clear. Christian Gebara: Okay. Let's go to the first. Look, the market dynamics is, of course, competitive. It's not very different from what we saw in the previous quarters. We've been doing as we normally do, adjusting price based on the inflation and the period that we can do that, focusing a lot in customer experience to retain as much as we can, playing convergence in the best way, innovating in our offering. We just launched the Vivo Easy Lite that is based in credit card that has been a huge success. And we've been doing that in a very positive way, as you could see in the performance that we had in net adds. I think net adds is a great example of the trend going forward. For the first time, we surpassed 1 million customers in postpaid net adds and the postpaid churn is in a very low level. Now we're also able to increase ARPU. So competition is there. We have different competition depending on the region, being able to respond to that, both in prepaid, hybrid and postpaid and also playing strongly the opportunity to sell more service to the same customer, adding not only the fiber to the mobile, but also the digital services. Now our success performance selling digital services, mainly entertainment for these customers is also given here. We are reaching 4 million customers, both mobile and in some cases, convergent, in other case, just fiber that we are able to sell digital service. This is only one example of one digital service, but we are also able to sell others. We expect this positive trend to continue, keeping the very competitive environment that we have. Operator: Our next question comes from Maria Clara Infantozzi from Itaú BBA. Maria Infantozzi: I have 2 questions here on my side. So the first one, can you please provide us an update how you perceive the competitive landscape in the fiber business? It caught our attention that ARPU continues to fall for the second quarter in a row this time. And the second question would be related to CapEx. It also caught our attention the sequential increase this quarter. And with the integration of FiBrasil soon, how should we think about the CapEx evolution in the following quarters? Christian Gebara: On the fiber, again, not to repeat myself, but it was a very strong quarter for us. We are talking about a revenue that's already BRL 2 billion with a growth of 10.6%. Net adds is also a record level. If you look back the last 5 quarters, that's the strongest one. And churn, if you look back many years, is the lowest one. When you talk about specific ARPU, here, you need to put into account. First, we are deploying new areas because we're expanding our network. Sometimes we have promotional entry offers. But more importantly is that we are selling 85%, if you consider just one channel, our stores, fiber with mobile in Vivo Total. And then there is a change in the allocation of ARPU because we're selling 2 services or more to the same customers. And we also stated here that on average, a Vivo Total customer has fiber, but has 1.7 postpaid lines. Add to that, that we also sell a lot of OTT, video OTT. So more than just looking at a specific service ARPU, we should look at the customer ARPU or we should look at the line of the absolute number of the fiber that, again, is growing double digits and is reaching BRL 2 billion per quarter. So we are very happy with our performance. As I stated before, we want to expand to more areas. We want to penetrate more our network. We want to sell more convergence to our fiber customers. And also, we launched new speeds, even 10 gigas as one of the last -- gigabytes one of the speed that we just commercially launched. So we also see opportunities to upsell in our customer base to 1 to 2 and up to 10. So the competitive scenario is hard. As you can see, we have thousands of customers, but I think we have assets and attributes that are very difficult to be replicated, and that's shown in our net adds that is well above the second player. Sorry, regarding CapEx, we are keeping the low intensity that we have right now, CapEx over revenues, and I think this should be the metric to look forward. Maria Infantozzi: So even with the acquisition of FiBrasil, we should think about a continuation of the declining CapEx over revenue stream, right? Christian Gebara: Yes. The acquisition, if it's approved, it's going to be less than 2 months, and it brings EBITDA and brings a little bit of CapEx. Operating cash flow impact is almost 0. It is slightly positive. Impacting CapEx is much more than replaced or compensated by the positive impact in EBITDA. So you shouldn't be worried about the CapEx impact of FiBrasil. Operator: Our next question comes from Mathieu Robilliard from Barclays. Mathieu Robilliard: I had 2 follow-up questions. One on the lease costs. which you are saying could be contained or decline. I was wondering if this is still due or linked to the acquisition of some of the Oi towers, and it was basically the prospects of continuing to rationalize your tower portfolio linked to that acquisition or it was something more structural? The second question was about B2B and more specifically data centers and cloud. Now that may be very euro-centric, my question, but certainly, what we're seeing over here is that with the geopolitical changes, sovereignty has become a big topic. And so a lot of countries and companies are thinking about having locally owned data centers. And I was wondering what was the debate there in Brazil and whether you guys had any data centers directly or plan to have in that context? And lastly, just to make sure I got the question about the fixed ARPU right or rather the answer. Are you basically saying that one of the reasons why the ARPU is down is because I guess there's a discount to the sum of the parts in your product and maybe you're allocating a bit more to the fixed business than the mobile business? I mean that's really an accounting question. Christian Gebara: Yes. This is Christian here. I'll go to the last one, and then David will jump to the first and then I go back. Yes, there is an allocation decision here, and I addressed that when we talk about Vivo Total. If you look the number of customers that we have in fiber 7.6 million, 3.2 million are already in Vivo Total. And I guess that's looking at a specific service ARPU, considering that our strategy is driven by selling more to the same customer, convergence being the key element of this strategy is going to be hard because there is some allocation here. What is important is that in absolute numbers, we are growing revenues in double digits. And commercially speaking, net adds are in a very high level and churn is in the lowest level. Yes, and there is some accounting that may be impacting the distribution of revenues among the 2 technologies. David Sanchez-Friera: Mathieu, this is David. So the first question about the leases. Look, this quarter, we have no impact from what you mentioned about other carriers that just left the business a few years ago. What is benefiting the trend is that before we were 5 carriers, now we are 3 here in Brazil. That means that we have -- we had to review all the strategy of sharing infrastructure that before we were sharing because we were 5, and now we end up being single tenant in a percentage of our sites that we see a big opportunity. So as I mentioned before, in the next -- let's say, in the next 3, 5 years, we are going to renegotiate a significant part of our sites where the contracts are about to expire. And therefore, we are prepared to face those negotiations with an approach where we can maximize the value in terms of return on capital, particularly to understand which are the strategic sites, which are the sites that we could pay less, which are the sites that we could share with someone who is just having a similar site, very near our existing infrastructure. So we will see synergies coming from this process that will be shown in our cash flows in the coming couple of years. So our plan is to continue showing positive numbers in terms of free cash flow. And we will keep you updated on the number that we have just shown this quarter. So we are talking about a 1.4 agent per tower compared to other countries where it's about -- it's above 2. We could be talking about specific countries where U.S., we're talking about 2.2. So here, the 1.4, we want to keep you updated to see how we are progressing, make this number higher, and this will fund all the new deployment that we need to have to keep having the best quality of 5G in Brazil. Christian Gebara: Going to the second question. No, we don't see the same issue that you described in the U.S. Here, what we are like trying to have is a more diversified portfolio of vendors to have it much more spread among different players. Many players are now entering strongly in the cloud area, and that's good for us because we are the key commercial partner of all of them, and we have a relationship with customers that these players don't have. What we see some companies, they want to have a hybrid strategy, having some on-premise servers combined with a cloud solution, but nothing related to what we described it before at the moment here in Brazil. Mathieu Robilliard: Okay. That's very clear. And just a follow-up on that. Do you guys have data center capacity? I mean, do you have infrastructure you own in Brazil that is important in size? Or is it essentially hyperscalers? Christian Gebara: Yes, we have a sales leaseback that we used to have a data center that we sold, and we have an agreement to occupy part of this data center. Apart from that, we don't have other data center. We use other big players in data center, and we hire capacity from their data centers and resell it. So we have a commitment to use part of their capacity, but it's not ours. Operator: The Q&A session is over. I would now like to hand the floor back to Mr. Christian Gebara for the company's final remarks. Please, Mr. Gebara, the floor is yours. Christian Gebara: Thank you. Thank you all again for participating in our call. Just want to highlight the strong results that we just presented and more importantly, the positive outlook that we foresee, especially based on our strong and consistent commercial performance and our ability of monetize and retain customers in all services and in all segments. If you have any other additional doubts, please reach our team. Thank you again, and see you soon. Operator: Vivo's conference call is now closed. We thank you for your participation and wish you a very good day.
Operator: Good afternoon, ladies and gentlemen, and welcome to SCOR Q3 2025 Results Conference Call. Today's call is being recorded. [Operator Instructions] At this time, I would like to hand the call over to Mr. Thomas Fossard. Please go ahead, sir. Thomas Fossard: Good afternoon, and welcome to the SCOR Q3 2025 Results Conference Call. I'm joined today by Thierry Leger, Group CEO; and Francois de Varenne, Deputy CEO and Group CFO; as well by other Comex members. Can I please ask you to consider the disclaimer on Page 2 of the presentation. And now I would like to hand over to Thierry Leger. Thierry, over to you. Thierry Leger: Thank you, Thomas, and welcome, everyone, also from my side. I'm satisfied with where SCOR stands today. We had another strong quarter, especially in P&C, where our strategy of diversifying growth pays off. The investment side continues to contribute in a stable and positive way to our results. And last but not least, on the Life & Health side, we deliver 1 quarter more in line with the updated forward 2026 plan. Also, we are ready for the renewals to come and very focused on the delivery of our plan. Our teams are close to our clients, leveraging our Tier 1 franchise. We offer tailored solutions that create value for our clients and shareholders. In the P&C context that has become gradually more competitive since 2024, a I would like to take a few minutes to reflect on the broader insurance landscape and the opportunities for SCOR as we approach the 2026 renewals. Looking back, 2025 has been a good year for the P&C industry so far. And overall, 2026 is expected to remain a good vintage year by historical standards. Nevertheless, as profits are up and the supply of capacity now exceeds demand, even if demand continues to grow, it results in increased pressure on prices and underwriting discipline is being tested. I have seen this before. This is the time when wrong strategic decisions can have a detrimental impact on the company's results. Usually, it is driven by the desire to grow in a particular line, some lines of business at the wrong time. Let me state this here very clearly such situations can be avoided. And at SCOR, we are determined to keep underwriting discipline high throughout the cycle. Our business is one of diversification and volatility absorption. We are here for the long term and support our clients when they need us. We have to demonstrate strength and resilience when times are difficult. For SCOR, this means that we will stay focused on fundamentals and deploy capital where risk-adjusted returns are adequate. We are maintaining our underwriting discipline, focusing on diversifying risk exposures and leveraging our analytical capabilities to support our teams to make the right decisions. In addition, our Tier 1 franchise provides us with the opportunity to choose where we allocate our capital in a determined way. I'm pleased to see that our teams are unaffected and fully focused on our clients and the business. They have no growth targets, but I have expressly asked them to leave no stone unturned to find profitable opportunities for SCOR and to discuss tailored solutions with our clients proactively. The aim is to balance long-term client relationships with bottom line, the latter being the priority ultimately. For our investors, this means a continued focus on capital efficiency, risk-adjusted returns and long-term value creation through the cycles. We will keep expanding in diversifying lines, such as inherent defect insurance, engineering, credit maturity, structured solutions, international casualty, facultative business and longevity. We have a very selective approach to marine, aviation, cyber and U.S. casualty monitoring the dynamics closely. In Nat Cat, where the cycle is most prevalent, we will monitor relative and absolute price levels, structures and conditions to determine where we deploy our capital. We will further consider our market share and exposure to climate change when we allocate our capacities. We continue to be underweight in Nat Cat. As long as rate adequacy is sufficient, this gives us room to grow by respecting the risk limits we set for ourselves for Forward '26. To conclude, climate change, geopolitical tension, cyber threats and AI create a more volatile and more uncertain environment, increasing risk awareness and demand for risk transfer. The need for a robust reinsurance industry is palpable, and growth opportunities are structural. Within this context, at SCOR, we remain confident in our strategy and optimistic about the opportunities ahead, even in a more competitive market. Francois, over to you. François de Varenne: Thank you, Thierry. Hello, everyone. I will now walk you through our third quarter results. Starting with a few key messages. Thierry and I, we continue to be very satisfied with these results. The performance of our 3 business activities is strong, delivering EUR 211 million of net income, 21.5% return on equity and an economic value growth of 12.7% at constant economics. On a 9-month basis, the net income stands at EUR 631 million, translating into return on equity of 19.5%. As mentioned by Thierry, P&C performance is excellent. The combined ratio for Q3 is at 80.9%, well ahead of our forward 2026 assumption of below 87%. These results reflect the very low Cat claims during the quarter and a slightly higher attritional loss ratio. In this context, we have continued implementing our opportunistic buffer building strategy, albeit with an addition in Q3 of lower magnitude than in Q1 and Q2. The amount of prudence built over the first 9 months of 2025 is equal to the entire presence of 2024. In Life and Health, with an insurance service result of EUR 98 million in Q3 and the year-to-date expand variance in line with our expectations, we are on track to reach our full year forward 2026 assumption of around EUR 400 million. Investment had another good quarter. We achieved a 3.5% regular income yield, thanks to our high-quality fixed income portfolio that continues to benefit from elevated reinvestment rates. Our economic value increases by 12.7%, a translation of the good business performance, both in P&C and Life and Health. It is now very likely that our full year EV growth will stand above our Forward 2026 guidance of 9%. Our group solvency ratio stands at 210%, stable to Q2, in the upper part of our optimal range. Q3 is a relatively low net operating capital generation quarter, given the absence of major P&C treaty renewals. Overall, thanks to the quality of our results over the first 9 months, we remain confident about achieving our full-year objective. Now I will go on with more details regarding our Q3 results. Let's look at P&C first. In Q3, the P&C new business CSM is mostly stable year-on-year, excluding the FX effect. This is a strong achievement in an increasingly competitive environment. On a 9-month basis, our P&C new business CSM, grows by 4%, benefiting from our strategic growth in preferred line as well as our dynamic retrocession buying, which offsets the inward business margin erosion. The P&C insurance revenue is down minus 1.6% for the quarter and up plus 3.1% at constant FX. In Q3, this is supported by growth in both reinsurance and as well at SCOR Business Solutions. In high insurance, the growth was driven by alternative solutions and our diversifying specialty lines. In SCOR Business Solutions, the trend has improved compared to the previous quarter as the timing effect on the renewal of some contracts has now caught up. In addition, here as well, the growth was supported by alternative solutions and by our syndicate activities, partially offset by property. On a year-to-date basis and adjusted for the large impact of the termination of one large contract and adjusted as well for FX, the P&C insurance revenue growth stands at plus 1%. Moving to the underlying performance of the P&C book. Our P&C combined ratio stands at 80.9% in Q3, benefiting from low Nat Cat losses in the quarter. Nat Cat ratio stands at 2.7% in Q3 and 6.4% year-to-date, which means well below the annual budget of 10%. Let's now focus a little bit on the attritional loss ratio, which is slightly more elevated this quarter than the previous quarter of the year. In Q3, specifically, we incurred an accumulation of small and midsized man-made claims. After investigating and checking the nature of those claims, I can tell you today that we do not expect at this stage of the annual P&C reserve review, any overall attritional deterioration of the P&C book by the end of the year. This outlook is supported by the fact that we tend to take the bad news upfront, especially this quarter, not financed by IBNR, and we released the good news later. On a year-to-date basis, the attritional loss and commission ratio stands at a robust 77.1%, which includes the presence build throughout the year. We are very satisfied with the shape of our P&C portfolio, delivering excellent performance quarter after quarter. Now let's have a look at Life Finance. The Life Finance business generated a new business CSM of EUR 82 million in Q3 this is mainly driven by the protection business and by financial solutions. This is lower than in the previous quarter of the year, but related to quarterly normal volatility. On a 9-month basis, with a new business CSM of EUR 284 million, we are well on track towards achieving the EUR 0.4 billion new business CSM annual assumption. On the insurance service results, Life Finance delivered EUR 98 million this quarter with the CSM amortization of 7.5% in the quarter. Adjusted for small one-off from Q2 and FX effect, the year-to-date CSM amortization stands at 7%, not far from our Forward 2026 guidance of 6.5%. Overall, we delivered over the first 9 months an ISR of EUR 334 million, in line with our annual guidance of EUR 400 million. On experience variance, this is fully in line with our expectations year-to-date. In Q3, the impact of onerous contract were a little bit higher, partially driven by an increase in the risk adjustment and other reserve movements. This remain contained in relation to the size of our portfolio. Moving to investments. We continue to benefit from a strong performance with a return on invested assets of 3.3% this quarter, generating an income of EUR 190 million. This comes from a regular income mill of 3.5% as well as from a real estate impairment this quarter and slightly higher ECL expected credit losses in the quarter. This creates no specific concern. The quality of our credit invested portfolio is very high. The economic value stands at EUR 40 per share, flat compared to the start of the year. Year-to-date market variance had a negative impact as expected on our reported economic value. At constant FX, our EV growth stands at 12.7%, supported by both the positive evolution of our IFRS 17 shareholder equity and the growth of CSM. With this, I will hand over to Thomas to start the Q&A session. Thomas Fossard: Thank you very much, Francois. On Page 17, you will find the forthcoming scheduled events. With this, we can now move to the Q&A session. Can you remind -- can I remind you to limit yourself to two questions each? With this, operator, can we move to the first question? Operator: The first question comes from Hadley Cohen, Morgan Stanley. Hadley Cohen: I appreciate you're very satisfied with the results, and I can -- I think I can understand why but I'm not sure that the share price necessarily agrees today. In that context, can you help us unpack what's going on in the solvency ratio, please? So you've got EUR 200 million a bit higher than that earnings, less EUR 80 million for dividend accrual. And you say that there's seasonally lower, no new business value and market neutral. But even so, I'm still not sure why the solvency ratio is lower. And in that vein, I sort of wonder, how much of that is impacted by the fact that you are building buffers in the reserves? I know you haven't quantified the buffer build year-to-date, but is it possible to give us a sense of how much higher solvency might have been if you hadn't done that? And then linked to this, given the buffers are now twice as big as you initially intended, how are you thinking about further buffers from here, given people clearly want to see growth in the solvency ratio? I mean there's a few questions in there. So maybe I'll just leave it at that for the moment. François de Varenne: Thank you Hadley for your two questions. I agree with you, given the share price reaction, that's probably the two hot topics of the day. Let me come back a little bit on what we said in Forward 2026. You remember when we published Forward 2026 in September 2023, we mentioned that it was a plan where our expectation was a capital generation in terms of solvency ratio of 1, 2 points per year. So that's the guidance, and we reiterate the guidance. Now let's look a little bit at the seasonality of the evolution of the solvency ratio during the year. The 1/1 renewal on the P&C side are booked in VNB the in Q4 and in Q1. The April renewal are booked in Q2 -- in Q1, the June, July renewal are booked in Q3, so -- in Q2. So we don't have in Q3 renewal on the P&C side. So it's a low quarter. It's a seasonality effect. It's a low quarter on the P&C, VNB in the solvency ratio. Let's look at what is happening on the capital deployment side. On the capital deployment side, we deploy each quarter the same amount, Q1, Q2, Q3, Q4. So there is no seasonality in the deployment of the capital in the solvency ratio quarter-after-quarter. And we adjust at the end of the year with the full year on the full capital deployment over the year. So that's basically the dynamic of the solvency ratio for a given year. Now let's look at what is happening in Q3 and over the first 9 months. We started 2025 with the solvency ratio 31st of December 2024 at 210. We were at 212 at Q1. So you could expect, given what I said, that the solvency ratio should have increased in Q2. And in Q2, we were at 210, if you remember the call end of July, and if you look as well at the work of the economic value in Q2, we mentioned during the call that Q2 was affected by a significant weakening of the dollar against the euro, which is our consolidation currency. And on top of it, which was historical, it was also a strengthening of the euro versus all the currency we model in the internal model. So I mentioned it. It's a couple of points of impact in Q2 due to market variance. That's the point we are missing today, but they were already there. So the solvency ratio slightly decreased in Q2, where the expectation is still an increase in Q2. The fact that versus Q2 -- Q2 versus Q3, we don't create a lot of capital is expected. So now what is happening in Q3, let's look in detail. On the P&C side, so we have a low VNB due to a very low amount of renewal. We have, of course, the good Cat ratio, but we have the higher attritional ratio this quarter linked to those mid -- small and mid and midsize events I mentioned during my speech, We still accrue the dividend of last year on a quarterly basis. So that's 2 points. The good news is that the market variance impact in Q3 is under control. We made a lot of progress on ALM during the summer, especially by additional hedge on the dollar. We have the early refinancing of the debt, which brings 3 points of solvency. And we have a one-off impact of minus 1 point, which is linked to restructuring of internal retrocession between one subsidiary and the motor company. So you have the work. But again, look at the first 9 months, the guidance of Forward 2026, what is missing today is not linked to Q3 is the market impact of Q2 that we disclosed end of July. You had a second question, I think, on the buffer... Hadley Cohen: The extent to which the -- I mean, is the -- and thank you for the first response. But I'm just wondering, does the quantum of the buffer build impact the OCG, i.e., if you hadn't built the buffers to the extent that you have done this year, would OCG have been higher? And I guess, more fundamentally, why is OCG on a normalized basis as low as it is 1 to 2 points? François de Varenne: Let me reexplain what we said in the past. So we have prudence in the bill, so under IFRS and under Solvency II. So that's the prudence in the -- on top of this prudence on top of this prudence, we decided with Thierry since July 2023 to add P&C buffers. That's on top of the prudence we have already in the bill. So we added those buffer between July and today. You know that we mentioned that at the end of 2024, we were significantly above the target of EUR 300 million. We mentioned today, and that's in the quote in the press release that the amount accumulated in Q1, Q2 and Q3 is of the same magnitude of what we did for the entire year 2024. We always mention that those buffers are in the risk adjustment. They are in the risk adjustment. So we confirm that they are in the risk adjustment and those buffer have no impact on the capital generation. Thomas Fossard: Operator, can we take the next question, please? Operator: Next question is from Michael Huttner, Berenberg. Michael Huttner: I had two. So the first one is on the attritional. Can you give us a little bit more color because the variance -- I know you say lots of little ones, but the variance is huge, right? So you go from 76% Q3 last year to 79% Q3 this year. And presumably, there's less buffer building, whatever. So the -- maybe if you adjust for that, it's probably a 5-point change or something. So it seems a lot. So any insight as what happened and where it is because then we can kind of think where it might not happen, whatever, anyway, it would be very helpful. And then the other one is a more general question. The word Tier 1 was mentioned, I don't know, 6 or 7 times. So clearly, it is very important. It's core to the story. I don't quite understand what it means. My guess is it means that you think you're underrepresented in your clients' wallet in terms of market share and things. But I don't know how you can increase that in a period when prices are falling. It doesn't -- it seems quite hard. But I'd be really interested in how quickly you could close the gap and how big you see it. Jean-Paul Conoscente: Okay. Thank you for your question. I'll start -- this is Jean-Paul. I'll start with the attritional loss question. So this quarter, in Q1, Q2 this year, we've had really exceptional attritional losses with very limited man-made losses and very good attritional losses. which allowed for a very strong buffer building. In Q3, we saw the loss activity reverting back to what I would call a normal activity. As Francois said, it was an accumulation of small to medium-sized losses across both property and casualty. And what we've decided is to basically take these losses to the P&L, absorb as little as possible in the IBNR and then revert to the Q4 reserve review to review a level of adequacy on the overall reserving. As Francois has already mentioned, the preliminary results from the Q4 review show that there is no strengthening needed on our overall attritional losses. So we're very comfortable with our reserving level where it stands today. Michael Huttner: And is there anything unusual about them? Is it like, I don't know, political risk or something just to give us a little bit of color? Or is it just normal? Jean-Paul Conoscente: No, I'd say it's normal. What was not normal was the loss activity in Q1, Q2. Here, again, it's a mixture of different lines of business, not really political risk. As I said, it's more property and casualty. And I'd say it's back to what I would call a normal level of loss activity. It's just the -- what you would expect in terms of the fluctuations quarter-to-quarter. François de Varenne: Just adding a point, Michael, if you normalize the combined ratio over the first 9 months, you normalize for the Cat effect and for the discount effect. You will find a combined ratio of 87.4%. So it's exactly in line with the guidance of Forward 2026. Remember, we said in Q1, we accelerated the buffer strategy. We said the same thing in Q2. Here, it's a lower amount, but still -- we still have buffer in Q3. Again, the magnitude is the same over the first 9 months. So inside this 87%, you have a couple of points of prudence. So -- and excellent underlying performance. And again, take my statement also on what I see again as overseeing the reserve of the group. there is no concern on the reserve at the end of the year as of today. Thierry Leger: And Michael, on your T1 question, it's true that I'm mentioning it quite a lot. And so it does help in both in a hard and soft market. So it's independent. And I'll try to explain it in the easiest and quickest way. But if you just generally have clients that view you as a Tier 1 means they have a genuine and general desire to see us with a higher share on their programs than we have today. That's a good position, a good starting position for us. That means that it should give us a tick better position when it is about choosing where we play on which programs we play and where we increase the shares and on which ones we might not wish to increase the share. So it should give us a tick better opportunity for growth and a tick better opportunity on the combined ratio side. That's what you are saying. And it's like a joker card that we have, and we intend to play. And I'm sure this is going to last for multiple years. Operator: Next question is from Andrew Baker, Goldman Sachs. Andrew Baker: The first on the tax rate. So clearly, it was good -- very good in the quarter, and you highlight in the release the ongoing improved profitability of the reinsurance activities under the French tax perimeter. Can you just remind me how we should be thinking about that for Q4 and then, I guess, more medium term, '26 and '27? And then secondly, on the Life and Health onerous contracts, I appreciate, again, this is driven by the increase in the risk adjustment. But what led to this? Is this prudence? Or is there something going on in a specific line? So just how should we think about that risk adjustment increase? François de Varenne: Thank you, Andrew. So on the first one, on the tax rate. So we start to see in Q3 an improvement in the effective tax rate of the group. I've been quite vocal on the topic. We initiated a strategy in 2023 we need to repatriate more taxable profit to France to be in a situation to reactivate losses carryforward we've got off balance sheet and to use also the DTA we have activated on the balance sheet. So you saw it in the past already last year. So we are well on track in all the restructuring of the group to repatriate more profit. It's mostly through restructuring of internal retrocession to bring more through quota share assets and profit in Paris. We are going to move probably at the beginning of the year, redomiciliate one entity from Ireland to France. So the effect you see today is just a combination of -- we have now a larger base of profit located in France -- and then you have a second effect, just the excellent performance of the 3 business activities, which bring more profit. So you have those 2 effects. So if you look at the tax rate over the first 9 months, we are close to 27%. Is it a good indication of the future? What I can tell you is that compared to the 30%, it will improve. Given -- I'm a French, given discussion at the French parliament currently on the budget for France in 2026, I prefer to wait a little bit to see what type of budget we will have in France. Let's see maybe during the call of Q4, if I change the guidance. I confirm it will improve. We are on track. Again, it's not yet linked to the consumption or the reactivation of the DTA. It's just the fact that we are more profit in France and they are just at the level which is exceptional. On your second question on onerous contract on Life & Health. Let me tell you a little bit the way we see the performance of this portfolio, and that's what I said in the introduction, the way we -- and the way we guided the market during the IR Day of last September. So we have a year-to-date insurance service result of EUR 334 million. We gave a guidance last December of EUR 400 million per annum, so which means we are in line and we are even slightly above the quarterly guidance accumulated over the first 9 months. I always mention, if you remember what I said during the IR Day and in the call after this year, I always mentioned that the EUR 400 million guidance includes a cautious buffer for contained volatility. And this volatility, which is normal given the size of our in-force could come from the experience variance or could come from loss component, again, given the size and the geographies of the in-force portfolio. That's what we see. So if you look at the experience variance since the beginning of the year, so Q1, Q2, Q3, it's close to 0. So it's close to 0. If you look at the loss component, we have a little bit of noise each quarter, which is on our side within the budget we had in mind when we gave the guidance of EUR 400 million. The guidance of EUR 400 million in our mind, and I was transparent on this fact, include a cautious buffer for volatility on experience variance and/or loss component. So again, it's normal, I would say. Keep in mind as well that there is -- we commented this a few quarters ago, there is an asymmetry in the treatment on the expense variance on the CSM and the expense variance on contracts which are already on. On onerous, as soon as the contract is onerous, any movement, positive or negative flow into the P&L. More specifically, what is now happening on loss component this quarter is just a slight adjustment on group of contracts, which are already onerous and it's slight adjustment on the risk adjustment and also on one client, it's an adjustment on reserve movement. So again, on our side, with Thierry, we are really, really satisfied with the overall performance of Life. coming from, again, the CSM amortization, the risk adjustment release and the expense variance and all the volatility on loss component. Last word, the stock of loss component of onerous contract, which we disclosed last year is unchanged as of today. Operator: Next question is from Kamran Hossain, JPMorgan. Kamran Hossain: Two questions from me, both on the P&C side. The first one is just it was at the beginning of the call, a very kind of strong message from Thierry on discipline opportunities and how to avoid kind of pitfalls going forward. Just interested with, I guess, the cycle moving slightly south from where it is now into next year. does the 4% to 6% revenue target become less important now for SCOR? So just trying to work out with that market coming down a little bit more discipline, is 4% to 6% still a priority or not really? And then the second question is, historically, you've been really big users of retrocession. And more recently, you've used a lot more other kind of capital relief measures, particularly last year. In terms of the market for those, where do you think those will head into '26? Will they come down at the same rate as reinsurance? Will they come down more? What do you think the dynamics will be in that market? Jean-Paul Conoscente: Thank you, Kamran. So I'll take these questions. On the outlook and the revenue target, definitely, the revenue target is no longer, I'd say, a target for us. It will really depend on market terms and conditions. As Thierry mentioned, we expect a competitive market. especially in the Cat XL area. You have to remember, Cat XL represents only 10% to 12% of our overall premium income. And the market itself is coming from a very high price adequacy level. So the -- I'd say, the decline of that market doesn't affect the overall pricing level of SCOR as much as it does some other peers. We see competition across all the lines of business, but to a much smaller extent. And a large proportion of our portfolio, over 70% is on a proportional basis, where it's more the driver of the insurance prices that drives the price evolutions. On your second question regarding retro, we do expect that the retro market to also be competitive. The question as to whether it would be more or less competitive than the reinsurance is a little bit early to tell. We do see on the retro side, even though there's a smaller number of players, we do see all those players having appetite to grow more in terms of limit deployed as well as in terms of different lines of business they want to write. So we do expect to have opportunities to optimize our retro program again this year. Operator: Next question is from Shanti Kang Bank of America. Shanti Kang: I just had two. One is on P&C. So I was just looking at the discount rate for 3Q, that's increased to 8.4%, but we had lower cats in the quarter. So I'm a bit confused why that's increased. It's also higher year-on-year. And last year, we had a hurricane in Q3. So maybe it's on the man-made losses, I'm not sure, but just information on that would be helpful. And then on Life & Health, on that new business CSM target, what's the execution risk to that EUR 400 million? Can you tell us a bit more about the pipeline and your new business CSM numbers just to get us a bit more comfortable about meeting the guidance given the softness today? François de Varenne: Thank you Shanti. I will take the first question, and Philipp Ruede will take the second one. So on the P&C discount, so we have a discount rate at 8.2% in Q3 compared to the guidance of 6% to 7%. If you remember, it was 6.3% in Q2. Here, it's just the impact of those small midsized man-made losses that we see in the quarter, which affect mechanically the discount. So it's just a mechanical effect of the man-made losses of Q3. Philipp Rüede: Yes. So on your second question, I would say this type of fluctuation is normal. The longevity and financial solution deals are lumpy by nature. And so we remain confident that with our guidance as previously given, which was EUR 400 million, but actually for next year, and if I refer to previous communication, we expected a more significant drop in protection as we redress the portfolio and the delivery of the protection this year is actually ahead of our expectations. In terms of Financial Solutions, the pipeline is growing, but I would say it's fair to say that the execution takes longer, and you could say maybe it is a bit delayed. Whereas on the longevity side, our pipeline is robust, both in the short and the medium term. and that pipeline is global in nature, so not restricted to the United Kingdom. So hopefully, that answers your question. Shanti Kang: And just -- sorry, just on that, you implemented some profitability thresholds, I think, in December in 2024. How is that emerging in the Life and Health side? Are you seeing any pushback? Could that have really attributed to some of the softness that we've seen today or? Philipp Rüede: No, no. I mean it's rather the opposite, right? We expected to lose a lot more business with these rates increase, and we were able to retain more of the business at these increased rates. And that's why I said in terms of protection that we are ahead of our expectations. Operator: Next question is from Chris Hartwell, Autonomous Research. Chris Hartwell: Just a couple of quick questions from me. Firstly, just on the subject of the buffer. I mean you're now -- you must be getting towards sort of 3/4 of the P&C reservice result, which obviously a lot higher than what you were originally anticipating. And I guess sort of I suppose part A of the question is, how much more scope do you think there is to move this higher? And secondly, I think given the sort of initial comments around the market environment as things stand currently, I mean do you think that the industry profitability is enough to support further buffer build? And then second question, I just wanted to actually come back to the previous one on discounting. I agree I'm also a little bit confused by this. And I would have thought that this would be more to do with longer tail or longer duration claims rather than the sort of small and midsized sort of mandates that you were talking about, unless I'm sort of mixing those 2 up. So just wondering if you could sort of help to clear that up for me as well, please. François de Varenne: Chris, so on your first question, so on what we can do in the future, we were clear since 1st of January 2025 with Thierry, we build opportunistically buffer. Jean-Paul mentioned that the level of the attritional loss and commission ratio was exceptionally good in Q1 and Q2. So we mentioned that we accelerated the buffer strategy -- we still have room of maneuver in Q3 to put a smaller amount of buffer. Is it the end? No. Should you see this systematically each quarter? No. And you can expect over the next few quarters and year with the softening of the P&C market, of course, probably we will reduce the pace of implementation or we will find less and less opportunities to build buffer. But that's not for tomorrow. That's not for tomorrow. We have probably still a few quarters in front of us with still excellent margin on the P&C side. On the second question on the discount rate. So again, I mentioned it's small and midsized man-made losses. You're right. If there is an impact on the discount, it means that long-dated claims, so it's related to casualty. Chris Hartwell: Okay. And just on that casualty point, can you give a little bit more color as to if there's any particular lines of business within casualty that those claims have materialized? Jean-Paul Conoscente: Chris, this is Jean-Paul. So it's a little bit, I'd say, random. It's GL on the treaty side, on the SBS side. It's some financial lines again on the treaty and SBS side. There's no particular trend. But it's -- as Francois said, it's more underwriting years that date back 3, 4 years and therefore, have an impact on the discount rate. François de Varenne: And again, you mentioned it. I mean, we could have the choice to absorb those man-made losses in Q3 through IBNR. We did not. So we don't do it. So the bad news is in the attrition, and we wait for the outcome of the P&C reserve review in Q4. You can imagine that we are well advanced in this review. So my statement on the fact that we should not expect impact on the P&C reserve at the end of the year include, of course, the review of the casualty book. So I confirm what Jean-Paul is saying. There is no trend identified as of today. Operator: Next question is from Iain Pearce, BNP Paribas Exane. Iain Pearce: It's just coming back to the capital generation point. So I understand that you're saying that the capital generation that you've achieved has sort of been in line with the guidance that you gave at the start of the year. But I guess in Q3, we've had positive experience, particularly in the P&C business. So if we just look at cat relative to expectations, you take out the buffer, which shouldn't impact the Solvency II numbers, you would think that, that would positively contribute to the solvency. So the solvency in Q3 should be developing better than what you guided to at the start of the year. Now I guess the only thing that could offset that is the man-made claims that you're referring to, but I wouldn't guess they're at the same quantum of the level of cat benefit you've had. So I'm just understanding why that positive experience hasn't come through in the capital generation. I don't really understand that. So if you could try and elaborate on that, that would be really useful. François de Varenne: Thank you, Iain. Capital generation in Q3. So if we look at the P&C contribution, we have, as I mentioned it, the good news of the Cat, but that's compensated by the higher attritional ratio. It's almost not one for one, but I would say it's almost an impact, which has the same size. So which means the good news is offset by the attritional losses this quarter, and it's almost a one-for-one impact. You don't have the impact of the buffer, of course, in the solvency ratio. Iain Pearce: Well, I guess if the man-made is offsetting the nat cat by 1: 1, and that's implying EUR 100 million of man-made increase versus expectation in the quarter. I mean that's a pretty high number. François de Varenne: Yes, if you want more precision when I say -- I said that the capital generation on the P&C side was low. So it could be still a little bit positive. So -- but again, the order of magnitude of the man-made losses this quarter offset in a good portion, the good news on the Cat side. Operator: Next question is from Darius Satkasukas, KBW. Darius Satkauskas: Two, please. So you suggested that the pace of the buffer building in P&C will slow down as the market softens. Is the intention here to limit the soft market pressure to your combined ratio and you see this buffer as a tool to achieve this? And that's why you're making such a comment. So we shouldn't essentially expect the sort of the opportunistic thing to continue and the benefit to come through the reserve releases, you will actually manage down how much you're adding if market softens. So that's the first question. And the second question, just on the Life & Health. I'm slightly confused why have you been making allowance for volatility in your ISR target? If you have been conservative in your assumptions in the recent review, wouldn't we expect to see positive experience more often than not? So these negatives in both P&L and CSM and the allowance rates are a bit surprising. François de Varenne: Thank you, Darius. So the first question, if I catch your point is basically when we are going to use those buffer. So the way we see it is really to manage in the future the volatility. So it's not to manage specifically a cycle. Maybe we will be really at the bottom of the soft cycle, but it's really to manage the volatility of the book. So that's all. Thierry Leger: Maybe there was another part of your question, Darius, is the buffer building, will the pace come down, right, given the market environment. So we very much feel in 2024 in terms of IFRS reporting, we were very much in a very attractive environment. We think we will remain in a very attractive environment next year. So we do not foresee necessarily -- again, it's opportunistic, so we can never give -- make a prediction. But we continue to believe that also next year, we should be able to build significant buffers if the results come in as expected. François de Varenne: And your second question on Life & Health and the way we set the ISR target. So that's true. I mean we did this significant assumption review in 2024. Then again, that's what I said, given the size of the in-force, given the geographies of the portfolio everywhere in the globe, given the underlying nature of all the existing treaties, we will have some volatility. So this volatility, I agree with you, this volatility could be negative or could be negative and could be on the experience variance side or it could be through a loss component onerous contract. We want to be cautious. We want to be cautious. And I agree with you, on an average, over a long period of time, this volatility should be around 0, again, with plus and minuses quarter after quarter, but it should be around 0. to be on the safe side, and we mentioned it to be on the safe side, the EUR 400 million guidance include a buffer to take into account any residual volatility that could be negative or positive, but we prefer to give a guidance and to underpromise and over deliver on the guidance. Darius Satkauskas: So if I understood Thierry correctly, the -- what you've done in terms of reserve buildup, that's for the volatility. But in terms of how much you will do going forward, you can very much manage the combined ratio in a soft market. François de Varenne: Yes. Operator: Next question is from Ivan Bokhmat, Barclays. Ivan Bokhmat: I've got 2 questions left. We've been talking about the Q4 reserve review for the P&C business. I was just wondering if you can update us on how periodically would you review the Life book? Is there a review coming in Q4? Maybe any early findings there? And the second question is related to the investment results. I think in Q3, you have flagged some higher real estate amortization during the quarter. Could you give a little bit more color on that of which portfolios or geographies that might relate to? Do you anticipate any additional charges such as this later? François de Varenne: So on the first question on the Q4 reserve review, -- so we did -- we took an external opinion in 2023 -- in 2024 with the same actuarial firm. So we list our [ Watson ]. I remind you that our Watson confirmed last year that we have increased the level of credence compared to 2023. We have been sharing this, and we -- I like to listen to the feedback of our investors on the topic. I'm not sure that bringing such a review each year will be useful. So we are listening with Thierry to recommendation or question or suggestion from investors or from you as analysts. So let's see the periodicity, but probably every 2, 3 years should be the good cycle. On your second question on the investment portfolio, so that's true that we have mentioned it, an impairment on the real estate asset. So it's a property asset that we own in France. We decided to significantly to invest and to do some CapEx to restructure this building. But first, when you invest, you have first to impair the building, then we are going to deploy the CapEx. And one day, we're going to lease it and sell it with a gain. So we are in the cycle of real estate and the DNA of the team is really what we call value-add -- so we like to restructure assets, and that's one we have and we impair it. So it's EUR 12 million. So it's not a trend. It's not something that just because we invest to value this asset, and we have to impair it a little bit before we start the renovation and the restructuring works. Ivan Bokhmat: And maybe just to follow up on this and broaden the question a little bit. François de Varenne: So which means if you look at -- because in the line real estate amortization and impairment, you have the impairment, it's almost EUR 12 million this quarter. And I would say normal amortization, that's the amortization compared to the book -- the historical value. So the amortized costs flow into the P&L and roughly, it's a budget of EUR 5 million, EUR 6 million per quarter. Ivan Bokhmat: Okay. And maybe if I could follow up on this question. And more broadly, if you can talk about the private assets that you hold, is there anything that make you concerned in the current environment? François de Varenne: No. I mean I've got -- I mean, you know that we have a positioning of the investment portfolio, which is highly defensive. The fixed income portfolio has a very high quality. The average rating is A-. Our exposure to private debt, private assets is fairly limited. We disclose it every quarter. If I take the collapse of first brands and Tricolor a few weeks ago, it was an indirect exposure on the investment side of EUR 0.2 million. So it's nothing, and it's a single low-digit number on the credit and surety side. So we don't change anything. We don't change -- I mean, we don't have any concerns, so we don't change anything on the asset allocation. And just remind you, since I mentioned all the discussion we have at the French parliament on the budget for 2026, I remind to everyone that we have 0 exposure at all to French. Operator: Next question is from Will Hardcastle, UBS. William Hardcastle: Just two. The first one is clarification really. I'm trying to understand the manmade. There's been a couple of confusing messages. You said clearly, it was above budget, I think, in Q3. Where is it year-to-date? I'm trying to understand just how much better than a budgeted type level H1 was? And the second question is just on P&C revenue. I think I just heard you say that, that 4% to 6% revenue CAGR and P&C target no longer stands. Is that right? Have you officially walked away from that? François de Varenne: Thanks, Will. I will take the first question and Jean-Paul, the second one. So I mentioned it, normalized for Cat and discount, the normalized combined ratio would stand at 87.4%. I mentioned that inside, you have a significant amount of buffer. It's a couple of points. And do not forget that the combined ratio published or normalized include a significant amount of buffer. So it's included in the attritional ratio over the first 9 months of 79.2%. Jean-Paul Conoscente: Hopefully, that reassures you that, again, the level of man-made we've seen year-to-date has been very low. Q1, Q2 was very low. Q3 is normal. So when you average it across the 9 months, it's low. In terms of P&C revenue, what I meant is we don't change the guidance. But for us, the 4% to 6% is more an outcome than an objective. We're not asking the teams to position the portfolio in such a way that we can absolutely meet this target. If the terms and conditions, we find them satisfactory and there's different price adequacy, we're ready to deploy capital and grow the book. If price deteriorate to a level that we think they're no longer price adequate, we're going to position the portfolio more defensively regardless of the guidance we've given on revenue growth. Thomas Fossard: And with this, we're going to take the last question of the call. Thank you. Operator: The last question is from Vinit Malhotra, Mediobanca. Vinit Malhotra: So almost all my questions have been answered. It's just -- and thanks for the clarification on the revenue growth. But just on the fact that you did grow U.S. Cat in July. And I'm just wondering whether what you know now, are you still happy with that decision to have grown? And the reason I'm asking is, obviously, you talked about Cat XL being an area where there's most concern, which is only 10% of the book. but still your more cautious message on pricing, was it was still considering this cat action you took? And also one more question, if I can follow up on. I think somewhere in the call, you talked about U.S. casualty with core business Solutions having some larger claims. Is that the same thing that you're talking about this attritional manmade being normalized or was something else, sorry? Jean-Paul Conoscente: Thank you, Vinit. So on the U.S. Cat, we definitely don't regret our decision to increase our risk appetite in U.S. Cat. you're right that we expect the prices to come down at 1/1 and the market to be competitive. You have to remember the price adequacy of U.S. cat currently is very high. You can see despite the wildfires at the beginning of the year, the tornado activity throughout the year, the -- let's say, the profitability of that portfolio remains extremely good. And our position is very much underweight in that market compared, for example, to Europe or to Asia. So we think there's opportunities for us to grow. In the renewal discussions, right now, the discussions seem to focus primarily on price. terms and conditions are remaining stable. Attachment points are remaining stable. So again, it's just a question of price. And given the level of price adequacy where we stand, I think we still view that market as attractive and producing very good returns. On your question on U.S. casualty and SBS, again, I'd say it's normal activity. We don't see any concerns there. It's more prior underwriting years where losses have developed to a level that we took them to the P&L. our book today on SBS is very small. We continue to take a cautious look at the U.S. casualty market overall, both on the treaty side and on the SBS side. We're following the market. The price increases on the insurance side is keeping up with loss trend, for example, in GL. The question is, is the price adequacy adequate. In our view, you have -- you probably need further years of similar price increases and no acceleration of the loss trend for it to be a price adequacy that meets our return on equity targets. So we're remaining very cautious today. Vinit Malhotra: And the claims was not in treaty or P&C, but only in SPS? Jean-Paul Conoscente: No, no, the claims were -- there was a few claims on the treaty side, a few claims on the SPS side. Operator: Gentlemen, we have no more questions registered at this time. Thomas Fossard: Okay. So thank you all for attending this conference call today. Our team remain available if you've got any follow-up questions. So give us a call. And with this, I wish you a good weekend. The Q4 2025 results call will be reported beginning of March on the 4 with a call as usual at 2:00 p.m. So wishing you a good weekend all. Operator: Ladies and gentlemen, thank you for joining. The conference is now over. You may disconnect your devices.
Operator: Greetings. Welcome to the Federated Hermes Q3 2025 Analyst Call and Webcast. [Operator Instructions] Please note this conference is being recorded. I will now turn the conference over to your host, Ray Hanley, President of Federated Investors Management Company. You may begin. Raymond Hanley: Good morning, and welcome. Leading today's call will be Chris Donahue, CEO and President, Federated Hermes; and Tom Donahue, Chief Financial Officer; and participating in the Q&A are Saker Nusseibeh, the CEO of Federated Hermes Limited and Debbie Cunningham, our Chief Investment Officer for Money Markets. During today's call, we may make forward-looking statements, and we want to note that Federated Hermes' actual results may be materially different than the results implied by such statements. Please review the risk disclosures in our SEC filings. No assurance can be given as to future results, and Federated Hermes assumes no duty to update any of these forward-looking statements. Chris? John Donahue: Thank you, Ray. Good morning. I will review Federated Hermes business performance. Tom will comment on the financial results. We ended the third quarter with record assets under management of $871 billion, led by gains from our money market and equity strategies. Equity assets increased by $5.7 billion or 6% from the prior quarter due mainly to market gains. Q3 equity net sales were slightly negative $130 million, as solid net fund sales of $1.4 billion were offset by about $1.5 billion of separate account net redemptions driven by one client and all their CIT strategies moving to passive ETFs. And another client where pension funds were merged and the surviving plan happens to use private strategies -- passive strategies. Interestingly, we are also seeing other clients interested in moving from passives into our MDT strategies, which have had several RFPs come in from investors considering this switch. The MDT fundamental quant strategies produced solid results again in the third quarter. MDT equity strategies had Q3 net sales of $2 billion. Looking at MDT fund performance rankings as of September 30, 7 of the 8 MDT equity mutual fund strategies are in the top performance quartile of their Morningstar categories for the trailing 1 and 3 years. And all eight are top quartile for the trailing 5 and 10 years. And four of these strategies are in the top decile for the trailing 3 years. We had net sales in 20 equity fund strategies during the third quarter including, obviously, a variety of the MDT offerings and the Asia ex-Japan fund leading the pack. We are actively developing MDT distribution opportunities outside of the U.S. and are finding considerable interest from institutions, intermediaries and others. For example, the MDT U.S. equity UCITS fund, that means it's registered for us in Dublin, launched in June, is off to a great start. We are seeing strong demand from clients outside of the U.S. and have already had $340 million in net sales from inception through last week. Now looking at our equity fund performance at the end of Q3 and using Morningstar data for trailing 3 years, 53% of our equity funds were beating peers and 33% were in the top quartile of their category. For the fourth quarter through October '24, combined equity funds and SMAs had net sales of $580 million. Now turning to fixed income. Assets increased by $3.1 billion from the prior quarter to reach a record high of $101.8 billion at the end of Q3. Fixed income total net sales improved by $4.1 billion, as we had $1.7 billion of net sales in the third quarter compared to net redemptions of $2.4 billion in the second quarter. Q3 net sales included about $1.4 billion from two large public entities that have regular sizable inflows and outflows. We had 24 fixed income funds with net sales in the third quarter, led by the three ultrashort funds with $579 billion combined, and the sustainable global investment-grade usage fund about $240 million. Regarding performance at the end of the third quarter, using Morningstar data for the trailing three years, 44% of our equity fixed income funds were beating peers and 15% were in the top quartile of their category. For Q4, through October 24, combined fixed income funds and SMAs had net redemptions of about $250 million. This was occasioned by positives in Ultrashorts and Total Return Bond Fund that were overcome by negatives in high-yield bonds. In the alternative private markets category, assets decreased by about $1.7 billion from the prior quarter, mainly due to a $1.1 billion in real estate fund transactions from -- that we have previously discussed, the restructuring of the U.K. Property Trust in the third quarter. This fund was successfully managed by us for many years. It was specifically designed for defined benefit clients. There are very few of these left. The liquidity was an important factor. The decision was made to move it to one of the last remaining managers of this type of DB fund for which we received financial consideration that Tom will address. Real estate also had net redemptions of $446 million from separate accounts in Q3 due mainly to property sales that were driven by a client's change to their asset composition. The MDT market-neutral alternative strategy had net sales of $173 million in Q3 and now stands with assets of about $1.7 billion. We are currently in the market with European Direct Lending III, the third vintage of our European direct lending fund. To date, we've closed on about $680 million. For your information, EDL raised $300 and EDL II raised about $640 million. We are also in the market with our global private equity co-investment fund which is the sixth vintage of the PEC series. To date, we've closed on approximately $318 million and PECs I through V raised approximately $400 million to $600 million in each fund. We're also in the market with the European real estate debt fund, which is a new pooled debt equity fund -- a debt fund and the marketing will continue here into 2026. We're also actively working on Energy Solutions product development plans following the Q2 acquisition of a majority interest in Rivington. Last week, we announced the agreement to purchase a controlling interest in FCP, a U.S.-based real estate investment manager with $3.8 billion of assets under management as of June 30. The acquisition will facilitate Federated Hermes' entrance into the U.S. real estate market at a time when the U.S. multifamily sector where FCP concentrates its efforts, enjoys strong fundamentals and significant growth opportunities. FCP has a strong experienced management team who have led the firm's growth through changing market conditions for over 25 years. We believe that FCP will be an excellent complement to our U.K.-based real estate business. There, with more than 40 years of experience, our U.K.-based team has more than 55 professionals managing $5.5 billion as of the end of Q3. Now back on FCP, we're planning to close the purchase around the end of the first quarter of 2026. Across our long-term investment platform, we began Q4 with about $2.1 billion in net institutional mandates yet to fund, in both funds and separate accounts. Let's delve into that. Approximately $1.6 billion is expected to come into private market strategies, which include direct lending over $800 million, private equity, a little over $650 million and trade finance at $100 million. Equities are expected additions of $1.2 billion, with about $875 million into MDT and about $365 million into international and global equity strategies. Fixed income is expected to have net redemptions of about $650 million, with wins of about $380 million in high yield and short duration offset by a single $1 billion high-yield redemption. Moving on to money markets. We reached another record high at the end of Q3 for total money market assets, which increased by $18 billion to reach $653 billion. Money market fund assets increased by $24.7 billion or 5% in Q3 to reach a record high of $492.7 billion. Money market separate accounts decreased by $6.3 billion in Q3, reflecting seasonal patterns. Market conditions remain favorable for cash as an asset class. In addition to the appeal of the relative safety and periods of volatility. Money market strategies present opportunities to earn attractive yields compared to alternatives like bank deposits, direct investments in T-bills and commercial paper. We're also developing money market funds and share classes available in tokenized form and working with parties on digital asset infrastructure. These efforts include a planned GENIUS Act compliant money market fund designed to serve as collateral for stable coins. Last week, we announced that we have made two of our UCITS money market funds, our Sterling Prime and U.S. dollar Prime available in tokenized form through Archax. Archax is a well-known digital assets operator in the U.K., having launched in 2018 and become the first FCA-regulated digital Securities Exchange broker-dealer and custodian. This represents a Federated Hermes initial non-U.S. digital asset initiatives. The Archax relationship complements our digital efforts, where we are the sub-adviser for the superstate short-duration U.S. government securities fund, a private tokenized fund with about $735 million in assets. We will also participate in the launch of a collaborative initiative between BNY and Goldman that will use blockchain technology to maintain a record of their customers' ownership of select money market funds. A significant step towards enhancing the utility and transferability of existing money market fund shares. We are exploring numerous other additional digital asset opportunities. We are committed to the digital space where we expect ongoing innovation and growth. Our estimate of money market mutual fund market share, including sub-advised funds remained at about 7.11% at the end of the third quarter. Now looking at recent asset totals as of a few days ago. Managed assets were approximately $865 billion, including $645 billion in money markets, $96 billion in equities, $102 billion in fixed income, $19 billion in alternatives, private markets, $3 billion in multi-asset. Money market mutual fund assets stood at $486 billion. Tom? Thomas Donahue: Thanks, Chris. For Q3 compared to the prior quarter, total revenue increased $44.6 million or 10%. Revenue from higher money market assets provided $17.6 million of this increase, while higher equity assets added $14.8 million. An extra day in the quarter added $4.9 million, higher performance fees added $2.4 million and the Rivington acquisition added $1.2 million. Q3 revenue also included a termination fee of $4.6 million from the restructure of the U.K. property trust, and this is about -- was about 1 year of revenue from that mandate. Total Q3 carried interest and performance fees were $3.6 million compared to $1.4 million last quarter, approximately $733,000 of the Q3 fees were offset by nearly the same amount of compensation expense. Q3 operating expenses increased by $32.2 million or 10% from the prior quarter due mainly to higher distribution expense from higher fund assets of $14.2 million. We had about $2 million in transaction costs from the FCP acquisition in Q3 in the professional service fees line. In other expense line items, FX and related expense increased by $9.4 million in Q3 compared to the prior quarter. These expenses were $3.7 million in Q3 compared to a credit of $5.7 million for Q2 as the pound weakened against the dollar in Q3. The other expense line item for Q3 also included $2.8 million related to a U.S. withholding tax matter on certain non-U.S. funds. The effective tax rate was 24.4%. The tax rate was impacted by $1.6 million related to R&D tax credits. At the end of Q3, cash and investments were $647 million. Cash investments excluding the portion attributable to noncontrolling interests were $610 million. We expect to use about $216 million in cash and about $23 million in FHI Class B stock for the upfront purchase price of FCP controlling interest acquisition. During Q3, the company paused its open market share repurchase, as we entered exclusive negotiations with FCP. We expect to be active again in Q4 and repurchase shares in the open market. Holly, we'd like to open the call up for questions now. Operator: [Operator Instructions] Your first question for today is from Ken Worthington with JPMorgan. Y. Cho: This is Michael Cho, on for Ken. So my first question, I just wanted to touch on MDT franchise. I mean there's clearly some growing momentum there. You called out some new RFPs, a pretty sizable pipeline as well as some initiatives to expand distribution more notably outside the U.S. I mean, how do we think we should kind of frame the potential sizing and maybe the pace of AUM or flows growth of the overall MDT franchise as you continue to scale and as the non-U.S. distribution starts to grow. I'm just trying to get a sense of how we should frame that opportunity set. John Donahue: I think you should frame it with enthusiasm and optimism. If you look at the sales to date through this time frame, they're still running net sales of -- up through October 24 of about $660 million so the pipeline continues. But for us, the exciting thing is the fact that we were able to sell these mandates across the globe. And if you look at where they're coming from, they're coming from different countries, in different ways and in different of the mandates exactly on MDT. I can't get into exactly who the clients are. But in those pipeline numbers is a great variety of client types and geographies. Y. Cho: Understood. And then if I could just ask a quick follow-up on expenses. Just broader over the year ahead. You have a number of initiatives. You called out a bunch today. Clearly, alternatives and the FCP acquisition is ahead, but you also have a number of things happening within money market and blockchain, digital assets and clearly, kind of extension of some of your key franchises. So I just think about the expense base and over the next 12 months or so, how should we kind of think about the trajectory there as you can continue to invest organically and inorganically across the business? Thomas Donahue: Okay. Mike, well, the first thing, FCP, we closed that near the end of the first quarter, then of course, those expenses will come in. But we've kind of factored that in -- on last week's discussion about our view of after transaction costs, it would be an accretive thing, and also in 2017, much more accretive based on our estimates of what we think is going to happen there. So of course, revenue go up and the expenses will go up. And in terms of -- you're calling out a few things. Obviously, the digital things and money market stuff and other expansions. I don't see outsized expenses coming in here. And if they do, we would fully expect them to come with revenue shortly thereafter. And if you want me to go through the -- not for the year, but for the next quarter, a few comments on the line items. I'd expect comp and related to go up, as sales are increasing and therefore, incentive comp is going up, and investment management performance is causing us to increase the incentives there. And on the corporate side, we're also increasing the incentive. These are all positive success items. On the distribution line item, we expect that to go up as you look at average assets, distribution line item and other success item goes up. On the professional service fees are looking at it today, we already said we'd expect some more FCP closing costs in Q4, but we had a couple of million, as I mentioned, in Q3, so maybe we have $3 million more as a change. And then the other line has effects in it, and that has that tax payment that we talked about and what's going to happen in FX we will see. But those are all comments on a quarterly, not a yearly basis. Operator: Your next question for today is from Bill Katz with TD Cowen. Robin Holby: This is Robin Holby on for Bill Katz. Heading into 2026, what are you hearing from your institutional investors on allocations, where are you seeing opportunities? And how are you thinking about the pace of deployment for the institutional pipeline? John Donahue: The institutional pipeline, I tried to hint at this a few minutes ago, is very, very strong. As we told you, we've got over $2 billion in it. And if you look into that, the pipeline is to see performance and different countries. So I was a little more general the last time, but we have a Belgium All Cap Core, MDT big mandate that we've won. In Canada, it's an international leaders mandate that we've won; in the U.K., a global equity mandate; in South Korea, a blended MDT; another U.K. client came into the All Cap Core, MDT. We have an MDT win in the Mid East as well. So it's across the board of performance-oriented activity. And then if you look at the style box security of the various MDT offerings, you get a sense that people are looking at it that way. And then I did hint that we are seeing some clients -- this is not an avalanche, don't go writing big hairy articles that people are looking at what they really own inside a passive or indexed situation and are thinking that maybe they need to look at some of the MDT mandates as alternatives. Raymond Hanley: And Robin, on the -- in terms of the pace of the funding of the pipeline, about 2/3 of it, we expect to fund here in the fourth quarter with the equity and fixed income equity inflows, fixed income outflows happening this quarter and about half of the alt funding happening this quarter. The alts usually have a longer tail, so they will continue to fund through the first half of next year, Q1 and Q2 pretty evenly. Thomas Donahue: Okay. Holly, we must go to the next question. Operator: We have reached the end of the question-and-answer session. And I will now turn the call over to Ray for closing remarks. Raymond Hanley: Okay. Well, thank you for joining us. That concludes our call. Operator: Thank you. This concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation.
Operator: Good morning, everyone, and welcome to Marcus Corporation's Third Quarter Earnings Conference Call. My name is Lydia, and I will be your operator today. [Operator Instructions] As a reminder, this conference is being recorded. Joining us today are Greg Marcus, Chairman, President and Chief Executive Officer; and Chad Paris, Chief Financial Officer and Treasurer of Marcus Corporation. At this time, I'd like to turn the program over to Mr. Paris for his opening remarks. Please go ahead, sir. Chad Paris: Good morning, and welcome to our fiscal 2025 third quarter conference call. I need to begin by stating that we plan to make a number of forward-looking statements on our call today, which may be identified by our use of words such as believe, anticipate, expect or other similar words. Our forward-looking statements are subject to certain risks and uncertainties, which may cause our actual results to differ materially from those expected or projected in our forward-looking statements. These statements are only made as of the date of this conference call, and we disclaim any obligation to publicly update such forward-looking statements to reflect subsequent events or circumstances. The risks and uncertainties, which could impact our ability to achieve our expectations identified in our forward-looking statements are included under the heading forward-looking Statements in the press release we issued this morning announcing our third quarter results, and in the Risk Factors section of our fiscal 2024 annual report on Form 10-K, which you can access on the SEC's website. Additionally, we refer you to the disclosures and reconciliations we provided in today's earnings press release regarding the use of adjusted EBITDA, a non-GAAP financial measure in evaluating our performance and its limitations, a copy of which is available on the Investor Relations page of our website at investors.markuscorp.com. All right. With that behind us, let's begin. I'll start this morning by spending a few minutes sharing the results from our third quarter and then discuss our balance sheet, liquidity and capital allocation. I'll then turn the call over to Greg, who will focus his prepared remarks on where our businesses are today and what we are seeing ahead. We'll then open up the call for questions. This morning, we reported a quarter with solid results overall despite somewhat mixed results in our divisions relative to our expectations. In hotels, we exceeded our expectations and were able to overcome a very challenging prior year comparison to deliver revenue growth and outperform our competitive sets. In theaters, we saw a less concentrated film slate with several films that performed well relative to our own expectations, but the slate lacked a major breakthrough of tent pole that we've seen in the third quarter the last couple of years. During our seasonally busiest quarter, our teams in both businesses remain focused on serving our guests with excellence to deliver memorable experiences. I'll start with a few highlights from our consolidated results for the third quarter of 2025. Consolidated revenues of $210 million were down 9.7% compared to the prior year quarter. Operating income for the quarter was $22.7 million a decrease of $10.1 million compared to the prior year quarter. Consolidated adjusted EBITDA for the third quarter was $40.4 million, a decrease of $11.9 million compared to the third quarter of fiscal 2024. Net earnings for the quarter were $16.2 million or $0.52 per share and were favorably impacted by a nonrecurring gain on a property insurance settlement of $3 million or $0.10 per share net of tax. Excluding the impact of the gain net earnings for the third quarter were $13.2 million or $0.42 per share compared to prior year third quarter net earnings of $24.8 million or $0.78 per share excluding the impacts of our convertible debt repurchases last year. The change in our fiscal year-end quarters had an immaterial impact on our third quarter results with 1 additional operating day during the quarter in fiscal 2025 compared to last year. Turning to our segment results. I'll begin this morning with our theater division. Third quarter fiscal 2025 total revenue of $119.9 million decreased approximately 16% compared to the prior year third quarter, primarily due to weaker performances from the top films in the quarter compared to the top films in the quarter last year and less carryover of films that released in the second quarter compared to last year's carryover. Comparable theater admission revenue for the third quarter decreased 15.8% and comparable theater attendance decreased 18.7% compared with our fiscal third quarter 2024. While our market share in the third quarter of 2025 was in line with our historical third quarter share, including our third quarter share in 2023, this year's film mix did not help us. Notably, the film slate did not include a family animated film in the top 5 movies of the quarter, a genre that our circuit typically outperforms in. When using our comparable fiscal days, U.S. box office receipts decreased 12% during our fiscal 2025 third quarter compared to U.S. box office receipts during our fiscal third quarter last year, indicating our admissions revenue performance trailed the industry by 3.8 percentage points. We believe that our lower box office performance relative to the nation during the third quarter, was primarily attributable to our strong performance in the third quarter last year when our circuit outperformed the national box office growth by nearly 6 percentage points. As you may recall, a year ago, our third quarter 2024 box office results benefited from a favorable film mix in which we achieved above our historical average market share for each of our top 6 movies in the quarter, including several films such as Inside Out 2, Despicable Me 4 and Twisters where we significantly outperformed our typical share. Our admissions revenues did benefit from several pricing changes that we discussed with you last quarter, with average admission price increasing 3.6% during the third quarter of fiscal 2025 compared to last year. Our admission per caps were favorably impacted by strategic pricing changes, including adjustments to our Everyday Matinee program and pricing surcharges on select high-demand summer blockbuster films. In addition, admission per caps were also favorably impacted by a higher percentage of our attendance on PLF screens compared to last year's quarter. We also grew our average concession food and beverage revenues per person at our comparable theaters, which increased by 2.1% during the third quarter of fiscal 2025 compared to last year's third quarter, and was driven by an increase in merchandise sales and pricing. Our top 10 films in the quarter represented approximately 72% of the box office in the third quarter of fiscal 2025, compared to 83% for the top 10 films in the third quarter last year. The less concentrated film slate featuring fewer blockbuster films compared to the more concentrated slate in the third quarter last year, resulted in an approximately 3 percentage point decrease in overall film cost as a percentage of admission revenues. Finally, Theater Division adjusted EBITDA during the third quarter of fiscal 2025 was $22.1 million, a 33% decrease over the prior year quarter, primarily due to the lower attendance volumes. Turning to our Hotels and Resorts division. Total revenues before cost reimbursements were $80.3 million for the third quarter of fiscal 2025, a 1.7% increase compared to the prior year. RevPAR for our comparable owned hotels decreased 1.5% during the third quarter compared to the prior year, which resulted from an overall occupancy rate increase of 1.7 percentage points offset by a 3.6% decrease in our average daily rate, or ADR. Our average occupancy rate for our owned hotels was 78.4% during the third quarter of 2025. As you may recall, our third quarter 2024 results benefited from the Republican National Convention and its significant impact on the results at our 3 Milwaukee hotels, resulting in approximately $3.3 million of incremental revenue. The RNC primarily had the effect of increasing average daily rates. And when we adjust out that onetime impact, we achieved some very impressive rate and RevPAR growth. When excluding the impact of the RNC on our 3 Milwaukee hotels from last year's results, our average daily rate during the third quarter of 2025 grew approximately 5% compared to the prior year quarter, and RevPAR grew approximately 7.5%. According to data received from Smith Travel Research, Comparable competitive hotels in our markets experienced a decrease in RevPAR of 6.7% for the third quarter of 2025 compared to the third quarter of fiscal '24, indicating that our hotels outperformed the competitive set by 5.2 percentage points. We believe our outperformance resulted primarily from strong sales results with our group customer segment as well as a strong summer season at Grand Geneva Resort & Spa and higher results from the recently renovated properties in our portfolio. When comparing our RevPAR results to comparable upper upscale hotels throughout the U.S. the upper upscale segment experienced a decrease in RevPAR of 1.3% during our third quarter compared to the third quarter of fiscal '24, indicating that our hotels performed generally in line with the industry despite the growth headwind from the prior year RNC impact, and they outperformed the industry by nearly 9 percentage points when adjusting for the estimated impact of the RNC on our RevPAR growth. With the strong growth in group business and events, our banquet and catering operations continued to grow with food and beverage revenues up 8.3% in the third quarter of fiscal '25 compared to the prior year, which includes the impact of the headwind from prior year RNC related banquet and catering events. Finally, hotels adjusted EBITDA was essentially flat in the third quarter of fiscal 2025 compared to the prior year quarter, which we believe was a significant achievement given the changes in our revenue mix, with a decrease in high rate, high-margin rooms revenue in the prior year due to the RNC and the increase in comparatively lower margin food and beverage revenue. Shifting to cash flow and the balance sheet. Our cash flow from operations was $39.1 million in the third quarter of fiscal 2025 compared to cash flow from operations of $30.5 million in the prior year quarter, with the increase in cash flow primarily due to differences in the timing of various working capital payments. Total capital expenditures during the third quarter of fiscal 2025 were $20.9 million compared to $18.5 million in the third quarter of fiscal 2024. A large portion of our capital expenditures during the third quarter were invested in the Hilton Milwaukee renovation, with the balance going to maintenance projects in both businesses. Our capital investments and renovations projects have progressed as planned, and we now expect capital expenditures for fiscal 2025 of $75 million to $85 million. The timing of several projects will impact our final capital expenditure number for the year. Looking ahead, as we get past the heavy part of the reinvestment cycle that we are in this year with our current hotel portfolio, we see a meaningful step down in capital expenditures in 2026. Our preliminary expectation is for approximately $50 million to $55 million of capital expenditures in 2026 with this range subject to adjustment for the final timing of payments for our 2025 projects. We ended the third quarter with approximately $7 million in cash and over $214 million in total liquidity with a debt-to-capitalization ratio of 26% and net leverage of 1.7x. Finally, in today's earnings release, we announced that during the third quarter, we repurchased approximately 600,000 shares of our common stock for $9.1 million in cash. This brings our share repurchases this year to just over 1 million shares or approximately 3.2% of our outstanding shares at the beginning of the year. Our cumulative buyback since resuming share repurchases in the third quarter of 2024 are now over 1.7 million shares or approximately 5.3% of our outstanding share count when we begin returning nearly $26 million in capital to shareholders. Our strong balance sheet and confidence in our businesses gives us the ability to continue pursuing growth investments while returning capital to shareholders through our quarterly dividend and opportunistic share repurchases. We will continue to allocate capital with a balanced approach that supports our strategic priorities while pursuing investments that provide the most attractive returns to shareholders. Greg will further discuss our capital allocation approach and today's announcement of an increase in our share repurchase authorization. And with that, I will now turn the call over to Greg. Gregory S. Marcus: Thanks, Chad. Good morning, everyone. When we were together last quarter, we shared that our summer was off to a solid start in both of our businesses. In theaters, a more diverse film slate was bringing out audiences for a series of solid performances. In hotels, we were gaining momentum as we entered the third quarter, and we're well positioned with several newly remodeled properties in our portfolio. As the rest of the third quarter played out, we saw some divergence between the results of our 2 divisions. In theaters, we saw a late summer movie season that included several films that performed well and met our own expectations, but it lacked a runaway hit blockbuster film that we've had the last couple of years, and the film mix was challenging for our markets. In hotels, our team executed exceptionally well, capitalizing on both group and leisure demand and delivered a quarter that outperformed our competitors in the nation, overcoming a very difficult comparison to our record third quarter results last year. As I will discuss today, while the overall result was a mixed quarter compared to our own expectations, there were many positives that we think will benefit us in the long term. I'll start with our theater division. In a quarter where there has been much industry discussion about a national box office that was down nearly 12%. I'd like to step back for a moment with some perspective and start with a few things that we thought were positive. First of all, we have good product supply with 32 wide releases in the third quarter this year compared to 29 last year. The film slate was less concentrated, and many of the smaller and midsized pictures actually performed better on average than they performed last year. When you get past the top 6 movies in the quarter, the average box office gross per film for the next 14 films in the top 20 was up over 11%. We believe this illustrates that there is an important role for small and midsized films in theatrical. And contrary to some of the narrative in the trade press, audiences want to come out to see these movies in theaters. Second, there were several films that outperformed expectations. James Gunn's Superman opened to $125 million domestically achieving over $350 million in box office during its domestic run and grossing over $600 million globally. More importantly, the success of this DC franchise film sets up a promising outlook for future sequels with more DC adventures on the horizon. Zach Cregger's horror hit Weapons crossed $100 million in domestic box office in just 2 weeks and its way to over $150 million for the run. The Conjuring: Last Rites smashed box office records with both the highest domestic and global opening for a horror film going on to become the highest grossing film in The Conjuring series. Demon Slayer: Infinity Castle broke the anime record with a $70 million domestic opening and has continued to play strong to become the highest grossing international movie ever in the U.S. with a domestic run now of over $132 million. These were all great results for these films, and they illustrate the audience appeal for a wide range of content across genres. So where did the summer box office come up short compared to last year? We think it ultimately comes down to a couple of simple factors. First, we didn't have a breakout smash hit this year that was the musty film of the summer, as we've seen in the last 2 years, the #1 film in the third quarter last year, was Deadpool & Wolverine. And in 2023, it was Barbie with both films grossing approximately $630 million domestically in the quarter. As I discussed earlier, the #1 film in the quarter this year, Superman was a great success for many reasons, but at $350 million, its gross was approximately $280 million lower. We've been in this industry for a long time, and this dynamic with varying levels of box office hits from year-to-year isn't new. It's just the nature of our business. Second and the third quarter, the summer box office was lighter on family films, a genre or we typically outperform. Last year, our top 5 films in the third quarter included Despicable Me 4 at #2, and Inside Out 2 is the #5 film, which was the second quarter release that carried over and held strong into the third quarter. This contributed $183 million to the third quarter domestic box office. This year's third quarter did not have a family animated film on the top 5 and didn't benefit from carryover of family films released in Q2. Again, this isn't really a new phenomenon, but it did create a tough comparison to last year, particularly for our circuit, which historically has outperformed on family films. Chad discussed the factors we believe are impacting our box office growth relative to the nation and while we underperformed the nation by just under 4 percentage points. This was primarily due to our strong outperformance last -- in last year's third quarter, coupled with a film mix this year that didn't include many family films. I'm pleased to share that we continue to make progress on optimizing prices to capture premium during peak periods and maintain the right balance of value-oriented options for more price-sensitive customers during lower demand periods. As expected, our admission per caps improved during the third quarter as we implemented blockbuster pricing on high-demand films and continue to adjust pricing for our Everyday Matinee program. We expect continued growth in our admission per caps for the next several quarters. We're looking forward to an exciting fall and holiday film slate with Wicked: For Good, Zootopia 2, Five Nights at Freddy's 2, The SpongeBob Movie: Search for SquarePants and Avatar Fire and Ash, just to name a few. Advanced ticket sales of Wicked: For Good have been strong and are currently trending over 3x ahead of presales for last year's Wicked. As we look ahead to next year, the 2026 film slate features major franchises, including Spider-Man: Brand New Day, The Super Mario Galaxy Movie, Moana Jumanji 3, Moana, Jumanji 3, 2 different movies, Toy Story 5, Megameno, Mega Minions, The Mandalorian and Grogu, Dune, Messiah; and Avengers: Doomsday just to name a few. There are many more great films coming noted in today's earnings release, the 2026 film slate continues to fill in and the early indication is that while there are a similar number of franchise films in 2026 compared to this year, the grossing potential of 2026 franchise is greater based on the historical predecessor box office performances. The 2026 slate currently includes 4 films where the predecessor earned over $500 million at the domestic box office compared to only 1 such film in 2025. Moving to our Hotels and Resorts division. You've seen the segment numbers, and Chad shared some additional detail on the performance metrics, including our outperformance to the competitive sets. We expected this quarter to be a challenging comparison to last year for the hotel division, given the significant impact the RNC had in our Milwaukee hotels in the third quarter last year. And I'm thrilled to share that our teams met the challenge and delivered absolute growth to overcome a tough comp. The RNC was an extraordinary period -- extraordinary event for our largest market, and we back out the RNC impact from our prior year results, our core business performed very well. In particular, 2 of our newly renovated properties, Grand Geneva Resort & Spa and Pfister hotel benefited from our investments in renovations and great execution by our teams to deliver outstanding results this quarter. There were several notable items in the quarter that I'd like to highlight. Average daily rates during the quarter were generally strong, with rate growth at 4 of our 7 hotels when adjusted for the prior year RNC impact. We have been successful in achieving higher rates at our hotels with newly renovated room product, including the Pfister, Grand Geneva Resort & Spa and Hilton Milwaukee. Occupancy remains strong with occupancy growth at 6 of our 7 hotels the combination of strong ADR and occupancy growth resulted in our properties once again outperforming their competitive sets with impressive RevPAR growth of 7.5% when adjusted for the prior year impact of the RNC. Group business during the quarter was stable. And as we approach the end of the year, our group room revenue bookings for full year fiscal 2025 or group pace in the year for the year are running slightly behind where we were at this time last year, which includes the RNC Group business last year, even more encouraging. Group room pace for 2026 is running approximately 14% ahead of where we were at this time last year, for the next year out with banquet and catering revenues similarly running ahead of last year's pace. The current state of our hotel business remains stable and consistent with our view last quarter. While some markets have seen some more significant leisure softening, our owned portfolio has generally performed well. Leisure transient demand remains soft in some markets around the country. But our hotel portfolio has not seen significant signs of softening or significant cancellations of group business. We believe our upper upscale positioning, drive to market locations and a broad segmentation lessening our exposure to any one type of customer. We'll see less volatility if further economic soften occurs. There remains an increased level of economic uncertainty compared to where we were a year ago. And if we begin to see softness, we are prepared to react and adjust quickly. Our operations team is continuously focused on labor efficiency, and we've developed a strong track record of successfully managing through a changing demand environment. Finally, I'd like to close with our views on capital allocation and returning capital to shareholders. For the last couple of years, we've made significant reinvestments in our assets. And as Chad discussed, we expect to move past this heavy CapEx cycle next year as we shift back to a more typical maintenance and ROI CapEx mix. We're seeing great results from our renovated properties, and we believe these investments will continue to have attractive long-term returns. On the growth front, we continue to look for opportunities to deploy capital to grow both of our businesses with value-accretive investments. We have confidence in our businesses and a strong balance sheet that allows us to move quickly when we see good opportunities. And we have a history of executing when they arise. To the extent that we don't see attractive investments that are actionable, we expect to return excess capital to shareholders through share repurchases or dividends. As Chad described in greater detail, we repurchased over 5% of our outstanding shares through opportunistic share repurchases since we began repurchasing shares in the third quarter of 2024. Between cash dividends and share repurchases, we have returned over $25 million or approximately $0.80 per share to shareholders in the last 4 quarters. This morning, we announced that our Board of Directors has approved a 4 million share increase in our current repurchase authorization, bringing our current share repurchase authorization to 4.7 million shares in the absence of growth investments with attractive returns, we will continue to use this authorization to opportunistically repurchase shares and return capital to shareholders. And this new authorization will give us the flexibility to move quickly as opportunities arise. Throughout our company's history, we've taken a balanced approach of investing in long-term growth opportunities while returning capital to shareholders, and you should expect us to continue to do both going forward. It won't be all of one or the other. We continue to pursue growth opportunities in both of our businesses, and we're generally opportunistic investing where we see value and attractive returns, whether it be in new deals or in buying back our stock as we've done recently. Finally, tomorrow marks an important milestone in our history. On November 1, 1935, my grandfather, Ben Marcus, founded, but became the Marcus Corporation with the purchase of a single screen movie theater in Ripon, Wisconsin. During the month of November, we will celebrate the company's 90th anniversary, and our theme for the year has been the spirit of entrepreneurship. One of the guiding principles that my grandfather and Dad instilled in all of us in our company's future will be built on that same entrepreneurial legacy. We are called on to push, change and evolve because as we know, from our 90 years of history, the only constant has changed. I'm excited to celebrate our 90th anniversary with our associates who, by the way, my grandfather taught us, our most important asset. As we both recognize our achievements and look ahead to a future that will continue the legacy of these great businesses for many years to come. Before we open up the call for questions, I want to conclude my remarks by saying thank you to all the hard-working associates of the Marcus Corporation. I don't want to ever take for granted what each and every one of them does to contribute to the success of both of our businesses. Thank you. With that, at this time, Chad and I would be happy to open the call up for any questions you may have. Operator: [Operator Instructions] Our first question today comes from Eric Wold with Texas Capital. Eric Wold: A couple of questions. You mentioned -- on the hotel side, you mentioned that you had rate growth in 4 of the 7 hotels in the quarter. I guess for the other 3, is that something that was more of a short-term issue? Is that something that's kind of been more than 1 quarter where you haven't had rate growth at those 3 hotels something that's we think more of a competitive issue in those markets. I don't want to lean on that too much, but I just want to get a bit more of a -- something that's been short term or something that's been more than a quarter. And is that something you think that's more of a competitive issue or something that may require an investment as you look in the next couple of years. Chad Paris: Thanks, Eric. Yes, I mean, at the 3 hotels where we didn't see ADR growth, I would say there are more market dynamics. Two of them have been persistent market dynamics that are more generated by supply in the market. And in the third, it really was just a little bit of softening very recently in demand. But I don't know, 2 of the 3, I don't see significant CapEx investments. We have 1 of those 3 that we're going to be doing some small refreshes too, but nothing anywhere near what we've done at the 3 major properties over the last few years. I would describe it as a more normal course refresh that is embedded in our $50 million to $55 million of CapEx that we expect for next year. Eric Wold: Got it. And on that $50 million to $55 million, is that considered including refreshes, is that considered, I guess, more of a maintenance CapEx number kind of going forward? Anything that would be kind of unusual in that number? Chad Paris: It's not 100% maintenance. There is some ROI that we're doing in that, and we've done some of that this year in the theater business, and there'll be some of that again as we look forward in both of the businesses. There's always some of those types of activities, but it is primarily maintenance and ROI capital. Eric Wold: Got it. And then just last question. I know you touched on this a little bit with the capital return comments. With the increased share repurchases this year and the new buyback authorization, should M&A -- I know obviously, you had some increased free cash flow with the reduced CapEx next year and presumably going forward, but should M&A opportunities come up on either the hotel or the exhibition side. Can you talk a little bit about your comfort taking on leverage to the balance sheet? And kind of what's kind of your comfort level on leverage ratio, and then also, should the equity get back to a more, whatever, in your mind, be a more appropriate valuation, would you use equity for M&A in the future? Or is that, in your view, the more appropriate way to go about that? Chad Paris: Yes. On the first part of your question on M&A, I think if we have something that's actionable, we will move on it. We have been allocating a lot of capital to share repurchases lately. And at the current leverage at 1.7x we're very comfortable, and we actually have a target leverage that's a bit above that, closer to 2.25% to 2.5%. So we have some capacity to do that. And if we found the right type of M&A opportunity, we have some flexibility and can flex up a bit and then bring ourselves back down to somewhere in that target level, but very comfortable with where we're operating right now, and there's actually some room to do a bit more and continue to invest. Gregory S. Marcus: As for whether we -- taking on more leverage and doing things, we have that balance sheet capacity, as Chad pointed out. Would we use equity? Yes, I mean, look, we have a history, if you look and you know this, Eric, if you go back, when we think there's -- when we think that we -- the opportunity to return capital to shareholders through stock repurchases make sense, we do that. When we have -- when we believe the stock is at a price where we think it's appropriate to use it as capital, we do that as well. And so it will just depend on market conditions. We are not a company that just says, well, we programmatically buy stock, no matter what the price is or we're going to sell stock to grow just to raise equity. We will do it based on where we think the price is and whether it makes sense. Chad Paris: And just to be clear, at the current levels, obviously, we're in the market and we were repurchasing shares during the quarter. And so that's kind of the level that we're at right now, you wouldn't see us issue equity at the current share price to go do M&A. Operator: Our next question comes from Patrick Sholl with Barrington Research. Patrick Sholl: Just curious on concessions. Just with the current macro environment, have you seen any change in how consumers are like -- just consumer uptake or I guess, hesitancy with regard to price increases and the ability to offset the inflationary pressures there? Chad Paris: Pat. No, we haven't really seen a lot to speak of over the summer in changes in consumer buying patterns. The hit rate and the basket sizes have been pretty consistent. We've moved through inflationary-type price increases. Nothing overly aggressive as we've seen in our per caps. And there's actually been more propensity for our customers to buy merchandise associated with concession purchases. That's been a nice part of the uplift. But nothing that we've seen that would tell you there's a change going on in the willingness to buy concessions. Patrick Sholl: Okay. And then maybe just a question on the M&A market. Just kind of with the, I guess, softening macro environment in hotels and maybe some stability in the film slate. I'm just kind of curious how you're seeing like the various macro factors kind of affecting the M&A market in those 2 segments? Gregory S. Marcus: It feels like there's some more trends. I mean, look, if you look at it from a macro level and you back up, the market is still very, very sluggish in terms of transaction volume. But it's -- if I -- how to feel right this minute, it's starting to feel like there's some more stuff happening. I don't think we're seeing so much selling pressure from anyone feeling the pressure to sell from performance standpoint yet. I think you get people who just own things too long, and that's their issue. The thing I think we bumped into and by the way, if interest rates -- as they come down, that will help because, again, I think one of the bigger challenges that we bump into is if you wrote a pro forma to buy an asset and you had an exit cap that's significantly below where cap rates are now, you're going to -- and you don't have to sell, you're going to hold on as long as you can. And so since the economy has held up, we're not seeing forced -- people feeling pressure and forced sales. You're seeing people where now they're starting to say, well, okay, I'm going to make the reinvestment in the next cycle, because we've got -- because PIPs are coming up on people, am I going to -- am I going to want to reload that, and that's probably where we're seeing some opportunity. It's more along that. We're not feeling that as you might be alluding to some economic pressure as the economy slows down. Operator: Our next question comes from Andrew Crum with B. Riley Securities. Andrew Crum: So I think you talked about expectations for admission per cap growth over the next few quarters. Does that incorporate or contemplate any further changes to your pricing strategy? And if so, what are those? And any early learnings from the pricing increases you took at the beginning of 3Q? Chad Paris: Andrew, yes, the -- it does not contemplate a lot of significant changes prospectively beyond what we did in the third quarter, it's more the annualization benefit and tailwind that we'll get from, frankly, flipping from a headwind on some of the discount programs that we've been comping for the last year to now moving to some strategic pricing moves that have increased pricing and that becomes a tailwind. During the third quarter, we had blockbuster pricing on a number of films that our pricing approach and that evolved a bit throughout the quarter in terms of the length of period that we had blockbuster pricing on and Everyday Matinee evolved a bit during the quarter. But I think we've hit a level that makes sense. Pricing, as we talked about last quarter, continues to be an area where the industry has done various experimenting. And so we'll continue to watch what others are doing. But in what we did in the third quarter, it is having the effect that we expected it would. Andrew Crum: Got it. Okay. And then you guys discussed the composition of the fleet in 3Q having a negative impact on your theater admissions. As you look at 4Q, how are you viewing mix? Is it a positive for your circuit negative or too tough to tell? Chad Paris: Yes, I'll start first and let Greg add on his thoughts. I mean I think it's a little bit tough to tell. It's easy to forget that we had a Moana film in the fourth quarter last year, and we don't have something quite like that. We do have a couple of family films here coming up in the quarter. And we have an Avatar, which we didn't have last year. So there are several puts and takes. It's frankly tough to tell on mix. Gregory S. Marcus: It's so hard. It is really hard to tell. We've never know. I'm glad we got Zootopia, glad we got Wicked, that will play, that should play good in our markets. SpongeBob, I'm a fan. So -- but we'll have to see how it goes. Operator: [Operator Instructions] We'll move to our next question from Mike Hickey with Benchmark. Michael Hickey: I guess first, Greg, obviously, I heard your prepared comments on '26 for both your segments, sounded pretty bullish actually encouraging. Just would love to get sort of your off-script thoughts Greg on the growth opportunity you see from theaters and hotels and any catalysts or major drivers. Obviously, you list a lot of films that sounds encouraging. Maybe something that's very relevant to your demo. And on the hotel side, I don't know if the mark, it seems like a really interesting project that you guys are doing, if that could be a catalyst or any other initiatives that you think can move the needle for you guys across your 2 segments in 26. I've got a couple of follow-ups. Gregory S. Marcus: Sure. Look, on the theater side, you know me, Mike, I'm not -- I tend to hate to try to predict how things are going to go. It's -- I always go down to let's just count the number of films, and that will give us a range. And then I don't know what -- and then in some years, it's going to be better or some years in some periods, it will be not as good. I mean I keep reminding myself, oh, yes, Memorial Day this year was the biggest Memorial Day on the history of the movie business and then summer slowed down. So you just don't know. But I thought it was a really interesting data point. Look and say, well, look at the number of franchise films next year pretty much like this year, I think maybe one less. But if you look back at the historical grossing of what the franchise zones that are coming around this time certainly more robust than we had in '25. So I'm not going to ignore that stat. Now go to bed, feeling good about that, but again, always hard to predict. On the hotel side, look, we've made a lot of investments that should continue to bear fruit for us, which is great. There's that old saying that old smells and new sales. And so that's very good for us, and we should see that. I don't want to overplay the Mark thing. The Mark was done opportunistically, frankly. We have -- we've been very disciplined about the amount of investment we want to put into the here into the Milwaukee Hilton. And in -- we were -- we had made the decision that we weren't going to renovate the entire property. We were going to actually close 176 keys. And we looked at it -- but we weren't going to close immediately, and we had demand for the rooms. And so while there's demand for the rooms, we're not going to actually make much of an investment in it. We're just going to separated out from the Hilton system basically that will run as an independent. And it's a wait -- if it's there, what's -- well, let's get some cash flow off of it while it's there, while we figure out where it's going. And if the city and the community decides they want to go in a certain direction because it will involve all of them that any further investment in hotel, frankly, is going to require a subsidy. And if that's going to happen, then we're [indiscernible]. If not, that will become a different use. But while it's waiting let's warehouse it and get some cash flow from it. Chad Paris: Mike, I just want to add 1 comment on the '26 slate in terms of film mix. The one thing that does stand out is when you look at family content next year and you look at the franchises, we have Mario Brothers, we have a Toy Story, we have Minions movie, we have Moana, we have a Jumanji. I think the family mix comparatively to '25 is very helpful for our circuit. Michael Hickey: Then I guess given that you guys seem optimistic on growth, how should we think about the bottom line here, EBITDA growth potential operating leverage and free cash flow conversion? I know that's come up a lot, when you think about, I guess, catalyst to your valuation. I think free cash flow in '26 would probably stand out as the largest. Chad Paris: Yes. No doubt. I mean just by virtue of the CapEx coming down, our free cash flow is going to grow significantly next year. And then I think as the -- the highest leverage is in the theater business. And so if you assume the hotel business continue steady as you go as it has with a stable economy, if you believe the '26 slate will grow, our operating leverage in theaters has historically contributed around 50% to the bottom line in top line growth. So we continue to focus on managing our cost structure and getting better at managing these buildings when you're in the troughs of the content supply, that's really critical to holding that type of contribution margin because the peaks and valleys have been pronounced the last couple of years. But yes, the EBITDA should flow through with what the top -- if the top line grows, as you would expect for the slate. Michael Hickey: Last question. Obviously, recent news that Mark is retiring, sad to hear that 55 years, you never hear that sort of tenure with the company, so congrats to him. Just curious on the transition plan, and if this could also be a potential catalyst for maybe a change in strategy and how you manage your theater asset? Gregory S. Marcus: Well, we are looking -- we're in the middle of a search for the new leader. We're looking at internal and an external candidates. We have both. And the -- with the new leader, look, the idea is that we hopefully will see new ideas and new approaches. And yes, look, we're celebrating our 90th anniversary. I don't think that we're going to see like -- we're going to wake up with a wholesale change as to how we approach the business. But I like the idea of new ideas and bringing out new approaches. And we will -- and we're always trying to do new things to figure out what will work. And most of it doesn't. But every one in a while, you find one and we'll run with it. I can't say It's like the surprise movie. I never know what it's going to hit, but there always is one. Chad Paris: Thanks, Mike. Operator: At this time, it appears there are no other questions. So I'd like to turn the call back to Mr. Paris for any additional or closing comments. Chad Paris: We'd like to thank everybody for joining us today, and we look forward to talking to you once again in late February when we release our fourth quarter results until then, thank you, and have a good day. Operator: This concludes today's call. You may disconnect your line at any time.
Operator: Good day, and welcome to the Federal Realty Investment 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 Jill Sawyer, Senior Vice President of Investor Relations. Please go ahead. Jill Sawyer: Thank you, Megan. Good morning. Thank you for joining us today for Federal Realty's Third Quarter 2025 Earnings Conference Call. Before we get started, a reminder that certain matters discussed on this call may be deemed to be forward-looking statements. Forward-looking statements include any annualized or projected information as well as statements referring to expected or anticipated events or results, including guidance. Although Federal Realty believes the expectations reflected in such forward-looking statements are based on reasonable assumptions, Federal Realty's future operations and its actual performance may differ materially from the information in our forward-looking statements, and we can give no assurance that these expectations can be attained. The earnings release and supplemental reporting package that we issued this morning, our annual report filed on Form 10-K and our other financial disclosure documents provide a more in-depth discussion of risk factors that may affect our financial condition and operational results. Before we begin our prepared remarks, I want to note that Don Wood, our Chief Executive Officer, is temporarily away due to a recent loss of an immediate family member. Our thoughts are with Don and his family during this very difficult time. In his absence, our Chief Investment Officer, Jan Sweetnam, will be reading Don's prepared remarks. In addition to Jan, joining me on the call today are Dan Guglielmone, Chief Financial Officer; Wendy Seher, Eastern Region President and Chief Operating Officer; as well as other members of our executive and senior leadership team, including Dawn Becker, Jeff Kreshek, Stu Biel and Melissa Solis that are available to take your questions at the conclusion of our prepared remarks. And with that, I will turn the call over to Jan Sweetnam. Jan, please begin. Jan Sweetnam: Thanks, Jill, and good morning, everybody. Following are Don's prepared remarks: Best leasing quarter we've ever had, ever. And that's saying something given the leasing strength over the past few years. 727,000 feet of comparable space written at $35.71, 28% more annual cash rent than the previous tenant. 2/3 of that space was for renewals with de minimis capital required. Of the remaining 1/3 related to new tenants, over half related to space that is currently occupied but for which a more productive tenant executed a lease a year or 2 or even 3 early in order to lock it up. There's no better evidence of the attractiveness of a shopping center to retailers than that, and it's one of the best ways in our business to assure an increasing stream of cash flows well into the future. Wendy will talk about core leasing a bit more in a few minutes. Strong comparable operating income growth of 4.4% in the quarter was equally encouraging and led to FFO per share of $1.77, despite the absence of capitalized interest and operating costs at Santana West that negatively impacted FFO per share by $0.04. That drag will begin to dissipate in this fourth quarter and in 2026 and 2027 as tenants in the 90% leased, soon to be 95% leased building continue to occupy and work through free rent periods. Operationally, this was a really strong quarter. And based on what we see thus far in October, should allow us to close out 2025 strong. In terms of development and redevelopment, residential construction in Hoboken, New Jersey and Bala Cynwyd, Pennsylvania are moving along nicely on or under budget and on time with leasing to begin in early 2026 at Bala Cynwyd. During the third quarter, we broke ground on 258 new residential units on the last surface parking lot at Santana Row, committing capital of roughly $145 million. Those three projects, Hoboken, Bala and Santana, will require roughly $280 million of capital, all in fully amenitized and proven environments and should yield 6.5% to 7% unlevered. There's more to come in this component of our business in 2026. Current conditions suggest market value should be 150 to 200 basis points inside those returns. We're committed to realizing that value over time as we've demonstrated with the sale of Levare at Santana Row earlier this year, Pallas at Pike & Rose, which is currently under contract for sale and should close right around year-end and the current marketing of Misora at Santana Row. On the acquisition front, I really want to thank those of you that made the trip to Kansas City to join us for our investor tour of Town Center Crossing and Plaza in Leawood earlier this month, we're off to a great start there from a cash flow and value-enhancing perspective. And I just want to reemphasize the two points that I think became apparent to investors and analysts on that trip. First, that we are not sacrificing quality by expanding our geographical footprint. The growth prospects for these investments exceed both the retail and residential assets we're selling, and it is highly likely that the exit cap rates for the shopping centers we're pursuing will tighten considerably based upon our re-tenanting and redevelopment. And second, that this is not a change in strategy for Federal. Our deep and experienced team is doing what it has always done, lease it better, both from a merchandising and strength of lease contract standpoint, create a more inviting physical space that lengthens stay times and increases spend and intensify the land with more retail or residential GLA, where and whenever economically feasible. Same business plan and strategy, just on different land with the same characteristics. The affluent consumer is underserved, the centers are big and dominant and existing relevant tenants have proven that it's the place in the submarket to be. You might have also seen that we closed on the acquisition of Annapolis Town Center in the A+ location off State Route 50, which heads into D.C. and Interstate 97, which takes you to Baltimore and Annapolis, Maryland. We bought the property for $187 million at a 7% unlevered return with an anchor and shadow anchor foundation grounded by very successful retailers, Whole Foods, Lifetime Fitness and Target, we expect to be able to enhance the surrounding merchandising with better and more productive tenancy, enabling higher rents. We're very excited about this addition in our core market. Next up is another large and dominant center in a growing Midwestern submarket that we expect to close in this fourth quarter. More to come on that one soon. So that's about it from my prepared remarks. Enhanced internal and external growth using all the tools at our disposal is the name of the game. Quarters like this third of 2025 increase my confidence of doing so. Let me now turn it over to Wendy to expand on the leasing environment. Wendy Seher: Thank you, Jan, and good morning, everybody. Exceptional performance for the quarter, highlighted by record leasing volumes that build significant forward momentum as we conclude the year and look ahead to 2026. As reflected in Don's comments, we successfully recorded a record 123 comparable deals at impressive rent spreads of 28% over in-place prior rents. Our operational metrics are in top form, evidenced by strong occupancy, healthy margins and reduced controllable expenses, all underscoring a solid financial performance. Outstanding results overall for the quarter. Occupancy in the comparable pool continues to show momentum as our occupied rate climbed 40 basis points last quarter and 20 basis points year-over-year to 94%. On an overall occupancy basis, including all of our shopping centers, we stand at 93.8% today. Keep in mind, our two recent acquisitions, Leawood and Annapolis were roughly 91% and 85% occupied at closing, therefore, impacting total overall occupancy as we head into the fourth quarter. We encourage investors to focus on our comparable occupancy metrics, which more accurately reflects the continued strength and momentum across the core portfolio. Turning to our leased rate. Our comparable leased rate stands at a very healthy 95.7%. We expect the figure to grow and show positive momentum into year-end, driven by a strong pipeline, including over 175,000 square feet of new leases currently in process for vacant space. This represents roughly 70 basis points of incremental lease rate opportunity. While the third quarter saw record leasing volume, a significant portion of this activity was for space which currently was occupied. This is a testament to the durability of the centers and reinforces future stability in our occupancy metrics, providing embedded growth even if it doesn't immediately lift the recorded rate. By pre-leasing space, we effectively reduce downtime, we smooth out quarter-to-quarter revenue and strengthen occupancy over time. This proactive approach is a major focus across our operating teams. We continue to see broad-based demand for our quality real estate with a variety of best-in-class names and categories such as [ Chopt, Alo, ] Burlington, Arhaus and Ross to name a few, and we continue to upgrade our retail lineup, including within our more recent acquisitions, Virginia Gateway, Pembroke and Leawood to be specific, which with names such as COACH and LEGO, Warby Parker and Bluemercury. We were able to drive rents and earn a return on our capital there. Merchandising and retail sales performance is our focus. LoveShackFancy just had their grand opening this past weekend at the Grove in Shrewsbury. Attracted by the addition of our small-format Bloomies concept, LoveShackFancy opened to a line out the door and had their best opening ever of their 25 locations. Merchandising matters in non-commodity centers. Our acquisition of Annapolis Town Center this quarter is a prime example of our disciplined acquisition strategy. 479,000 square foot mixed-use retail property confirms our focus on acquiring high-quality dominant centers in affluent markets. With an 85% current occupancy rate, we expect the addition of Annapolis to provide meaningful growth with strong existing anchors like Whole Foods, Target and Life Time and featuring popular retail brands such as Sephora, RH, Pottery Barn and Anthropologie, a perfect addition to our Maryland portfolio. Expect us to provide a number of tenant announcements for Annapolis on our next call. And with that, I'll turn it over to Dan. Daniel Guglielmone: Thank you, Wendy, and hello, everyone. Our reported FFO per share for the third quarter of $1.77, above consensus and at the top end of our guidance range of $1.72 to $1.77. Comparable POI growth for the quarter was 4.4% on a GAAP basis and 3.7% on a cash basis. Both metrics outperformed our expectations, primarily due to higher-than-forecasted revenues in retail, residential and parking. As a result, we will increase guidance for both 2025 FFO per share and comparable POI growth. More to come on that later in my prepared remarks. But first, an update on the balance sheet. We continue to have significant liquidity of approximately $1.3 billion at quarter end, comprised of availability on our $1.25 billion unsecured credit facility and over $100 million of cash at quarter end. Amid an active capital allocation program, our balance sheet remains strong. Third quarter annualized net debt-to-EBITDA is solid and stands at 5.6x, reflecting the purchase of the Leawood assets and our fixed charge coverage stood at 3.9x. We continue to look to execute on our capital recycling program with $400 million of assets at various stages in the asset sale process, with roughly $200 million expected to close by year-end or shortly thereafter, and another $200-plus million forecasted to close in the first half of 2026. Behind that, we have a pool of over $1 billion of noncore assets under consideration to be brought to market in 2026 and beyond. Of that total, roughly $1.5 billion pool, about 1/3 is peripherally located residential with the other 2/3 being noncore retail. With estimated blended yields targeted in the mid- to upper 5% cap rate range and blended unlevered IRRs inside of [ 7%, ] very attractively priced capital. While leverage may fluctuate modestly from quarter-to-quarter, given the inherent timing differences between acquisition and sale transactions, we expect to maintain a long-term net debt-to-EBITDA ratio in the low to mid-5x range. From a flexibility perspective, with leverage metrics where they are and over $1.5 billion of asset sales in process and under consideration, we are very well positioned to continue to be on offense with respect to capital deployment. Now on to guidance. As mentioned earlier, with a third consecutive beat and raise, we are raising our forecasted range for FFO per share, excluding the new market tax credit, more akin to a recurring FFO to $7.05 to $7.11. This represents about 4.6% growth on this recurring basis at the midpoint over 2024 and roughly 4% to 5% at the low and high end of range, respectively. Including the onetime new market tax credits in these figures, our NAREIT-defined FFO range increases to $7.20 to $7.26, which represents 6.8% growth at the midpoint over 2024. This increase is driven by $0.01 of net operating outperformance during the quarter and roughly $0.01 accretion from the Annapolis acquisition for the quarter, which translates to $0.03 to $0.04 on an annualized basis. Given another strong result for 3Q, we are increasing our forecast for 2025 comparable POI growth to 3.5% to 4% or 3.75% at the midpoint. And that's 4% when excluding prior period rent and term fees. We expect comparable occupied levels to be in the low 94s by year-end, given the deals signed to date and the continued robust pipeline of leasing activity, which continues to have momentum even after a record third quarter volumes. Retail tenant demand for our portfolio is showing no signs of abating to date. We do have one other acquisition that we have under contract that should close before year-end of roughly $150 million. Although given the expected closing late in the quarter, we do not expect it to materially add to 2025 FFO. One thing to keep in mind, the acquisitions we have completed so far this year, including the one currently under contract, will total over $750 million at a blended initial cash yield of roughly 7%, a GAAP yield north of 7% and initial blended occupied rate of just 88%. These are high-quality assets with clear leasing upside, which will enhance growth in 2026, '27 and beyond. The implied FFO guidance for fourth quarter 2025 is $1.82 to $1.88 and represents 7% growth year-over-year at the mid-point. While we won't be providing formal 2026 guidance until our fourth quarter call in February, we do expect a strong year operationally. We're executing from a position of strength, we're investing strategically maintaining balance sheet discipline and setting ourselves up for another year of meaningful growth ahead. Now before I hand the call back to the operator [Operator Instructions]. And please, no multipart questions. If you have additional questions, please re-queue. And given the really tough news that Jill shared earlier, we completely understand that many of you may want to send a message of support to Don and his family. However, we respectfully ask that you refrain from expressing condolences on this call, so we can focus on the discussion on Federal Realty and its third quarter results and keep the Q&A segment of the call as efficient as possible. Thank you. And with that, operator, please open the line for questions. Operator: [Operator Instructions] The first question comes from Juan Sanabria with BMO Capital Markets. Juan Sanabria: Great. For the team, I guess. Dan, you talked about the dispositions and processing kind of a blended cap rate. But just curious if you can give any color on how the two main buckets, retail versus resi, compare given kind of early feedback on what may be kind of out there in the marketplace to test pricing. Daniel Guglielmone: Sure, sure. Look, we've got, as we mentioned, $400 million in the market now that's probably a little bit more skewed towards residential. Overall, the $1.5 billion, the 1/3 of the peripheral residential, 2/3 noncore retail. Pricing is going to be kind of in and around 5%, sub-5% for what we're selling on the residential, and it will be in and around 6 -- yes, low 6s, 6%, sometimes high 5s on a blended basis on the retail. And so blended, we should be in the mid to upper 5s overall. So I think a nice positive spread to where we're deploying the capital in and around the high 6s, low 7s on a cash basis and GAAP yields above that. Operator: The next question comes from Michael Goldsmith with UBS. Michael Goldsmith: Dan, you mentioned you're not going to issue formal 2026 guidance, but you did talk about some of the factors, right, like Annapolis and the benefit that you'll see next year as well as the capitalized interest in Santana [indiscernible]. So can you outline kind of any sort of onetime or other topics that you've already talked about for 2026, just so we can get a sense of where the puck is going. What's the trajectory of the company and what the earnings growth next year could look like based on what you've already said? Daniel Guglielmone: Yes, good question. Thank you, Michael. With respect to onetimers, obviously, the big one timer really is what's occurred in 2025 with the new market tax credit. We would encourage folks if you want to understand kind of the true operational growth underlying the business is to exclude that onetimer in 2025 and focus on the $7.08 of kind of more of a recurring number. And in terms of looking forward, we don't have anything or expect to have any onetimers. Onetimers, we consider recurring numbers, as term fees. We think that's recurring. It's a part of the business. It's unforecastable, but we do not expect any kind of material differences from our current guidance, which we increased a little bit this quarter in the $5 million, $5 million to $6 million range. So it should be consistent with that. With regards to capitalized interest, you brought up -- we had about $13.5 million or expecting in the $13 million to $14 million range this year. We're not done. We don't have a precise number, but I think as a placeholder using kind of a $10 million to $11 million kind of level for capitalized interest is something you can use for now, but we'll provide more precision on that in February. With regards to growth, we don't have a precise number, but right now, at current guidance in 2025 the recurring number is in the mid-4s, 4.6%. I would expect that, that feels like it should be somewhat consistent with where we'd expect things to be next year as well on a recurring basis. Keep in mind, that's with about 150 to 200 basis points of headwind from the refinancing of our bonds in February that we're expecting. And so that's, call it, 5.5% to 7% underlying growth in the core business, which I think is -- we feel really, really good about. And so that's kind of, I think, the big numbers I would point you to. We do expect -- we only have $3 million to $5 million of incremental development POI contribution this year, that will be up higher next year into the double digits. We'll have a more precise number for you in terms of the 2026 incremental contribution on the following February. Operator: Our next question comes from Samir Khanal with Bank of America. Samir Khanal: I guess, Jan or Wendy, the spreads in the quarter were impressive, right, 28% cash spreads. I guess if you take a step back, how much of that is sort of true market rent growth that you're seeing in your portfolio versus maybe just sort of mix or tenant upgrades. Trying to understand if these spreads are sustainable. And if there's sort of this inflection of market rents that are taking place for your type of assets. Wendy Seher: Sure. There's no question that the 28% is a strong number from us. As you kind of -- the way I kind of look at it is more over a 12-month period, which is more we're seeing kind of in the mid-teens. So -- and continue to be aggressive, and it makes sense, right, because our leased and occupied rate continue to increase, so we're able to drive rents at that rate. I think that it can be lumpy. So not every quarter will be 28%, but I think that we are definitely seeing some ability to drive rents. And like I said, that trailing 12 months should provide us in that mid-teens as the results will play out in the fourth quarter and into the first quarter. Operator: Our next question comes from Alexander Goldfarb with Piper Sandler. Alexander Goldfarb: Dan, on -- out at Santana West, you had that office tenant that, whenever, didn't take the space this year, whatever the take space, making it ready that got delayed, is that tenant looking to be on track for '26, meaning like should we expect sort of early in '26 that, that revenue would start flowing? Or is that -- could that be further delayed from a revenue recognition standpoint? Daniel Guglielmone: Yes. Our expectation is in line with our revised guidance earlier in the year that this fourth quarter, we will begin recognizing straight-line rent. And so they'll be -- we'll be recognizing on PwC, which is roughly the 40% anchor tenant in the building will be recognizing straight-line rent. And that's why -- that's one of the drivers of kind of the incremental POI that we'll see from our development pipeline, our development portfolio in 2026. So in line with our expectations and will be a driver of growth next year. Operator: Our next question comes from Michael Griffin with Evercore ISI. Michael Griffin: Maybe one for Jan, just as it relates to sort of the investment pipeline and outlook. I know in Kansas City, you talked about the upside opportunity in some of these larger open-air centers similar to town center versus maybe the premium the market is putting on more grocery anchor. So can you just talk about your thoughts on maybe the disconnect between those two types of properties? I mean, is it expectations for higher foot traffic at grocery-anchored center that's maybe driving down that cap rate? Or is there just a a broader disconnect versus the types of assets like a town center or an Annapolis that you all are targeting? Jan Sweetnam: Yes. Thanks, Michael. Good question. Interesting time in the market. There has historically been for at least the last 10 years, strong demand for grocery-anchored centers and cap rates have gotten bid down to relatively low levels. It sort of feels like they've flattened out a little bit. And there just has not been as much capital on the market. In fact, really recently, there's been very little capital in the market for larger transactions. And so the few transactions that came to the market, there was good bidding for it, but the yields were higher because just there wasn't that much competition for it. And so this last -- in the second half of this year, I think what we've seen is there's a lot of large centers that have come to the market. There's a lot of -- there's more capital in the market chasing those. It still feels like there's a good supply-demand equilibrium there. But it's just that -- we still see that spread happening here simply because the larger centers are -- that they can be more complicated to execute. There's a lot more leasing that needs to be done there. And I just think we are -- one of the reasons we're really interested in it is we think we get a great risk-adjusted yield in buying these assets that are a little bit more complicated. They're larger, they're harder to operate because we've just got a great leasing team. We've got such great relationships with the merchants, and we get so much intel on these things before we actually start bidding on them, no, let's put them under contract. And so we still think that spread is going to be there, it has not disappeared. Operator: Our next question comes from [ Simi Rome ] with Barclays. Unknown Analyst: I was wondering if you could elaborate a bit on the debt maturity schedule and particularly the $200 million Bethesda Row mortgage maturing in December, I saw there's two 1-year extension options there. So I was just wondering what the plan is. Daniel Guglielmone: Yes. With regard specifically to Bethesda Row and I'll talk a little bit more broadly about our maturity schedule going forward, but Bethesda Row, we will be extending that for another year, exercising the first of those two options, which will take us to the end of 2026. We have the flexibility to push it out to the end of 2027. It's a low leverage. It surely is imminently financeable at the end as well. So really no concerns there. We did refinance our Azalea loan, which has a maturity of tomorrow. And so that's been refinanced at very attractive rates in the kind of on a swap-to-fixed basis, it will end up in kind of the below 4s. And then with regards to the maturity we have in February of our $400 million of bonds with the 1.25%, we've got options, and it's good to have options. Whether it be in the bond market, whether it be in the bank term loan market, whether it be in the convertible market to have those options is really kind of what -- being Federal and having our high investment-grade rating kind of allows us to do to be able to be opportunistic and nimble with regard to how we plan to refinance that, and we'll look to optimize it. And so more to come on that. Obviously, in February, there will be more color on exactly how we execute it. Operator: Our next question comes from Floris Van Dijkum with Ladenburg. Floris Gerbrand Van Dijkum: A question on your physical occupancy. I note you're still about 160 basis points, I believe, below peak levels. And maybe, Wendy, if you can give some sort of update on how quickly you see that trending? And is there a chance that we could surpass that level over the next 18 months or so? Wendy Seher: Thanks, Floris. I think what we're seeing is in terms of our ability to drive that occupancy rate up, I'm feeling good about the anchor side of it, I think, is where we have more room to push that number. And I think you're going to see that, as I mentioned in my comments, was that 175,000 square feet of space that we have, really finalizing and signing leases in the next quarter for spaces that are currently vacant. So you're going to see that push up towards the end of the quarter. And I think on the small shop side, we're over 93% leased right now. So I think we're going to use that as an opportunity to continue to drive rents. It could go up a little bit, but we're going to -- we like a little bit of that frictional vacancy, as I call it, that we can drive rents. But I think you're going to see it more increase on the anchor side, which will overall increase our occupancy. Operator: Next question comes from Cooper Clark with Wells Fargo. Cooper Clark: Great. Curious how Annapolis is funded and how that ties into the $0.01 accretion for 4Q and $0.03 to $0.04 for the full year? Wondering if that $0.01 accretion is combined with the $200 million of sales to fund or just trying to figure out how that $0.01 is inclusive of sales to close by year-end or not? Daniel Guglielmone: Yes. Look, it's somewhat fungible. And look, we have a big balance sheet that allows us the flexibility to fund. Ultimately, we've got capacity on our credit facilities and our term loans. Temporarily, we fund it on that basis, cash on hand. Ultimately, on a long-term basis, it will be on a permanent basis, be funded with the asset sales. So the $0.01 accretion is really the spread between kind of the long term, basically yield or the initial yield day 1 and the next 12 months relative to -- we're selling stuff in the initial yields in the mid- to high 5s. And we're in the -- on a GAAP basis in the 7s, that's how you get to the $0.01 accretion on a quarterly basis for the fourth quarter and $0.03 to $0.04 on an annualized basis for the full year. Hopefully, that answers your question. It's a good one, Cooper. But hopefully, that answers it. Operator: Our next question comes from Greg McGinniss with Scotiabank. Viktor Fediv: This is Viktor Fediv on with Greg McGinniss. As you are now in an active external growth mode, could you share some details on current competition for the assets you target and how it is impacting cap rates overall? Just trying to understand whether the pool of assets that check all the boxes for Federal are shrinking or not. Daniel Guglielmone: Jan, do you want to take that one? Jan Sweetnam: Yes, I'm not sure I totally heard the full question. Is the question in terms of what does the pool of future potential acquisitions look like? Was that the question? Viktor Fediv: Yes, yes, as a result of current dynamic and competition for the assets, yes, just trying to understand the size of the pool, yes. Jan Sweetnam: Yes, yes. Got it. All right. So the -- it sort of feels like we're in continued equilibrium. And what I mean by that is, go back 12 months or 9 months ago, there weren't a lot of large transactions that we were interested in that were on the market. And there weren't a lot of people chasing those type of assets. And so it felt like it sort of was an equilibrium. And today, there was a lot of large transactions that came on the market in April, May, June that were also matched by more capital coming in looking at those acquisitions and those possibilities. And so it feels like we're sort of -- while there's more competition out there, I think it's more work for the sellers trying to understand who's real in the bid sheet and of the ones that are real, who are the ones that really stand out as being able to work through issues and be at the closing at the end. And as we think through, we think we compete very well on that basis. So just from a competitive standpoint, it feels like we're sort of in the same position from an equilibrium standpoint. We'll have to see what happens in '26 and beyond that. But we would expect to continue to see more large transactions coming to the market later this year, beginning of next year, and we think we're in a pretty good competitive position to make a play for. Daniel Guglielmone: Yes. And look, I think that another thing that is not kind of, I think, fully appreciated, I guess, is the skill set that we have with Federal Realty, whether it be in our leasing capability, our relationships with tenants, our ability to add placemaking and other things that enhance the operations and productivity of the assets that we buy. A lot of these assets are under-managed. And they're not -- it's not easy. It's not low-hanging fruit, and you need a really, really good operator to drive those kind of results. And I think that's a competitive advantage we have over much of the capital that we're competing with. And we can do things that others can't in terms of driving POI upside and NOI upside at these potential acquisitions. Operator: Our next question comes from Craig Mailman with Citi. Daniel Guglielmone: Craig, we don't hear you. You're on mute? Okay. We'll go to the next question. Operator? Operator: The next question is from Ravi Vaidya with Mizuho. Ravi Vaidya: Can we discuss the SNO pipeline? How much do we have in total rent that's embedded in that pipeline? And what's the projected time line for this to come online? Do you think it will compress from here on out? And -- or is there room for this to expand further as occupancy grows? Daniel Guglielmone: Great question, Ravi. And Craig, re-queue, we'll get to your question, for whatever the technical difficulty. We didn't hear you, but please re-queue so we can -- we want to hear from you. Ravi, great question. SNO is going to be about $20 million in the comparable portfolio and another $18 million in kind of the to-be-delivered portfolio. So $38 million in total. In terms of about 1/4 of that will come online or on an annualized basis, begin and commence in the fourth quarter, about, call it, 60% should be in 2026, and the remaining 15% should occur, call it, in 2027 for the most part. The -- probably of the 60% next year, roughly probably 3/4 of it is going to be -- call it, 70% to 75% should be in the first half of the year. Obviously, SNO has become a -- it's helpful for you guys from a modeling perspective. It only tells half the story. I mean when you look at SNO, you have to look at the other side of that's filling the top of the bucket, SNO. What is the leaks in the bottom of the bucket, what is your credit reserve? What's the credit profile of your tenancy? I think that, that needs to be looked at in tandem. So I would encourage you guys to the extent that SNO is important to you, that you look at both sides of that. With regards to our SNO, given what Wendy had indicated, we expect our lease rate to grow into the fourth quarter and into the beginning of 2026. That should grow our spread between our leased rate and occupied rate, both of them should trend upwards, which is what you want. I think that's more important, the direction of your occupancy metrics than necessarily what the spread is between the two. We will look to -- it may increase up towards 200 basis points, but our objective is to tighten that as much as we can and get into kind of historical levels in the low hundreds, 100 to 150 basis points, that's obviously kind of where we'd like to be because that shows efficiency in getting tenants open. And it is also an indication about credit quality of your tenancy, if you kind of can maintain a very, very tight SNO as everyone likes to say. Operator: Our next question comes from Craig Mailman with Citi. Unknown Analyst: This is [ Sydney ] on for Craig. I think he was having some technical difficulties. So Wendy, you mentioned that tenants are buying for currently occupied space 2 to 3 quarters and years ahead of expirations now. Is this a significant trend that you're seeing? Or is this more anecdotal? And how much of this activity actually drive the cash spreads on new leases during the quarter? Wendy Seher: Yes. Thank you for the question, [ Sydney. ] When I look at what we've been doing over the last several quarters, you can see that our rate of new deals that are being basically signed up for space that's already occupied has continued to tick up. So maybe it's more in the -- if you look kind of coming out of COVID, we were leasing -- we had more vacancy. We were leasing space that was occupied in the 30%, 40% range. Now we're up to 50%, 60% and this quarter was 70% of what we're leasing is already for occupied space. So I think that will continue as our occupancy and lease rates go up, and I think it's showing a healthy ability to reduce downtime and to level out our revenues quarter-to-quarter, and that's really what we're focused on. Operator: Our next question comes from Hongliang Zhang with JPMorgan. Hong Zhang: I guess a quick question for clarification. I think you talked about FFO growth being kind of in the mid-4s on a recurring basis going forward. Is that just for the current portfolio? Or does that also layer on potential future acquisition and disposition activity, too? Daniel Guglielmone: Yes. No, that's just kind of with what's in place for the most part. It reflects kind of expectations with Annapolis, but it does not assume any incremental acquisitions in -- or speculative acquisitions in 2026. That would be additive given our objective of doing acquisitions that are accretive from day 1, obviously, that is -- the mid-4s is kind of the baseline, and acquisitions will enhance that figure kind of going forward. And so there's no embedded assumptions on speculative acquisitions or dispositions in that number. Operator: Our next question comes from Omotayo Okusanya with Deutsche Bank. Omotayo Okusanya: Could you talk a little bit about the $150 million acquisition that's still meant to happen by year-end? If you could just kind of give us a general sense of kind of what it is, where it is? Daniel Guglielmone: Yes. Jan, you can add on. I'm just going to -- look, we'll announce that when we close on it. We are expecting -- we're under contract. It's roughly $150 million. As Don alluded to, it's kind of in a -- it's a -- it will be a similar market to a Leawood, Kansas type of location. We'll announce that when it closes as is our policy and kind of what we do on a normal basis. Jan, I don't know -- with regards to returns, it's going to be consistent with the returns that we've been achieving on the assets to date. Jan, I don't know if there's any other color, but I think that's what we're probably prepared to give you today, Tayo. Jan Sweetnam: Yes. No, I think you nailed it, Dan. I think the only thing I would just add or reemphasize is, it will -- it's going to be -- it's a great city, it's a great MSA. It fits unbelievably well in the affluent submarket and the affluent customer there is underserved, and there's pent-up demand in the marketplace. And I think that we'll be able to demonstrate that and talk about it once we close it. So that's what I would add. Daniel Guglielmone: Yes. And I'd add another thing that this is an off-market transaction, something that was sourced off market. And it fits perfectly within kind of the new Federal playbook in terms of top metros with a dynamic employment, dominant assets with a meaningful size and significant trade area, affluence, unmet retail demand and proven hits and checks all of those boxes. So we're excited about it and stay tuned. Operator: Our next question comes from Linda Tsai with Jefferies. Linda Yu Tsai: It sounds like including what you have under contract to sell, $200 million closing by year-end and another $200 million closing in 2026, you can be selling up to the $1.5 billion you've identified. Is it feasible to replenish with another $1.5 billion and recycle that as well? Just wondering about the length of runway for unlocking of value creation? Daniel Guglielmone: Yes. Look, it's a great question, Linda, and thanks. I think that the -- that gives us runway probably into '27 and the existing $1 billion gives us a runway. These are identified. We think that they'll attract interest from the market and so forth. Do we have more behind that? Is there -- yes. I mean we can kind of delve in. I think this is the near term, the next 18, 24, 36-month pool that we're considering. And is there more behind it? Yes. We need to be thoughtful. A lot of what we own in our portfolio has significant gains because we've created significant amounts of value in these assets. And so we need kind of to be thoughtful with regards to managing that. Ideally, we'd like to do that through 1031 exchanges. So that also is kind of a governor. But to the extent we need to accelerate because we see more opportunities in the market to deploy capital on the acquisition front or in redevelopments and so forth, we have that ability to accelerate and move up some of the pool to the forefront of activity in our asset sale process. Operator: Our next question comes from Kenneth Billingsley with Compass Point. Kenneth Billingsley: I just want to follow up. I think you made some comments on the leasing side. But looking at renewal rates of up 29%, GLA was the highest in the last 12 months. Can you maybe just discuss -- there weren't a lot of TIs in there. Could you just maybe discuss what formulated such a high increase on a renewal basis? Daniel Guglielmone: Look, we were able to push rents on the renewal. Look, timing of renewals, it ebbs and flows. We happen to have a significant kind of opportunity this quarter and those deals got done. There were some really strong renewal rates that we were able to achieve. And in terms of the volume of renewals, that happens, that will ebb and flow over time. I think there were a number of deals that we're able to get renewals at rates that were kind of above average. I would not expect us to maintain, continue to be driving renewal rates. I would look also on a trailing 12-month basis, maybe a little bit lower just because renewals tend to be a little bit lower. But I would look at kind of a more normalized number is looking at the trailing 12, which is in our supplement on the leasing page there. Operator: Our next question comes from Paulina Rojas-Schmidt with Green Street. Paulina Rojas Schmidt: This is a more big picture question. You have highlighted that the recently acquired centers have a very clear significant operational upside. Do you think these acquisitions, along with the broader market focus are a turning point for the company in terms of expected growth? Or you are more maintaining a growth trajectory, essentially replacing more mature centers for others that will drive the next phase of growth? And yes, I hope my question is clear. Daniel Guglielmone: Yes, I think I understand. And it's a good question, Paulina. Look, we are seeing kind of the opportunity to buy assets that are more raw material to kind of put into our -- kind of the Federal business model, where we can really drive merchandising, leasing, rents, invest capital on a disciplined basis to really drive and enhance returns for those assets. I think that, that is something that is additive. It's no different. Look, we are able to do that on our existing portfolio as well. But I think we see the opportunity to sell some of the assets that maybe we have done a really, really good job of harvesting the opportunity in the near term and see that as an attractive source of capital to redeploy into assets that can enhance our growth rate. But I don't see it as a turning point. I think it's more a continuation of what we do well. I think we're seeing an opportunity to harvest gains in our portfolio and redeploy them into -- and really to enhance our growth rate, but it's really just a continuation and an expansion of what Federal has always done. Operator: [Operator Instructions] We have a follow up question from Alexander Goldfarb with Piper Sandler. Alexander Goldfarb: As you guys look at some of the expansion markets, that you're -- obviously, Leawood and then whatever the next city is, do you see that perhaps retailers or rents haven't been pushed as much as they have in those markets? I'm just trying to understand like, obviously, everyone knows like the infill markets like Philly area or New York Metro or D.C. Metro and retailers know that, hey, you have to pay big rents, there's big incomes. But just wondering, as you go to some of these next -- some of the Midwest markets and just different legacy of ownership, do you find that the rents have been pushed in the same way? Or is there -- is that part of the opportunity? I'm just trying to understand if it's more just, hey, new area for growth, versus actually the way the markets have worked, they maybe haven't been as efficient because just different types of ownership that may have existed there versus in the coastal markets. Daniel Guglielmone: Yes. I'm going to let Stu Biel answer that one. You guys all met Stu on our Leawood trip. Stu, you're probably at the forefront of that. Stuart Biel: Yes. Alex, thanks for the question. I think the short answer is there is a lot of runway on the rents here. They have not been pushed as hard. The properties haven't been invested in the right way to push them as hard. At the end of the day, this is all a fraction of -- the function of the volume the tenants believe they can do here. I think we showed you guys, when we were at Leawood, the volumes that were coming out of that property before they had been kind of running the way that we would run them. And so I do think that's a big part of this push is there is a lot of runway to continue to upgrade the merchandising, push the sales, invest in the properties and push those rents to get closer to what they're used to paying in other places in the country. Operator: This concludes our question-and-answer session. I would like to turn the conference back over to Jill Sawyer for any closing remarks. Jill Sawyer: Thank you for joining us today. Have a nice weekend, everyone. Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Operator: Good morning, and thank you for standing by. Welcome to the AbbVie Third Quarter 2025 Earnings Conference Call. [Operator Instructions] Today's call is also being recorded. If you have any objections, you may disconnect at this time. I would now like to introduce Ms. Liz Shea, Senior Vice President of Investor Relations. Thank you. You may begin. Elizabeth Shea: Good morning, and thanks for joining us. Also on the call with me today are Rob Michael, Chairman and Chief Executive Officer; Jeff Stewart, Executive Vice President, Chief Commercial Officer; Roopal Thakkar, Executive Vice President, Research and Development, Chief Scientific Officer; and Scott Reents, Executive Vice President, Chief Financial Officer. Before we get started, I'll note that some statements we make today may be considered forward-looking statements based on our current expectations. AbbVie cautions that these forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from those indicated in our forward-looking statements. Additional information about these risks and uncertainties is included in our SEC filings. AbbVie undertakes no obligation to update these forward-looking statements, except as required by law. On today's conference call, non-GAAP financial measures will be used to help investors understand AbbVie's business performance. These non-GAAP financial measures are reconciled with comparable GAAP financial measures in our earnings release and regulatory filings from today, which can be found on our website. Following our prepared remarks, we'll take your questions. So with that, I'll turn the call over to Rob. Robert Michael: Thank you, Liz. Good morning, everyone, and thank you for joining us. AbbVie's business continues to perform above our expectations. We delivered another excellent quarter, including strong financial results, pipeline advancement across all stages of development and strategic investments to drive sustainable long-term growth. Given our positive momentum, we are raising our 2025 outlook for the third time this year. Starting with our third quarter performance, we delivered adjusted earnings per share of $1.86, which is $0.10 above our guidance midpoint. Total net revenues were nearly $15.8 billion, reflecting high single-digit sales growth and beating our expectations by approximately $300 million. I'm especially pleased with the execution of our growth platform, including combined sales growth of more than 40% from Skyrizi and Rinvoq, our leading immunology medicines as well as double-digit revenue growth from neuroscience, our second largest and fastest-growing therapeutic area. With no significant LOE events in the near term, our growth platform provides a clear line of sight to growth into the next decade. This puts AbbVie in a strong position to fully invest for the 2030s and beyond. Since our inception in 2013, we have invested more than $84 billion to research, discover and develop new medicines and solutions for patients. We anticipate $9 billion of adjusted R&D expense in 2025, a substantial increase from the prior year. This supports numerous pipeline opportunities across our core areas: immunology, oncology, neuroscience and aesthetics as well as new sources of growth like obesity. More broadly, I'm very pleased with the breadth and depth of our robust pipeline with approximately 90 programs across all stages of development. We are making excellent progress and expect several important milestones over the next 2 years, including new product approvals for tavapadon and PVEK, expanded indications for Rinvoq, Epkinly, Qulipta and Ubrelvy and pivotal data for lutikizumab, Temab-A and etentamig. These pipeline programs have the potential to drive growth for AbbVie later this decade. We also continue to invest in external innovation, adding novel mechanisms and platform technologies to further augment our pipeline to drive growth in the 2030s and beyond. Our recent deal activity includes announcing the acquisition of Gilgamesh's bretisilocin, expanding our psychiatry pipeline with a next-generation psychedelic currently in Phase II development for MDD. And closing the acquisition of CapstanTherapeutics, further strengthening our immunology pipeline with an in vivo CAR-T platform. Our consistently strong performance as well as the progress we are making to build and advance a robust pipeline fully supports our capital allocation priorities. This includes investing at least $10 billion of capital in the U.S. over the next 10 years. Construction is already underway for a new API manufacturing site in North Chicago as well as expansion of biologics manufacturing and R&D capacity at our existing site in Worcester. We are also committed to delivering a healthy, sustainable dividend that grows every year. Today, we announced a 5.5% increase in our quarterly cash dividend, beginning with the dividend payable in February 2026. Since inception, we have grown our quarterly dividend by more than 330%. In summary, this is an exciting time for AbbVie. We are demonstrating outstanding execution across our portfolio, and our long-term outlook remains very strong. With that, I'll turn the call over to Jeff for additional comments on our commercial highlights. Jeff? Jeffrey Stewart: Thank you, Rob. I'll start with the quarterly results for immunology, which delivered total revenues of approximately $7.9 billion, up 11.2% on an operational basis. Skyrizi and Rinvoq continue to exceed our expectations, once again demonstrating robust growth across a broad set of indications. Skyrizi global sales were $4.7 billion, reflecting operational growth of 46%. Rinvoq global revenues were nearly $2.2 billion, up 34.1% on an operational basis. I'm especially pleased with our portfolio performance in gastroenterology, where these 2 medicines are on pace to nearly double their combined sales in IBD this year. Our uptake in Crohn's disease remains impressive with Skyrizi and Rinvoq together achieving in-play share leadership in a dozen countries. This includes capturing roughly 50% of newer switching Crohn's patients across all lines of therapy in the U.S. We see similar momentum in ulcerative colitis as well with Skyrizi and Rinvoq collectively holding in-play share leadership in more than 10 key markets and capturing nearly 1 out of every 3 newer switching UC patients across all mechanisms in the U.S. IBD continues to be an area of high unmet need with substantial headroom for biologic penetration as well as expanding lines of therapy. Given the compelling efficacy, safety and dosing profiles for both assets, Skyrizi with less frequent dosing favored by patients and clinicians, especially for the maintenance treatment relative to the most effective dose for other IL-23s. And Rinvoq, often preferred for difficult-to-treat IBD cases, having demonstrated the strongest response rates in UC studies as well as very strong efficacy in CD as well. Along with Rinvoq's recently expanded label in IBD, which is a great outcome for patients who will now have access to Rinvoq earlier in the treatment paradigm when anti-TNF treatment is clinically and advisable. So we remain very competitively positioned for continued strong growth across gastroenterology. Moving to the rest of our core immunology indications. Skyrizi continues to perform exceptionally well in psoriasis, gaining share across our key markets. This includes an impressive 50% in-play patient share for biologics in the U.S. Rinvoq is also delivering strong prescription growth in rheumatology. In RA, Rinvoq continues to achieve the leading in-play patient share across lines of therapy. We now have 3 head-to-head studies demonstrating Rinvoq's superiority to other biologics in RA, including recent positive data from our SELECT-SWITCH trial, which clearly supports the clinical benefits of switching to Rinvoq after a first TNF failure. Lastly, we are seeing a very nice ramp in GCA, where Rinvoq now has full formulary coverage. I'm very pleased with the progress and look forward to the commercialization of additional sizable indications like alopecia areata and vitiligo. Turning now to Humira, which delivered global sales of $993 million, down 55.7% on an operational basis, reflecting biosimilar competition. We continue to anticipate Humira access in the U.S. will decrease throughout the remainder of this year and into 2026 as more plans select exclusionary contracts for existing patients. This step-up in volume erosion is expected to be partially offset by a price benefit also associated with these contract changes, which is included in our fourth quarter outlook. Moving to oncology, which delivered total revenues of nearly $1.7 billion, relatively flat versus prior year. Momentum from Venclexta as well as newer products, Elahere, Epkinly and EMRELIS helped to offset the expected sales decline from Imbruvica, which continues to be impacted by competitive dynamics in CLL. Overall, I'm very pleased with the progress we are making to expand our commercial capabilities in both heme and solid tumors with our existing portfolio. These efforts will ultimately support our emerging oncology pipeline, which includes several promising programs to improve patient outcomes in many difficult-to-treat cancers. Turning now to aesthetics, which delivered global sales of approximately $1.2 billion, down 4.2% on an operational basis. Botox Cosmetic global revenues were $637 million and Juvederm global sales were $253 million, with growth rates for both products down on an operational basis. While our portfolio is performing well from a competitive perspective, we continue to face challenging market conditions in several key markets, which are impacting our results. With overall consumer sentiment remaining quite low, especially in the U.S. as concerns about the economy and inflation weigh on discretionary spending, we now see category growth tracking below our previous assumptions globally. However, this near-term macro pressure does not dampen our excitement for the long-term potential of our leading aesthetics portfolio. We are investing to support patient activation with robust promotion and product innovation. We recently launched new consumer campaigns for BOTOX as well as fillers to further stimulate category growth, which remains highly underpenetrated and where we stand to disproportionately benefit upon market recovery giving our leading product shares. Innovation from our pipeline, including novel toxins like TrenibotE, a fast-acting short-duration toxin as well as several next-generation fillers will also provide growth in the coming years. Moving now to neuroscience, which is demonstrating exceptional performance. Total revenues were more than $2.8 billion, up 19.6% on an operational basis. I'm very pleased with our leading migraine portfolio with Ubrelvy, Qulipta and Botox Therapeutic all delivering robust double-digit growth. Qulipta is now the #1 CGRP treatment for migraine prevention with a total prescription share of approximately 7.5%. Vraylar is also performing well in both bipolar and [ AMDD ] with total sales of $934 million, up 6.7%. Physicians continue to report positive feedback on Vraylar's strong benefit risk profile, including dosing flexibility, low sedation and the ability to address anhedonia and anxiety symptoms often associated with depression. Lastly, in Parkinson's disease, VYALEV's launch trajectory has been very impressive. Total sales were $138 million, up 40% on a sequential basis. The uptake across international markets continues to exceed our expectations with physicians and patient communities highlighting meaningful improvements in on time and off time from the 24-hour delivery and the control of symptoms throughout the morning, day and night. VYALEV is the only Parkinson's treatment that often replaces the need for add-on oral therapies to manage motor fluctuations, reducing the daily pill, pill burden for these patients. We anticipate expanded coverage of VYALEV in the U.S. soon, which we expect will provide further revenue inflection next year. I'm also excited about tavapadon, where we are pursuing approval for use as a monotherapy for early Parkinson's disease as well as an adjunct to optimize oral therapy for more advanced patients. This will be a very complementary offering for both VYALEV and DUOPA. Given the significant commercial opportunity with our emerging Parkinson's portfolio, we are now actively expanding our field sales team to support higher anticipated demand next year. Overall, again, we are demonstrating strong revenue growth and our commercial execution has been outstanding. And with that, I'll turn the call to Roopal for comments on our R&D highlights. Roopal? Roopal Thakkar: Thank you, Jeff. Starting with immunology, we announced positive top line results from the second Phase III Rinvoq alopecia areata trial, reinforcing the potential for Rinvoq to significantly improve hair regrowth for patients suffering from severe forms of this condition. Data were consistent with the results from the first trial with Rinvoq demonstrating meaningful improvement in hair regrowth across both doses compared to placebo. We remain on track to begin submitting regulatory applications later this year. We also recently announced positive top line results from 2 Phase III Rinvoq vitiligo trials. In both studies, Rinvoq met the co-primary and key secondary endpoints at week 48, demonstrating improvements in both total body and facial vitiligo scoring compared to placebo. We are very pleased with these results, which illustrate Rinvoq's potential to provide significant skin repigmentation to patients suffering from nonsegmental vitiligo. The daily challenges of living with this condition can often lead to depression and anxiety. With no approved systemic treatments, there is very high unmet need for these patients. Once approved, Rinvoq could potentially be the first systemic therapy available for vitiligo. Regulatory submissions are planned for early next year. Positive top line results were also announced from the SELECT-SWITCH trial, which compared Rinvoq to Humira in RA patients who had an inadequate response or intolerance to their first TNF inhibitor. This is the first head-to-head study comparing anti-TNF cycling versus switching to Rinvoq. In the study, Rinvoq demonstrated superiority to Humira for efficacy measures with nearly twice as many patients achieving low disease activity and remission. For RA patients who did not respond well to their first TNF inhibitor, these results clearly show the benefit of switching to Rinvoq rather than cycling to another anti-TNF. In IBD, Rinvoq recently received a label update in Crohn's disease and ulcerative colitis, allowing its use prior to anti-TNFs in patients who have received at least one approved systemic therapy when TNF inhibitors are clinically inadvisable. The treatment paradigm has evolved in IBD with increasing utilization of newer, higher efficacy agents like Skyrizi. There are certain clinical scenarios when an anti-TNF may not be the most appropriate next treatment option for a patient. This label update provides physicians with the flexibility to use Rinvoq prior to anti-TNFs for certain patients after they have tried another approved systemic therapy. Moving to oncology. The regulatory application was submitted to the FDA for PVEK in blastic plasmacytoid dendritic cell neoplasm. This rare aggressive blood cancer primarily affects an older population who is at high risk for complications with traditional chemotherapy or precluded from stem cell transplantation. As a new treatment providing durable responses with a manageable safety profile, our novel ADC has the potential to become an important new therapeutic option for these patients. At the recent ESMO meeting, we presented 3 orals for Temab-A, highlighting this novel ADC's potential, both as a monotherapy and in combination across advanced difficult-to-treat solid tumors. In CRC patients who received 2 or more prior lines of therapy and regardless of c-MET expression levels, Temab-A in combination with bevacizumab demonstrated manageable safety and better responses and disease control compared to current standard of care. Treatment with Temab-A at 2.4 milligrams per kilogram plus bevacizumab achieved an objective response rate of 30% and a confirmed disease control rate of 97% compared to rates of 0% and 70%, respectively, for Lonsurf plus bevacizumab. Based on these results, we plan to begin a Phase III study for this combination in late-line all-comers CRC. In a proof-of-concept study in pancreatic cancer, monotherapy Temab-A demonstrated an objective response rate of 24% in the overall population and 40% in patients who received first-line gemcitabine plus, Abraxane. A Phase II study in pancreatic cancer is expected to begin next year. And in an exploratory study in MET amplified solid tumors after progression following standard of care, monotherapy with Temab-A resulted in an objective response rate of 47% and median duration of response of 12.5 months for the 2.4 milligram per kilogram dose. Higher responses were observed in patients with non-small cell lung cancer with a rate of 69% and gastroesophageal cancer with a rate of 71%. A Phase II study in MET amplified solid tumors is expected to begin later this year. We are making significant progress with Temab-A across a broad range of tumors, and there is an increasing body of evidence demonstrating durable efficacy and a manageable safety profile in these difficult-to-treat cancers. We look forward to providing additional updates on Temab-A programs as data mature. In neuroscience, the regulatory application for tavapadon in Parkinson's disease was recently submitted to the FDA. For many patients with Parkinson's, existing oral therapies aren't sufficient to manage symptoms. Our selective D1/D5 receptor partial agonist demonstrated robust efficacy as a monotherapy in early Parkinson's disease and as an adjunct to levodopa-carbidopa oral therapy in patients still experiencing motor fluctuations. Once approved, we believe tavapadon will be an important new treatment option. Results from a Phase II study evaluating BOTOX in upper limb essential tremor were recently presented at the MDS Congress. In the study, BOTOX met the primary and all secondary endpoints, demonstrating significant improvements in all assessment measures compared to placebo. With a global patient population of about 25 million, essential tremor is the most common movement disorder. This progressive neurological condition can substantially hinder patients' physical activities and diminish their quality of life. Current treatment options are limited in terms of both efficacy and tolerability, leaving considerable need for new therapies. Based on these results, we plan to advance a new toxin for upper limb essential tremor. TrenibotE is a novel toxin that has demonstrated different pharmacologic properties preclinically compared to BOTOX, such as less diffusion to neighboring muscles. Phase II studies for TrenibotE in essential tremor and ventral hernia repair will begin next year. To further expand our neuropsychiatry pipeline, we acquired bretisilocin from Gilgamesh. Bretisilocin is a novel (5-HT)2A receptor agonist and 5-HT releaser with a short duration of hallucination that has demonstrated robust efficacy in a Phase II proof-of-concept study in major depressive disorder. Rapid efficacy was achieved after the initial dose with response and remission maintained through day 74 without additional intervention. This novel psychedelic has the potential to provide significant benefit to patients by offering rapid, robust and durable antidepressant effects following a short in-clinic treatment session. Additional Phase II studies in depression are expected to begin next year. To summarize, we continue to make good progress across all stages and therapeutic areas of our pipeline and look forward to many important pipeline milestones in the remainder of this year and into 2026. With that, I'll turn the call over to Scott. Scott Reents: Thank you, Roopal. Starting with our third quarter results, we reported adjusted earnings per share of $1.86, which is $0.10 above our guidance midpoint. These results include a $1.50 unfavorable impact from acquired IPR&D expense, primarily reflecting upfront charges for the acquisition of Capstan Therapeutics and our license agreement with IGI. Total net revenues were nearly $15.8 billion, reflecting growth of 8.4% on an operational basis, excluding a modestly favorable impact from foreign exchange. Importantly, our ex-Humira growth platform delivered reported sales growth of more than 20%, once again exceeding our expectations. Adjusted gross margin was 83.9% of sales, adjusted R&D expense was 14.3% of sales and adjusted SG&A expense was 21.6% of sales. The adjusted operating margin ratio was 30.9% of sales, which includes a 17% unfavorable impact from acquired IPR&D expense. Net interest expense was $667 million. The adjusted tax rate was 24.5%, reflecting the lower deductibility of acquired IPR&D expense this quarter. Turning to our financial outlook. We are raising our full year adjusted earnings per share guidance to between $10.61 and $10.65. Please note that this guidance does not include an estimate for acquired IPR&D expense that may be incurred beyond the third quarter. We now expect total net revenues of approximately [ $16.9 billion, ] an increase of $400 million. This updated forecast primarily reflects Skyrizi global sales of $17.3 billion, an increase of $200 million with continued share gains in psoriasis and IBD. Neuroscience global revenues of $10.7 billion, an increase of $200 million, reflecting continued strength across Vraylar, Botox Therapeutic, VYALEV and the total oral CGRP portfolio. Aesthetics total sales of $4.9 billion, a decrease of $200 million, reflecting greater-than-expected market softness globally, with the remaining $200 million increase reflecting the collective momentum from Rinvoq and several other products across our diverse portfolio. And we also continue to assume a relatively neutral impact from foreign exchange on full year sales growth. Moving to the P&L for full year 2025. We continue to expect adjusted gross margin of 84% of sales, adjusted R&D expense of $9 billion and adjusted SG&A expense of $13.5 billion. We now anticipate an adjusted operating margin ratio of approximately 41% of sales, in line with our previous expectations after including the roughly 6% unfavorable impact of acquired IPR&D expense incurred through the third quarter. And we now forecast our non-GAAP tax rate to be approximately 17.3%, also reflecting the impact of acquired IPR&D. Turning to the fourth quarter. We anticipate net revenues of more than $16.3 billion. This reflects an estimated 1% favorable impact from foreign exchange on sales growth. We expect adjusted earnings per share between $3.32 and $3.36. This guidance does not include acquired IPR&D expense that may be incurred in the quarter. Finally, AbbVie's robust business performance continues to support our capital allocation priorities. Our cash balance at the end of September was more than $5.6 billion, and we generated approximately $13 billion of free cash flow in the first 9 months of the year, which includes nearly $2.2 billion of Skyrizi royalty payments. This free cash flow fully supports strong and growing quarterly dividend, which we are increasing 5.5% to $1.73 per share, beginning with the dividend payable in February 2026. As well as capacity for continued business development, we have executed approximately 30 deals since the beginning of 2024, and we continue to assess external innovation across all of our key growth areas. We also remain on track to achieve a net leverage ratio of 2x by the end of 2026. In closing, AbbVie once again delivered outstanding results and our financial outlook remains very strong. With that, I'll turn the call back over to Liz. Elizabeth Shea: Thanks, Scott. We will now open the call for questions. [Operator Instructions] Cedric, we'll take the first question, please. Operator: Yes. And our first question comes from Terence Flynn with Morgan Stanley. Terence Flynn: Congrats on the quarter. Two for me. I guess the first is just, Rob, would love your perspective on the potential implications for your business of the new PBM model that Cigna discussed on their earnings call yesterday, I believe. And then IRA price negotiations recently concluded. And just wondering if you're able to comment at all on how those went for Vraylar and Linzess? Robert Michael: Thanks, Terence. So this is Rob. I'll start with your first question. I'm going to have actually Jeff supplement as well. But I think one thing that's important to think about as it relates to whether it's PBM reform, questions we've got on DTC, ultimately, what drives AbbVie's performance is our differentiated medicines, along with our execution track record and strong culture. And that's why we deliver similar strong performance in markets outside the U.S. where PBMs and DTC do not play a role. So now given our ability to execute, we are very good at utilizing the tools that are available to us. If there are changes to the PBM model, we will certainly be able to adapt effectively. I mean I think for us, as we think about it, the key is to continue developing differentiated medicines as that is what delivers real value and can drive growth in any environment. And I'll let Jeff speak more specifically to how we see the PBM model playing out. Jeffrey Stewart: Yes. Thanks, Rob. And just to sort of reiterate this approach. I mean, if you think about some of these announcements over the years, whether it's rebate pass-through or there's existing models like this that work today. And we think there's a lot of merit to that, like the ability for patients to share and lowering their out-of-pocket cost at the counter is a good approach. There's been a lot of structural barriers to that, of course, over the years. Sometimes it's the clients don't really have the incentive to go in based on how they're using those rebates, maybe to lower premiums. We all know those stories. I think the key point is Rob's point that across my global footprint, we're used to dealing with any type of approach, whether it's a net price market, it's a rebate-driven market or a hybrid market that's net price and rebate like Germany or HTA markets. So we're very, very adaptable to sort of any sort of structure because we rely on the distinctiveness of our brands. And when we position those in the right way, which we always do, we perform exceptionally well from a market share and a competitive perspective. So we'll continue. We don't know a lot of the details, but we talk to Cigna all the time. Our account teams talk. We talk at the executive level. So we'll continue to study it, but we're very confident in terms of if there were to be changes in the PBM model, we would adapt very well. Robert Michael: And Terence, this is Rob again. On your question regarding IRA, the prices are obviously not yet public. But I would say that the administration's focus on achieving greater reductions in this year's round was very clear. That said, the outcomes for Vraylar and Linzess will not impact our long-term guidance. Operator: Yes. Our next question comes from Chris Schott with JPMorgan. Christopher Schott: Just would love a little bit more of a discussion on the IL-23 market. Obviously, Skyrizi doing really well here. But just with the TREMFYA subcu induction dosing kind of rolling out, what are you seeing in terms of competitive dynamics and positioning? And how do you see kind of the dynamics between those you and that -- and your nearest competitor kind of evolving over time? And then my second question is just any initial look on 2026 as you think about the various pushes and pulls in the business? And anything in particular you think the Street isn't properly accounting for as we think about the outlook for next year? Jeffrey Stewart: Yes. Chris, it's Jeff. I'll take your first question. So yes, we are very pleased with Skyrizi's growth overall and in the quarter. I mean, 46% year-over-year is quite strong. So -- and we see that momentum with share gains, it's market growth, and we retain a very, very strong in-play share position in IBD. It's really a leadership position -- what we do see is we know that TREMFYA is going to gain some market share and in-place share. But what's actually happening is the category or the class of IL-23 is expanding incredibly rapidly. And we view this as a positive. We said before, this is not a zero-sum game. We're very confident in our competitive position. I'll give you a little bit of some numbers, more -- some more recent numbers to see how dramatic this is. So just over a year ago, when the IL-23 were entering, the NBRx share for UC, this is ulcerative colitis, which is the smaller of the 2 was around 5%. That was the penetration rate. Now it's approaching in this latest quarter, close to 40%. So this is a dramatic change in the adoption of the IL-23s. Skyrizi continues to grow. TREMFYA will grow. There's -- yes, there are subtle differences, but we're super confident in where this product will go. So Skyrizi is performing very, very well and we'll continue to do so. And don't forget, it's just not a Skyrizi story. AbbVie has uniquely sort of a one-two punch in this market. We've got Skyrizi and Rinvoq. And as I mentioned in my prepared remarks, our position with Rinvoq just got significantly stronger for gastroenterologists and patients with that enhanced indication. So what that allows to do is that physicians, if they choose, if someone is not eligible or it's inadvisable clinically for a TNF, you can go right to Rinvoq. So it's a really, really powerful position and setup for AbbVie right now and over time. So that's basically what we're observing in the marketplace. Roopal Thakkar: And Chris, it's Roopal. For subcutaneous for Skyrizi, we'll see data next year for our own induction. And then that plus IV still leads to every 8-week dosing, which continues to be a major advantage. Robert Michael: And Chris, this is Rob. Regarding your question on 2026. Look, our business continues to perform exceptionally well. We've raised our revenue forecast this year by nearly $2 billion since our initial guidance in February, and that's not just coming from Skyrizi and Rinvoq. We're seeing overperformance across the entire neuroscience portfolio and oncology is ahead of our original guidance as well. That momentum should allow us to deliver strong growth next year despite headwinds from continued Humira erosion and Imbruvica IRA pricing. Recall that Imbruvica was negotiated and that pricing will kick in next year. And Humira erosion will continue, albeit not at the same absolute level as we saw in 2025. When I think about just the growth platform, in particular, obviously, a lot of attention is placed on Skyrizi and Rinvoq appropriately. But in neuroscience, when you think about the performance of Vraylar, our migraine franchise, inclusive of Botox Therapeutic, which a little bit over 40% of that business is for chronic migraine. And then VYALEV, we're just seeing tremendous ramps. And we're also starting to now see, as Jeff mentioned, we expect in the inflection, particularly with the U.S. We've seen some nice progress there. But I would say that will be a very nice growth driver for us in 2026. And so we're very pleased with the performance. Obviously, clearly, the momentum is there. We've now beaten and raised it every quarter of '25. And of course, we'll provide specific guidance for '26 on the fourth quarter call. Operator: Our next question comes from Vamil Divan with Guggenheim Securities. Vamil Divan: So I have 2, if I could. So one just around -- thanks for the comment, 2025 and now 2026. My question is actually around the 2027 guidance you've given for Skyrizi and Rinvoq before you be clearly on track to exceed that. I'm curious your thoughts around updating the Street on sort of your longer-term outlook for Skyrizi and Rinvoq. And then the other question is on the aesthetic side. Can you just comment on the latest market share since you have for both BOTOX and Juvederm in the U.S? Robert Michael: So Vamil, this is Rob. I'll take your first question. So as you recall, we updated the 2027 guidance for Skyrizi and Rinvoq during the Q4 call earlier this year. And since then, we have raised the combined guidance for 2025 by over $1.7 billion. So it's reasonable to assume that we will exceed that long-term guidance. And I think that will be very clear when we provide 2026 guidance on the upcoming Q4 call. Now we have provided long-term guidance in the past really to help investors understand what the company will look like on the other side of the Humira LOE event. We said we would rapidly return to robust growth and deliver high single-digit compound revenue growth from '24 to '29. And we gave product specifics to support that high single-digit growth outlook. I mean sitting here today, we have clearly demonstrated the rapid return to growth. Our 2025 sales outlook exceeds our previous peak by almost $3 billion, and that's within 2 years of the LOE event. And the Street now reflects our high single-digit growth outlook for this decade. I'd say there appears to be good recognition of our momentum with Skyrizi and Rinvoq, though they do continue to perform above our own expectations. And there's recognition that our diversified growth platform can drive top-tier performance. That said, there are a few things that remain underappreciated. I think one is our strategy to continue innovating in immunology and drive growth beyond Skyrizi and Rinvoq, both in terms of combination approaches with Skyrizi or Rinvoq as a backbone and through new platforms such as oral peptides and B cell depletion approaches. We also have lutikizumab in our pipeline. We have a TL1A. We have a TREM1 antibody. So I think there's quite a bit of depth here in the immunology pipeline that can set us up to grow beyond Skyrizi and Rinvoq. And I don't think that's always appreciated. We also do not see enough investor focus on our neuroscience franchise. It's increased but it's still not at the level that I think it should be given it's our second largest therapeutic area and the fastest growing in our portfolio. We have very strong positions in psych and migraine and an emerging leadership position in Parkinson's with VYALEV and tavapadon. We also have an opportunity to transform care for essential tremor. The Aliada platform also gives us the potential to advance Alzheimer's treatment. And our Gilgamesh and Gedeon Richter deals give us more depth in mood disorders. So at the same time, we are starting to see more attention on our oncology pipeline, including Temab-A in several solid tumors, etentamig in multiple myeloma, 706 in small cell lung cancer as well as the recent BD transactions for trispecific antibodies from Simcere and IGI. And given our clear runway to growth into the next decade, we are in a very strong position to continue increasing our R&D investment and acquiring more external innovation that can help drive long-term growth. So to me, it's more important that investors appreciate the depth of our pipeline that can drive growth in the next decade versus updating financial guidance again for this decade. Jeffrey Stewart: And Vamil, it's Jeff. I'll just give you some of the sense you asked about the dynamics in the U.S. with aesthetics. So really, just to start with the market. If you look at the U.S. toxin market, it's really in a flattish position in the U.S. The filler market has been problematic. It's been down double digits. When you look at our share, what we can see is that year-over-year, we are lower than we were last year because of the [indiscernible] reimagined. But sequentially, we're growing. So we sit in the low 60s in terms of BOTOX share, and that's a clear leadership position by a large margin in the U.S. When you look at the HA filler, generally, that's in the mid-40s, call it, 45%, and that's largely been very stable. So that gives you some sense of the dynamics. The big thing is as the leader, we have to invest and we are investing in the market, as I mentioned in my remarks. We have a significant BOTOX consumer campaign that's in the market. We're starting to see some nice pickup there. So we're encouraged. We have an HA filler sentiment campaign to make sure that we're working with all of our clinics to make sure we can revitalize and get that market stabilized and more robust because you really do need HA fillers to really get the aesthetics outcome. So we believe we can rehabilitate that segment. And we also have opened 3 very significant training and sort of practice growth centers around the country to continue to lead that marketplace. So that gives you a sense of the metrics that you were asking for. Operator: Our next question comes from Matt Phipps with William Blair. Matthew Phipps: Congrats on another great quarter. Now the Gilgamesh acquisition closed, I wonder if you could give us any details on how you might design future studies, especially around the use of a low-dose active control. Maybe how do you see this fitting into the overall MDD treatment paradigm given the in-clinic administration? Roopal Thakkar: Yes. Thanks, Matt. It's Roopal. We're very excited about this approach. With other psychedelics, they tend to have a very long tail, especially around hallucination. And this one has a very short duration. So when it's in clinic, it will be a short duration. And a lot of clinicians are prepared to do this already. So we're not worried about having that being a barrier for uptake. There is so much depression and unmet need, we think that patients and caregivers would really like more options like this one. The other benefit that we saw is a longer duration after just 1 or 2 doses. And that maybe speaks to this potential concept of rewiring. So we're very excited about that. So the key for us is in depression, looking at different doses and looking at different duration paradigms, and we're going to do that in Phase II and ultimately move into Phase III. There is this regulatory need for a low-dose comparator, and that's because of the potential unblinding. And the Phase II study that we've -- that Gilgamesh has already posted was against a low-dose comparator, and you saw those very large deltas. So that's what we're excited about, and we think there's opportunities in different lines of depression and potentially other mood disorders that we're going to investigate to go beyond just major depression. Operator: Our next question comes from David Amsellem with Piper Sandler. David Amsellem: So I wanted to drill down on your Parkinson's franchise. Can you talk to uptake of the [ VYALEV ] and specifically what you're seeing regarding competitive dynamics given the availability of an [indiscernible]? So that's number one. And then on tavapadon, which you've talked about increasingly, you've got adjunctive therapy and also monotherapy here, so pretty versatile. But also bearing in mind that with oral therapies, it's highly genericized. So how are you thinking about sales potential there and ultimately, where you see a role in practice for tavapadon? Jeffrey Stewart: Yes. Thanks for the question. I'll start off and then turn it over to Roopal. So as Rob and I mentioned, we're very, very pleased with VYALEV around the world with sales ramping very, very nicely. And it is levodopa-carbidopa. So it's the gold standard. It's just the ability to get that in the subcu version. Cause is incredible disease stability and recovery. So we do see a lot of distinction versus, let's say, the competitors, and we've dealt with the competitors around the world. It's relatively new in the U.S. So in terms of what we see on the market perspective, the in-play capture right now is roughly 80%, 85% in favor of VYALEV. And that's because of the 24-hour coverage, you have far less supplemental orals. The levels of control are great, particularly when you wake up and you're through the night. The other metric that we look at is, in some cases, we've launched VYALEV after subcu apomorphine has been available in the international countries. And essentially, the shares invert very, very rapidly. So we're quite confident in the both short- and long-term position for a product like VYALEV. It really is an exceptional medication. So I'll turn it over to Roopal to talk about the tavapadon development and then ultimately, he and I can talk about where the positioning might be. Roopal Thakkar: Yes. Thanks, Jeff. It's Roopal. Let me start on the VYALEV side briefly, dovetailing on what Jeff just went through. So on the R&D side, we've received very favorable feedback thus far from caregivers and patients. And I would say the word transformative is the common theme. And the benefit of VYALEV is a full 24-hour opportunity for state of control. And that facilitates the ability to sleep and the ability to wake up on ready to go and face the day. The competitor that you mentioned is a 16-hour profile, so may not afford that same 24-hour control. Also, as Jeff had mentioned, VYALEV delivers a meaningful dose of levodopa-carbidopa. So what that means is patients -- many patients no longer require their oral therapy. So that means a monotherapy simplified approach is possible. The competitor is provided as an adjunct. So you won't be able to get off of your oral therapies. Also with VYALEV, when you look at the maintenance phase, dyskinesia rates are very low. And with the competitor you mentioned, they're roughly 15% up to 30%. The other benefit of VYALEV from a competitive standpoint is we see less than a 5% rate of sedation. And with apomorphine, it's around 20%. And also VYALEV, we have limited headaches, and this is in the teens with apomorphine. Also, another benefit of VYALEV is no warnings for orthostatic hypertension or falls that can't be said about the competitor. And also, we have very low rates in no need for treatment for nausea. And with apomorphine initiation, you need an antiemetic and often that need to be taken 3 times a day. So as Jeff stated, I think we're very well positioned from a competitive standpoint with VYALEV for all the reasons I just mentioned. And then I think it's very important that we mentioned tavapadon. I spoke about just it's being submitted. And this will be a very nice complement to VYALEV as a monotherapy and as an adjunct. It's a once-a-day profile that has a long half-life, and it's going to allow patients to optimize their regimen before the need to moving to advanced therapies. And where our clinicians are excited about differentiation from existing oral generics is the efficacy, which approaches levodopa-carbidopa and the safety profile, that could be a key differentiator, and that's what our experts are telling us about. Specifically impulse control disorders, just around 1%. We've seen others reach as high as 30% or 40%. Immediate -- people fall asleep with this one, sedation is less than 5%, dyskinesia around 2% and peripheral edema, which can be quite a nuisance with the generic molecules and very difficult to treat even if you use potent diuretics, we don't see that as a problem, 1% or less with tavapadon. So we think for efficacy, safety, tolerability reasons, it has a chance to differentiate and again, a very nice complement to VYALEV. Operator: Our next question comes from Dave Risinger with Leerink Partners. David Risinger: Yes. So I have 2 questions. The first is, could you please discuss the outlook for accelerating growth as Humira's absolute dollar declines diminish in coming years? And then second, could you, Roopal, just comment on the top few pipeline candidate readouts that we should focus on over the next 6 months? I'm assuming Amylin is one of them, but what are the biggest cards that are turning over in the next 6 months or so? Scott Reents: David, this is Scott. I mean I'll -- some thoughts on your question about accelerating growth. So you're right, Humira continues to erode and step down this year with our guidance, it's going to step down just over -- in the U.S., just over $4 billion. Certainly, that step down in absolute dollars will diminish and will diminish next year as well, of course, given the math. We will see, certainly, though, significant percentage erosion from this year to next year as well. That will continue to erode as the tail starts to form in '26. So when you look at the business, I mean, the business has a number of strong drivers. You've seen the growth of the business today. I think that one thing that we've spoken about several times is our long-term guidance for high single-digit growth through the decade. That will be from the growth that we have this year, we've talked about that accelerating as we hit that. And we still remain extremely confident in our ability to achieve that high single-digit growth through the decade on the top line. The bottom line will continue to expand. This year, our EPS is roughly in line, a little bit ahead of the earnings growth, but we're going to have operating margin expansion driven by leverage and efficiencies in the SG&A line. So you will see earnings growth expand a little bit faster than the revenue growth through the decade with that long-term guidance. Roopal Thakkar: And Dave, it's Roopal. I'll talk about some of the readouts we're excited about moving into 2026. In immunology, our IBD platform will start reading out data next year. This is in combination with Skyrizi, looking at those combos versus monotherapy Skyrizi. Lutikizumab is one of those and the other is our own alpha4beta7-382. So we'll start seeing that data next year. Also in combination with lutikizumab plus [ Arava ] in rheumatoid arthritis, that will be something else to look for. And then maybe turning to oncology for a moment. For Temab-A, we've -- I went through a variety of different positive readouts. Also next year, expect to readout in head and neck cancer and even ovarian cancer, which many of these patients have high c-MET expression, along with etentamig in a variety of different combinations in multiple myeloma. And then our next-gen coming after Elahere, our biparatopic FR alpha antibody 151, we'll start seeing readouts there in platinum-resistant ovarian cancer. And then also next year, we're excited about our -- using our bispecific technology that we spoke about in immunology, along with our linker and warhead technology from oncology putting those together, we have a bispecific ADC that binds to PSMA and STEAP for prostate cancer. And that's another one, I would say, to look for next year. And then in neuroscience, we have our follow-on to VRAYLAR-932. We'll start seeing data in bipolar depression, probably moving into '27, looking for generalized anxiety disorder. And then we'll also be able to give an update on emraclidine we're currently conducting a multi-ascending dose trial to see if we can move the dose above 30 milligrams, and that has already initiated, and we'll be able to give an update on where the dose lands. And once it does, we can start moving into Phase II programs there in schizophrenia as an adjunct and potentially as a monotherapy along with psychosis associated with neurodegeneration. And then on the obesity front, the Phase I study will get data in the first half of next year from healthy volunteers looking at different starting doses and different titration schemes. However, these patients will have normal BMI, and we've already seen reasonable weight loss there at 6 weeks. So we'll also have 12-week data. The other thing, Dave, I'll mention is we're starting a Phase Ib program late this year, maybe into January when we get everything started. But that will also look at our 295 Amylin asset, but the difference will be -- different titrations and in patients that have obesity. And that data will also likely read out probably in Q4 of next year. So I would say a very robust number of events that we should keep our eyes on. Operator: The next question comes from Steve Scala with TD Cowen. Steve Scala: Two questions. Rob, it sounds like IRA discounts are deeper this year than last year. You said it will not impact the long-term outlook, but will it impact the outlook in 2026, which you have yet to share externally, but will it impact the numbers that you otherwise would have shared externally? Secondly, why was Rinvoq's Phase III in HS updated to complete in 2028 from 2026 previously? Was it an issue with endpoint, enrollment or something else? Robert Michael: So Steve, this is Rob. I'll take your first question, then Roopal will take your second question. So as it relates to the Vraylar and Linzess negotiations, keep in mind, those prices will not take effect until 2027. Again, as I mentioned before, we have visibility to where it's landing. It's obviously not public yet, but we're not concerned about it impacting our long-term guidance, but there's no impact in '26 because those prices do not take effect in '26. Roopal Thakkar: And Steve, it's Roopal. We still anticipate our double-blinded week 16 data at the end of next year in HS. We'll get other double-blinded cuts and then there's open-label extension. So sometimes that changes on duration, how long we follow patients could result in some updates to [ ct.gov. ] Operator: Your first question comes from Simon Baker with Rothschild & Co Redburn. Simon Baker: Two, if I may, please. Firstly, on Rinvoq in nonsegmental vitiligo. In some markets, that's up to 2% of the population. So I just wonder if you could give us an idea on your thoughts of the size of that opportunity. And then secondly, on Elahere, I note in the press release that you are launching it in the U.K. at a list price equal to the U.S. Now on the basis that people in the U.S. don't generally pay the list price, should one assume the same situation in the U.K. And going forward in the U.K. and Europe, do you envisage moving more to a U.S. style gross to net type market from the more net market that we see at the moment? Jeffrey Stewart: Yes. So it's Jeff. I mentioned that as we look at the -- what we call the next wave of innovation around Rinvoq, and we've seen some of those readouts, which are really, really encouraging. GCA, which is the smallest of the next set of indications is performing really well and overall helping great momentum in rheumatology. So then when we look at basically the, let's say, the next big 4, okay? So you have alopecia areata, vitiligo, as you highlighted, HS, as Steve highlighted, and then lupus, we've looked and sized those that, that revenue potential is at least $2 billion at peak. So we continue to work through, given as we look at the data, we watch the market develop like how they will sort of adapt and change over time. I can say that the alopecia data was quite striking. I mean it's quite striking relative to the standard of care, Ig, other JAKs that are out there. So we're going through the sizing issue. We certainly see that there are different segments of vitiligo like the high body surface area is more amenable to, let's say, a JAK inhibitor like Rinvoq, which will be the first systemic. Is it active? Or is it stable? So net-net, I mean, you could say that all of these together would be greater than $2 billion, and we're going to continue to hone those forecasts as we go towards launches over the next year or so. Elizabeth Shea: Thanks, Simon. Sorry, one more. Jeffrey Stewart: Just one more question on Elahere. You're right, the price in the U.K., the list price is similar to the U.S. One of the aspects that we are looking at is how basically because of the most favored nation and other global pricing dynamics, how that may or may not change our approaches around the world. Certainly, we would like to see reforms in many of the European countries, whether they are clawback systems or even the way that the HTAs work because we do think that these medicines should be more highly valued. So exactly how that will ultimately play out, certainly, some of the early discussions with the administration are around basically more stable and equitable pricing around G7 inclusive of Switzerland and Denmark. So all of that strategies are basically in place. Ultimately, how that will play out, we're going to continue to see. Certainly, in the U.K., as you know, you can have list prices, but ultimately, it's an HTA market, and we'll have to go through the NICE evaluation to see where that net price ultimately would land. Operator: Our next question comes from Luisa Hector with Berenberg. Luisa Hector: I'd like to ask in immunology, just if you could outline your next steps with your CAR-T and your oral peptide platforms. And then just a sort of longer-term question, but what level of market penetration do you think is ultimately achievable for the advanced therapies in the more mature indications, where could we actually get to? And would that require success from the combinations to raise efficacy ceiling or some of these new platform technologies? Roopal Thakkar: Luisa, it's Roopal. I'll start with the insight to CAR-T from Capstan. What -- maybe some benefits and then we can talk about our plans. We have an opportunity to optimize that dose. It's also an off-the-shelf therapy. We also see rapid expression and also transient expression. So over time, that could have some safety advantages, especially if you can deplete the pathogenic B cells and then the naive B cell population repopulates and you don't have the CAR on board any longer, and that's the advantage of the mRNA therapy. In the early Phase I, we have observed B cell depletion. And the other benefit is no need for lymphodepletion. So taken together, this could be a very exciting opportunity for patients. So next steps is to continue dosing in the first-in-human studies. And then I would say, next year, once we have a handle on dosing, we'll start looking at patients starting on the rheumatology side of things like RA and lupus. And if it works similar to ex vivo CAR-T, we think patients can have very deep and durable remissions, which could be very, very important and certainly raises the bar and breaks through existing efficacy ceilings. So that's, I would say, on Capstan. On the oral side, the Nimble acquisition, these are macrocyclic molecules, the ones that we're focusing on, the attempt there is to make them as potent as possible and to extend the half-life. I think the current issue we see with certain oral platforms is that the half-life is very limited. We think a benefit would be to extend that half-life. So those are the 2 things that are going on. The lead candidates right now are an oral IL-23 and a TL1A. And when it comes to our IBD platform, with the combination, the higher the efficacy, the better, obviously. But many of these patients that we'll see will be second line and potentially even third line because lines of treatment are continuing to expand. You have many patients that have already received anti-TNFs in IBD, and you see medicines like Skyrizi also starting to penetrate into that front line. And if that's not working, then you have JAK inhibitors like Rinvoq. So we'd be studying a relatively refractory population. So if you can get 10-plus points better on the higher, the better, I think that would be a huge benefit because breaking through where current efficacy stands today has really been the challenge. And I would say some of the best assets we have are currently Rinvoq and Skyrizi. Jeffrey Stewart: And then the idea of the market structure that you highlighted in your second question, to Roopal's point, I mean, these immunology markets are quite amazing because you essentially have a bio penetration, which varies by major indication. And then you also have line of therapy expansion. So they are very, very buoyant because there's significant headroom and unmet need. To give you the bookend, when you look at biopenetration, I'm going to give you the U.S. biopenetration rates roughly and the European and Asia are lower generally based on the way those markets are developing. The highest biopenetration rates are in Crohn's disease, which is above 50%. So you still have quite a few patients in a very severe disease that have not been exposed to a biologic. And these are in the moderate to severe segmentation. On the very low end, you have a super dynamic market, which is atopic dermatitis, incredible high unmet need that just basically with the availability of drugs like Dupixent and Rinvoq, that may be in the high single-digit biopenetration for moderate to severe. So new technologies are going to help. Communications are going to help, a line of therapy is going to help. And that's why to Roopal's point, we're very excited about certainly the baseline adoption of these technologies, but transformative future technologies as well. Operator: Yes. Our next question comes from Mohit Bansal with Wells Fargo. Mohit Bansal: I have a couple of them. So one is on oral IL-23, the competitors one. So Roopal, you mentioned some limitations there. Can you talk a little bit about how you think about this competition over time versus Skyrizi or Rinvoq? And then a portfolio question. So you do have Amylin in this space now with Gubra. How much do you think a portfolio of these assets, GLP or other assets is important to fight and win in this particular segment given that the competitors or incumbents have a portfolio of multiple assets out there? Roopal Thakkar: Thanks, Mohit. It's Roopal. So I'll start. I think when we look at Skyrizi, first of all, the psoriasis data are very strong. Just to think about some of the numbers that we have, by week 16, if you're looking at clear or almost clear, you're approaching 90%. If you're looking at week 52, PASI 90, that's at 80%. And if you're at PASI 100, that's at 60%. So these are very, very high efficacy. And you also see over time, if you're an early PASI responder, the majority of these folks are going to maintain over the course of the year and beyond. And even if there is treatment withdrawal, and that's one thing I was getting at with why we like Nimble of potential half-life extension is that if you take oral, some people may miss some doses. And if you have a very short half-life, your treatment withdrawal data will sync very quickly. And if you miss many doses, you will lose effect. And with Skyrizi, and actually, this is even in our label, if you stop dosing for 1 year, you still have 60% of patients that are clear or almost clear. Now if you keep dosing, obviously, you'll get to that 80% to 90% range. So I think it's important just to set up where is Skyrizi today, and you have this opportunity to have quarterly dosing. So the patients have a chance to forget that they have psoriasis, and they don't have to worry about when they eat their meals or how long they need to be fasting. The other benefit is Skyrizi has what I would like to say is head-to-toe benefits, and these are all statistically significant readouts. What do I mean by that? That means palmoplantar, that means scalp and genital across the board. The other insight about psoriasis is about 30% or so will have psoriatic arthritis. So they'll have joint disease. And now with Skyrizi, we have 5 years of data where 88 -- approaching 90% of patients do not have x-ray progression. And I would say taking in totality, that gives you -- gives us a benefit to continue to be very competitive, whether you're talking about another injectable or even an oral. And the oral, as Jeff has stated, will have uptake like many of these assets because psoriasis, unlike IBD, is still quite underpenetrated, and it's a growing market. And maybe, Jeff, if you want to make a comment as well. Jeffrey Stewart: No, I think it's very clear, Roopal. We're very confident in our competitive position. And we've seen other orals enter the market. We have multiple head-to-head trials in terms of where those orals will compete and what the differences are. And so I think Roopal phrased it very, very nicely with his summary. Robert Michael: And then on the Amylin, yes, we think it would be of a benefit, and we do continue to look with partnered programs and external opportunities where you could potentially combine with the Amylin. And the focus there is tolerability and durability. We continue to see only about 30% of patients with obesity continuing their incretins after 1 year. So these beneficial gains are not going to result in long-term favorable outcomes if patients can't stay on these. So our focus is on the Amylin, but we continue to look for combination agents and also other orthogonal approaches if you have the opportunity to maintain bone and muscle and then we are also exploring the potentials [Audio Gap]. Operator: And our next question comes from Geoff Meacham with Citibank. Geoffrey Meacham: Okay. Rob, on the policy sides, I know we have some public agreements with the administration from your peers on Medicaid and onshoring and manufacturing. Just was curious if you expect to also have a formal agreement, if that's a priority. And then the second thing on aesthetics, it still seems that we're seeing more macro headwinds. And I know you've made some commercial and DTC investments as well as new launches. But what would you say are the leading indicators of a rebound? I'm just trying to assess what green shoots perhaps you may be seeing. Elizabeth Shea: Geoff was asking a question. Obviously, we can't hear any. Sir, go ahead with your question. Geoffrey Meacham: Can you guys hear me at all? Elizabeth Shea: Now, we can hear you. Hi, Geoff, sorry. We were unfortunately, disconnected. Geoffrey Meacham: Yes. No worries. Okay. So I just had 2 quick ones. Rob, on the policy side, I know we have some public agreements with the administration from your peers on Medicaid and onshore and manufacturing. I was curious if you expect to also have a formal agreement, if that's a priority for you guys. The second thing on aesthetics, it still seems that we're seeing more macro headwinds. And I know you've made some commercial and DTC investments and also have some new launches. But what would you say are the leading indicators of a rebound in aesthetics, I'm just trying to assess what green shoots perhaps you may be seeing. Robert Michael: Geoff, it's Rob. Thanks for the questions. So obviously, we continue to actively engage with the administration on ways to improve patient access and affordability and preserve U.S. leadership in medical innovation. We were having discussions before the July 31 letter and have had more discussions since. I'd say we are aligned on the need to address global freeloading and have been working closely with the USTR on ways to address that, which ultimately, I think a Section 301 investigation in unfair practices will be important as we partner with the administration to make progress in terms of pricing outside the U.S. We're open to expanding direct-to-patient models where it makes sense beyond what we already have in place with our Synthroid direct program. You've also seen us take actions to invest further in the U.S. by building a new API plant North Chicago and expanding biologics capacity in Worcester as part of our $10 billion capital commitment. So you see the company's commitment to innovation, driving future growth, and that's certainly something we're in discussions with the administration about. We also, as we mentioned previously, announced that Elahere has been priced in the U.K. at the same list price as the U.S. I'd say all these actions are directionally aligned with the administration's stated goals. And we'll continue to work with the administration on solutions that improve access and affordability while also supporting future innovation. And we'll certainly share more information as we have it. Jeffrey Stewart: And Geoff, some of the dynamics that we're looking at that we monitor, to your point, I mean, these market conditions have been more protracted than we anticipated. So it's challenging to predict. But here are a few of the things we look at. Obviously, we're looking at sort of overall consumer confidence. It's quite low. So that can be a leading indicator. We know that our middle-income consumers, particularly for BOTOX and toxins are also on the sidelines. So we monitor sort of their posture relative to sort of seeking particularly new treatment with the toxin, which is the leading indicator for the facial injectable business. And we also, as I highlighted in my remarks, we're monitoring every month sort of the HA filler sentiment. So we've seen that stabilize to some degree, which is good. It's not continuing to go down. But those are some metrics that we look at for early indicators to sort of anticipate sort of a market rebound. And again, we're going to invest through that. We think that, that's a good idea. Certainly, we also believe that TrenibotE, the ability to activate new consumers, which will come next year for the U.S. market is a significant catalyst to try to sort of lead this market back to health. Operator: Our next question comes from Courtney Breen with Bernstein. Courtney Breen: Perhaps one more on the policy side and then just a follow-up on Rinvoq. If you were to simply look at AbbVie's ratio of the business right now, about a 75% U.S. exposure versus 25% ex U.S., how different do you expect that to be in 5 years' time? How much of that might be down to the product mix? And how much of that might be down to kind of equalizing price or some of these new U.S. policies? And then the follow-up on Rinvoq was just about the expansion opportunity associated with the changes to the Rinvoq label. Can you just help us quantify that a little bit more clearly? Robert Michael: So this is Rob. I'll take your first question. So you're right, when you look at the business today, it's in the 75% U.S., 25% international. I think historically, before Humira, you saw it more like 2/3 to 1/3. We haven't publicly disclosed what that U.S. OUS mix will look like over the long term. Obviously, it's portfolio dependent. I'd say that is the larger driver of fluctuations that you see there versus assumptions around price. And so as we drive this business, given the innovative platform, there's opportunities to grow in the U.S., there's great opportunities to grow internationally. But the way to think about it is, if you think about historical levels where it was before Humira, that's not a bad way to think about where it could go over time. But we haven't publicly disclosed what that mix looks like in our long-term outlook. Jeffrey Stewart: And then in terms of the enhanced IBD label, we -- we haven't fully quantified it, but I would say it's clearly a net incremental positive. We weren't sure, frankly, that we would get this type of language as we worked with the U.S. KOLs and the FDA, but we did. So we're very happy with that. Clearly, what we see is that this benefit will build over time based on the dynamics that I mentioned and Roopal mentioned, which is you're seeing a very significant transformation over the structure of the IBD space, whereas a few years ago, it was a heavy TNF focus. And now you see this ascension of the IL-23s, you certainly still have ENTYVIO in there. And so this is a net positive, and we're going to continue to monitor how effective this is with that 1, 2 punch with that in-play share that we're continue to be very pleased with. Elizabeth Shea: Thank Courtney. Operator, we have time for one final question. Operator: Our last question comes from Asad Haider with Goldman Sachs. Asad Haider: Just maybe, Rob, for you on M&A. Just any updated thoughts following the recent acquisitions, Capstan and Gilgamesh. Just curious as to what your latest thinking is on business development. You've always referenced BD priorities that are geared towards the 2030s. Is that still the case? And amongst your core therapeutic areas, where would you prioritize adding? And then just also curious if you have any appetite for larger deals? Robert Michael: Thanks, Asad. This is Rob. I'll take that question. You're right, our BD focus continues to be on assets that can drive growth in the next decade and beyond. I mean we certainly have the financial wherewithal to pursue late-stage opportunities as well. But that's not really a need given that our current portfolio provides a clear line of sight to growth into the next decade. And that's why we have focused our efforts on novel mechanisms and platform technologies that can drive longer-term growth. And that includes B cell depletion approaches, which Roopal mentioned, and oral peptides capabilities in immunology, trispecifics and an in vivo CAR-T platform in oncology. You look at neuroscience, there's novel mechanisms for mood disorders and Alzheimer's that we've licensed in. And we have a very compelling siRNA platform that can generate opportunities across all 3 of those therapeutic areas. And we've also utilized BD to enter another growth area, obesity, which as Roopal mentioned, we will build upon. Again, given the strong outlook of the portfolio, we'll continue to focus on BD efforts that really drive long-term pipeline opportunities. And the areas of focus are our core areas: immunology, neuroscience, oncology, aesthetics, and we've now added obesity. And so you think about those are the areas. And if you think about the 30 deals we've executed, more than 30 deals we've executed over the last 18-plus months, there's been a nice mix between immunology, oncology, neuroscience, a few deals in aesthetics. So I think you should expect us to continue to add, I'd say, very robust depth to our pipeline to drive that long-term growth well into the next decade. Elizabeth Shea: Thanks, Asad. And that concludes today's conference call. If you'd like to listen to a replay of the call, please visit our website at investors.abbvie.com. Thanks again for joining us. Operator: Thank you. That concludes today's conference. You may all disconnect at this time.
Operator: Good morning. Today is Friday, October 31, 2025. Welcome to the Toromont Industries Limited Third Quarter 2025 Results Conference Call. Please be advised that this call is being recorded. [Operator Instructions] Your host for today will be Mr. John Doolittle, Executive Vice President and Chief Financial Officer. Please go ahead, Mr. Doolittle. John Doolittle: Okay. Thank you, Joelle. Good morning, everyone. Thank you for joining us today to discuss Toromont's results for the third quarter of 2025. Also on the call with me this morning is Mike McMillan, President and Chief Executive Officer. Mike and I will be referring to the presentation that is available on our website. In the start, I would like to refer our listeners to Slide 2, which contains our advisory regarding forward-looking information and statements. After our prepared remarks, we'll be more than happy to answer questions. So let's get started and move to Slide 3. And I'll pass it over to Mike. Michael Stanley McMillan: Great. Thanks very much, John. Good morning, everyone, and thanks for joining us. Our team delivered solid results in the third quarter, executing effectively despite persistent macroeconomic and trade challenges. We remain focused on long-term success, continuing to invest in our people and capabilities to support our customers and drive sustainable growth. Net income rose aided by a property sale, while underlying earnings reflected gross related investments, lower net interest income and short-term noncash costs from the AVL acquisition. The Equipment Group executed well with solid activity in rentals, product support and used equipment deliveries in construction and mining. However, activity levels still reflect the economic environment, which continues to impact end-customer demand. As expected, mining deliveries were lower due to the segment's inherent variability. Revenue declined as revenue from the acquired business, along with higher rental and product support revenue was more than offset by lower new equipment sales, which was as expected in the Mining segment. Rental revenue rose driven by a larger fleet. Product support revenue increased due to higher parts and service volumes. Operating income in the third quarter included a pretax gain of $13.7 million on the sale of our property. Excluding this gain, operating income was 1% lower for the quarter, given a strong comparator which reflected market dynamics in play at that time, along with the higher expenses. CIMCO posted higher revenue and earnings driven by good demand and disciplined execution in both Canada and the U.S. Growth in the package -- in package revenue was supported by a strong order backlog, while product support activity continued to improve, aided by our growing technician workforce. Operating income increased on higher revenue and solid execution, partially offset by lower gross margins and an unfavorable sales mix, which is lower product support revenue to total revenue and higher expenses to support activity and growth in the segment. We continue to work closely with our new partners in AVL, focusing on this promising market. Production in Hamilton has ramped up since the acquisition supporting our healthy order backlog and demand. Hiring and development of production capacity continues. As noted in Q2, we acquired a facility in Charlotte, North Carolina to expand capacity and to better serve the Eastern U.S. market. This facility commenced the first phase of production during the third quarter of 2025 and will ramp up throughout 2026. While the business is performing well, the bottom line contribution on a year-to-date basis reduced EPS by approximately $0.02 per share related to various noncash related purchase price accounting items. Of course, more detail is available on our financial statements and disclosures. Let's turn to Slide 4, our key financial highlights. Investment in noncash working capital decreased 13% year-over-year largely on lower inventory levels, partially offset by higher accounts receivable and accounts payable balances due to equipment delivery timing. Accounts receivable increased mainly reflecting the addition of receivables from the recently acquired AVL operation. DSO increased by 1 day to 48 days. Our team continues to manage receivables aging and customer credit metrics effectively. Inventory levels declined partly due to executed deliveries against the order backlog, inventory management initiatives as well as lower work in process at CIMCO, reflecting project and service timing. We ended the quarter with ample liquidity, including $1 billion in cash, an additional $453 million available under existing credit facilities. During the quarter, we also completed the redemption of our 2025 debentures at par as previously announced. Our net debt to total capitalization ratio was negative 9%. Overall, our balance sheet remains well positioned to support operations and navigate the evolving economic and business conditions. We will continue to apply operational and financial discipline as we support customer needs and evaluate future investment opportunities. Toromont targets a return on equity of 18% over the business cycle. Return on equity was slightly below this at 17.5%, reflecting slightly lower earnings and higher shareholders' equity. Return on capital employed was 23.3%, also lower year-over-year, reflecting our increased capital investment. Finally, as announced yesterday, the Board of Directors approved a regular quarterly dividend of $0.52 per share payable on January 5, 2026, to shareholders of record at the close of business on December 5, 2025. John, back over to you for a more detailed commentary on the results. John Doolittle: Okay. Thank you, Mike. Let's turn to Slide 5 for a few initial comments on the consolidated numbers. As Mike noted, profitability improved in the third quarter of 2025 compared to last year and compared to the first half of the year, benefiting from a $13.7 million pretax gain on the disposition of a property. Excluding this, operating income was $0.9 million or 1% from the similar quarter last year. Equipment Group revenues were lower as expected, with declines in Mining, which is coming off a comparatively strong period of capital investment, partially offset by revenues at the newly acquired business AVL. While uncertain market conditions persist, and customer purchasing decisions and activity are somewhat mixed, rental and product support revenues increased, CIMCO revenue increased on a continuing good demand for its products and services. On a consolidated basis, gross profit margins improved compared to prior year on good execution and better sales mix. Expense levels reflect continued support for key operational focus areas. Net interest expense was higher than the prior period, reflecting both higher interest expense as a result of higher borrowings as well as lower interest income earned on cash on hand due to lower interest rates. Bookings for the third quarter increased 47% compared to Q3 2024 and increased 13% on a year-to-date basis. We saw good order intake in construction and power systems, which includes a significant contribution from the acquired business, partially offset by lower mining orders. Backlog remains healthy at $1.3 billion, up 17% year-over-year with an increase in both the Equipment Group up 15%, and at CIMCO, up 24%. Backlog remains healthy and reflects deliveries in progress on construction schedules, good new booking activity and backlog related to the acquired business. On a consolidated basis, revenue decreased 2% in the third quarter with a decrease in the Equipment Group of 4%, largely driven by lower mining deliveries against a strong comparable and an increase of 22% at CIMCO on higher package and product support revenue. For the first 9 months of the year, revenue increased 2% as the Equipment Group revenue was comparable to last year, while CIMCO was up 15%. Excluding the property disposition gain in the acquired business, SG&A expenses increased 9% in the quarter, 3% year-to-date. Higher DSU mark-to-market adjustments increased expenses in both periods, accounting for approximately 30% of this increase. Compensation costs were higher year-over-year, reflective of regular salary increases, partially offset by lower profit sharing accruals on lower income. Salary headcount is largely unchanged year-over-year. Sales-related expenses increased year-over-year, reflecting continued investment in resources. All other expenses such as travel, training, occupancy and information technology costs have increased slightly on continued investment for future growth and inflationary effects. Expenses increased slightly to 12.6% of revenue compared to 12.1% last year on a year-to-date basis. Operating income increased 8% in the quarter and excluding the property gain, increased 1% compared to Q3 2024 as higher gross margins were partially offset by lower revenue and higher expenses. On a year-to-date basis, operating income was relatively unchanged. However, excluding the gain on property disposition, operating income decreased 3%, reflecting higher expenses, partially offset by the gross margin improvements. As a percentage of revenue, operating income was 12.1% on a year-to-date basis compared to 12.4% last year. Net interest expense increased $4 million in the quarter and $18 million on a year-to-date basis, reflecting interest expense from higher borrowings with the new senior debentures issued in March 2025 as well as the lower interest income earned on cash due to lower interest rates. Net earnings increased 7% or $9.7 million in the quarter compared to last year and decreased 3% or $10.8 million for the first 9 months of the year. Basic earnings per share $1.73 in the quarter and $4.18 year-to-date, reflecting the change in net earnings. Turning to the Equipment Group on Slide 8. Revenue declined 4% in the quarter as revenue from the acquired business, along with higher rental and product support revenue was more than offset by lower new product sales as expected in the Mining segment. For the first 9 months of the year, revenue was relatively unchanged. Equipment sales, including both new and used equipment were down in both the quarter and on a year-to-date basis by 12% and 2%, respectively. New equipment sales decreased 15% in the quarter, 2% year-to-date with decreases in mining against a strong comparable, partially offset by higher power systems markets, which include revenue in the acquired business. Used equipment sales increased 7% in the quarter, largely driven by improved activity in mining and construction markets and decreased 6% year-to-date. In most markets decreased predominantly led by the lower construction market, slightly offset by improved mining market activity. Looking at the market segments. Total equipment revenue decreased 4% in Construction and 60% in Mining, while Power Systems increased to 102% and Material Handling increased 6%. Rental revenue was up 5% in the quarter and was up 10% year-to-date. While market conditions remain relatively soft, revenues increased compared to the prior year, reflecting a larger fleet and improved utilization in certain areas. Revenue improved in most areas for the quarter as follows: heavy equipment rentals were up 24%, material handling up 26%, partially offset by a decrease in the light equipment rentals, down 2%, and power rentals down 20%. The RPO fleet was $104 million versus $81 million a year ago, and the rental revenue was up 73% per quarter and 60% year-to-date compared to similar periods last year. Product support revenue increased 4% in the quarter and 2% year-to-date with an increase in both parts and service. Activity was higher across most markets and regions, reflecting end-user demand and activity levels. Looking at specific markets for the quarter, change in revenue was as follows: Construction was up 11%; Mining down 3%; Power Systems up 1%; and Material Handling up 6%. Gross margins -- gross profit margins increased 250 basis points in the quarter compared to Q3 2024 and increased 20 basis points on a year-to-date basis. Equipment margins were up 110 basis points in the quarter, up 40 basis points year-to-date, reflecting market dynamics in play in both periods. Rental margins were relatively unchanged in the quarter, down 30 basis points year-to-date on the higher cost of fleet additions. Product support margins increased 30 basis points in the quarter, down 10 basis points year-to-date, reflecting the nature of the work and sales mix. Sales mix was favorable for both the quarter and on a year-to-date basis, reflecting a higher proportion of product support revenue to total revenue in each period, increasing margins 110 basis points and 20 basis points, respectively. Excluding the gain on the property disposition and the acquired business in 2025, selling and administrative expenses increased $11 million or 8% in the quarter and $10 million or 3% for the first 9 months of 2025. Higher DSU mark-to-market adjustments increase expenses in both periods, again, accounting for approximately 30% of the increase. Compensation costs were higher in both periods, reflecting regular salary increases, partially offset by lower profit sharing accruals on lower income. Other expenses such as training, travel and occupancy costs had increased in the light of sales levels, planned investment and inflation. As a percentage of revenue, selling and administrative expenses increased to 12.3% in the first 9 months of the year compared to 11.7% in the similar period last year. Operating income increased 7% for the quarter and decreased 2% for the first 9 months of the year. Excluding the property gain, operating income decreased $2 million or 1% in the quarter and decreased 5% year-to-date, reflecting lower activity levels and higher expenses. The acquired business continues to increase production; however, it did not contribute meaningful to operating income given the expenses arising from purchase price accounting, including such items as amortization of intangibles in the setup of our new U.S. facility. Bookings increased 49% in the quarter. Construction markets were marginally higher with bookings up 2%, reflecting more normalized supply dynamics. Our systems, which includes the acquired business saw strong order activity of 388% with good demand for our products. Mining markets are lumpy or cyclical due to the nature of the business and were down 43% as expected from the third quarter last year which was a strong comparable. Backlog of $923 million at the end of September remains at healthy levels. Backlog includes approximately $278 million at AVL, which has a delivery schedule over the next 2 years. Excluding this, backlog was 20% lower compared to the same time last year, reflecting good deliveries against customer orders over the last 12 months, along with good new order intake over the same period. Approximately 80% of the backlog is expected to be delivered over the next 12 months. But of course, this is subject to the timing differences depending upon vendor supply, customer activity and delivery schedules. When you consider the impact of AVL on our results, please keep in mind that the bulk of the purchase price amortization is related to acquired backlog. We expect this backlog to be substantially shipped by the first quarter of 2026. However, it is important to recognize that we own 60% of the business and any dividends paid to minority shareholders will be treated as expenses when paid. We expect dividends to begin in 2026 related to 2025 performance. Also, keep in mind the production ramp-up in Charlotte that Mike noted in his remarks. Let's turn to CIMCO on Slide 7. Revenue was up 22% in the quarter and 15% for the first 9 months of the year. Package revenue increased 28% in the quarter and 23% year-to-date with good execution on equipment delivery and progress on customer schedules. Recreational activity increased 67% with higher revenue in both Canada and the U.S. Industrial market revenue decreased 18% with lower activity in Canada against a strong comparable and higher activity in the U. S. Product support revenue increased 14% in the quarter and 7% on a year-to-date basis with higher market activity in Canada in both periods. Activity in the U.S. was relatively unchanged in the quarter but were up year-to-date with a stronger start to the year. Activity levels continue to improve on good customer demand and the increased technician base. Gross profit margins decreased 70 basis points in the quarter and increased 20 basis points on a year-to-date basis versus the respective comparable periods. Package margins reflect good execution and the nature of projects in process for both periods, driving a 60 basis point increase year-to-date. Product support margins decreased 50 basis points in the quarter and 10 basis points year-to-date. Improving execution and efficiency continues to be a focus. An unfavorable sales mix with a lower proportion of product support revenue to total revenue dampened margins in both periods, resulting in a 20 basis points and 30 basis point reduction in gross margin, respectively. Selling and administrative expenses increased $3 million or 18% in the quarter and $5 million or 10% for the first 9 months of the year. Compensation costs increase reflects staffing levels, annual salary increases and higher profit sharing accruals and higher earnings. Other expenditures such as travel and training expenses increased the support activity and staffing level. As a percentage of revenue, selling and administrative expenses improved to 14.8% in the first 9 months of the year versus 15.6% in the comparative period last year. Operating income was up $3 million or 19% for the quarter and $9 million or 25% for the first 9 months of the year, largely reflecting higher revenue, partially offset by the unfavorable sales mix, lower gross margins to higher expenses. Operating income as a percentage of revenue increased 100 basis points to 11.4% on a year-to-date basis compared to the similar period last year. Bookings increased 35% or $20 million in the quarter and were 13% higher, up $25 million on a year-to-date basis. Industrial orders were up 24%, while recreational orders were down 8%. Generally, activity is continuing with a good strategic capital investments. However, the current economic uncertainty has delayed some customer buying decisions. Backlog of $341 million was 24% higher versus last year, with higher backlog in both recreational and industrial markets. Backlog in the U.S. was solid, up 46% from this time last year, and backlog in Canada was up 13%. Approximately 75% of the backlog is expected to be realized over the next 12 months. However, again, this is subject to construction schedules. And with that, we can move to Slide 8, turn again to Mike to highlight some of the key takeaways as we look forward to rounding out the year. Back to you, Mike. Michael Stanley McMillan: Great. Thanks again, John. So as John mentioned, as we round out the year, our focus remains firmly on executing our strategic priorities, namely maintaining safe and efficient operations, delivering exceptional customer service and applying disciplined and financial and operational rigor to support our long-term growth. With that in mind, we continue to monitor several external factors that may influence the business environment. Trade negotiations between the U.S. and Canada remain fluid. We have implemented a proactive mitigation plan and continue to refine such plans as the situation evolves in order to manage potential impacts. Foreign exchange volatility, particularly fluctuations in the Canadian dollar is being actively managed primarily through our hedging program. While this helps protect our bottom line, broader economic effects may still present challenges. Macroeconomic conditions, including inflation and interest rates are being closely tracked. As John mentioned, our backlog of $1.3 billion and the equipment supply chain is well positioned to support customer requirements. The AVL acquisition continues to track to our production plan though near-term earnings contributions remain modest due to noncash purchase accounting adjustments, as noted earlier. We continue to invest in our technician workforce, a key enabler of our aftermarket growth strategy. This critical initiative strengthens our aftermarket services capability and enhances the value we deliver to our customers through our product and service offerings. From both an operational and financial standpoint, we have a focused operating model, talented leadership team, disciplined culture and ample liquidity, which equipped us well to navigate near-term uncertainty while pursuing strategic growth opportunities. Our long-term commitment to shareholder value remains anchored in cost discipline, strategic investment and operational excellence. We thank our team for their continued dedication and our stakeholders for their trust and support. That concludes our prepared remarks. We'd now be pleased to take your questions. Joelle, over to you, please, to set up the first call. Operator: [Operator Instructions] Your first question comes from Yuri Lynk with Canaccord Genuity. Yuri Lynk: A couple of questions on AVL, if you'll allow me. Really good sequential growth in revenue. Wondering after a couple of quarters of ownership here if you're willing and able to kind of put a revenue number on what the Hamilton facility is able to do on an annual basis with the capacity expansion in place? Michael Stanley McMillan: Yes. Thanks for the call, Yuri. Maybe I'll start with that. But what I would suggest you is it does fall in under our Equipment Group, of course, within the Power segment. And probably the best indication that we had directed to is the disclosure we provide in terms of backlog, and that will be a good indication at this stage. As John mentioned, we are providing some clarity around the earnings performance and some of the noncash adjustments as we work our way through that. But I think at this point, that's what we've included in our disclosure. Yuri Lynk: Okay. And that's, I guess, what you're saying there, the backlog is -- you're viewing that as a 12-month -- kind of be executed over 12 months? John Doolittle: Yes. I think in my remarks, I think we said the backlog -- existing backlog will flow at over 2 years, Yuri. Michael Stanley McMillan: Yes. I mean, keep in mind as well, a little bit of that is going to be dictated by construction schedules for the underlying data centers and delivery. But I think the 2-year mark would be the furthest extent. Yuri Lynk: Okay. And can you share how the ramp-up of the Charlotte facility is going, particularly your ability to staff that facility? Michael Stanley McMillan: Yes. No, a great question. So we're quite happy with progress there. Again, we acquired that facility in Q2, and we do have some limited production starting on 1 line, there's 3 lines. And as I mentioned in my comments, we expect that to ramp up throughout the course of 2026. Hiring to date has been pretty -- has been tracking at least to plan. And so we've had good responsiveness. And we do have a great team down there. By the way, we have set up a team managing the facility and also local recruiting and HR management. And so it's been progressing nicely. Operator: Your next question comes from Krista Friesen with CIBC. Krista Friesen: I was just wondering if you could provide a little bit more color on what you're hearing from some of your customers in the Construction segment in particular, especially given the number of announcements this year and the budget announcement coming up next week? Michael Stanley McMillan: Yes, that's a great question, Krista. I think we're all anxious to hear the announcements that are due next week prior to the great cup apparently. And so looking forward to that and also the sequence and timing. So from a customer perspective, I mean, I think longer term, I think we all feel that there's reasonable tailwinds and lots of interest in investment in infrastructure and so forth. I think part of what we're waiting for, though, is beyond the provincial indications is something more concrete coming out of the federal side of the government, and I think just the funding and how they're going to match that progress. So stay tuned for that. I mean I think cautious optimism is there, but I think the timing and sequence of when shovels will be in the ground and so forth, that's the question for most. Krista Friesen: And maybe just further to market sentiment. I appreciate it's still a relatively uncertain environment. But let's say, relative to the spring, are you finding that there's a bit more confidence or certainty in some of your customers or still kind of up in the air? Michael Stanley McMillan: Yes. I think if you think about it -- and maybe I'll start and John can speak a bit on -- we tend to think of it by segment a little bit. Like if you look at say, the Mining segment, for example, right now, we do see continued interest in investment. Of course, the activity is dictated by mine development schedules and so forth that we do see with gold prices and things that there still seems to be a fair bit of activity, longer cycle, of course, but some good sentiment there. I think construction, when you separate it between, say, typical construction activity versus residential, that's probably where we see -- we still tend to see softness on the residential side and the infrastructure supporting that residential development. And so that would probably be the area where we see the most uncertainty. However, we are seeing some small projects in road construction, a few things like that you typically would see. John Doolittle: Yes. I agree, Mike. It really varies by segment, some regional impact as well, Krista. Operator: Your next question comes from Cherilyn Radbourne with TD Cowen. Patrick Sullivan: This is actually Patrick on for Cherilyn. I was just wondering, we saw, I guess, mid-single-digit product support growth year-over-year. But to what extent do you have visibility on an upcoming inflection in that product support based on the fact that you had some very, very strong deliveries over the last 2 years. Michael Stanley McMillan: Yes, great question, Patrick. Thanks for that. I think as you mentioned, I mean, we're starting to see a little bit better activity levels. We're up about 4%, I think, say, in the Equipment Group. And although we saw very strong product support on the CIMCO side, I think it was overcast a little bit by package growth, which outpaced it. So both the areas we're seeing some positive year-over-year performance. I think you sort of touch on an important point. We've seen some -- the team has done a really nice job delivering new equipment with availability improvement over the last, say, 18 to 24 months, getting the hours and the activity levels because we have seen a little softer activity environment, getting those hours on those machines and then seeing parts consumption product support requirements beyond preventative maintenance is certainly what we're watching for. And I think that will all come. As we see improved activity over the next, say, 12 to 24 months, we should start to see a little bit stronger product support on the equipment side. However, it does take time, right, for the equipment to get the hour zone that we expect. The other piece of that, of course, is on the mining side, where we've had some nice deliveries, and it does take -- like we've said, John and I, it could take 2 to 3 years before some of that new equipment gets to a point where product support requirements are beyond preventative maintenance. Patrick Sullivan: Okay. Great. And then I guess on data center stuff. So much of a discussion of potential future data center activity has been focused on Western Canada so far. But given the time lines to build these things, and then I think we're starting to hear that timelines on power system gensets maybe starting to extend as well again. Can you discuss if there's just any early discussion you're hearing in Eastern Canada given timelines, it could be 2, 3, 4 years out? Michael Stanley McMillan: Yes. I think it's difficult to speculate, Patrick. One of the constraints, obviously, on the data center side is availability of energy to support these facilities because they do consume a lot of energy. And so I would say that there are some discussions. I think your time frame is probably pretty accurate in terms of what it takes to construct and we would certainly participate as best we can from the backup power generation. There may be the opportunity for some prime power. But yet to be determined, right, in Eastern Canada. John Doolittle: Yes. I mean the other thing I would add, Pat, is a lot of discussion over the last several weeks about data privacy and containing some data in Canada. And so I think that it maybe will spark an interest as well across the country in terms of data center build-outs over time. Operator: Your next question comes from Devin Dodge with BMO Capital Markets. Devin Dodge: Maybe just picking up on the last question. With the size of data centers continuing to increase, we've seen lead times for gensets kind of extend out. Have you seen interest from developers to transition away from reciprocating engines for backup power to higher power units such as turbines? Michael Stanley McMillan: Yes. Thanks, Devin, for the question. Good question. I mean, I guess, that is sort of the constraint that we mentioned earlier is I would say it's early days, especially in our markets before we can really comment on that. I think, ideally, it's great connection and clean power coming out of hydroelectric sources would be the ideal situation in our marketplace, right? I do think there are business cases that are being contemplated for interim solutions to bridge, right, while that development takes place over time. But I'd say it's a bit speculative right now to say it's going to go too far in that direction. But one that we certainly are monitoring carefully. Devin Dodge: Okay. Makes sense. Maybe just a question on AVL. Look, big sequential improvement in revenue. I think you touched on some things already here. But just wondering if this -- the Q3 revenue, does that reflect the full contributions from the recent expansion in Hamilton? Or is there more to go? And is it fair to assume that the initial contributions from the facility in Charlotte were pretty minimal in Q3? John Doolittle: Yes. We're running at close to capacity in Hamilton. Maybe some additional on closures, but not many. So we're running pretty close to capacity there. In Charlotte, we're really just getting up and running. As Mike said, we've been successful in hiring. There are some costs to get the facility up and running. So the contribution from Charlotte in the quarter was minimal, if any. Michael Stanley McMillan: Or ramp-up costs. Operator: [Operator Instructions] Your next question comes from Steve Hansen with Raymond James. Steven Hansen: Just out of curiosity, are you taking orders or bookings at this point for the new facility? Like or any of that you suggest over 2 years, the current backlog stretches. But have you started to take on those new orders for the Southern facility? Michael Stanley McMillan: Yes. Thanks for the question, Steve. Yes, I would say as we continue to ramp up production there, again, part of that is dictated by the schedule and the hiring that we mentioned earlier and so forth. But we are seeing some interest in demand. And as we mentioned in our comments, it's really that facility is intended to help support demand in the Eastern seaboard of the U.S., and we are starting to pick up some orders, and you'll see that reflected somewhat in our backlog. We don't break it out, obviously, but between the two facilities, and we can supply that market by both facilities out of Hamilton and Charlotte. However, we're starting to see some good interest there given the proximity. Steven Hansen: Okay. Helpful. And just maybe a point of clarification or just you provided some good disclosure in the footnotes that in the MD&A. But frankly, it's still a little bit difficult to understand what your pretax margins are on AVL. Can you just comment on where those stand roughly? And we can still see the noncash expense that you outlined and the revenue you outlined, just a little bit murky between the net income piece and the operating line. I mean it looks like these margins are quite healthy. And then maybe once you comment on that, just sort of how you think about the durability of that? I think last quarter, you referenced a lot of the tightness in issues, allowing you to overrun a little bit. How should we think about the trajectory of those margins over time? John Doolittle: Steve, thanks for the comment on the disclosure. If you go to Page 3 on the business combination section, we laid it out, I think, pretty clearly, we give you the revenues for the quarter, we give you the amortization cost for the quarter and we give you the net income for the quarter. And so I think you can back into the margins, and I think your conclusion is correct in terms of the margins are good. And we'll continue to monitor that as we expand the Charlotte facility, and we'll see how that goes over the course of the time, I'm not going to call out where margins are going. But you're right in your assumption right now. Steven Hansen: Okay. Helpful. I would just suggest maybe a table every quarter would be helpful just for everyone, so it's perfectly laid out if possible. Secondarily, just on a separate topic, could you just maybe comment on the backlog side a little bit. Again, the influence of AVL is obviously showing really strongly given how great that business has been performing. Just curious on the mining backlog if you're surprised at all. I know it's been -- I know it's a lumpy business, but I'm also surprised that there hasn't been some uptick in mining a little bit. Is there any visibility on the mining business improving here from early discussions and a lot of the conversations around Northern development and things. Have you seen any sort of early stage or advanced talks on that front? Michael Stanley McMillan: Yes. Thanks, Steve. I think -- so just on the mining side, I think, again, as we mentioned -- and you touched on it here in your comment in your question, it is very cyclical and lumpy given the mine development schedules. And so on one hand, I would say, especially in precious metals like gold, we're seeing continued investments, some expansion, some opportunities and some other commodities. However, given the development cycle, the investment cycle and so forth, they are lumpy. And so we're not surprised by the backlog. We anticipated that. We had, over the last 18 to 24 months some really strong equipment deliveries over time. And I guess all I would say is, look, our team is fully engaged in looking to earn their way into opportunities as they develop over the next several years. We are hearing certainly in the Ontario market, say, for example, some interest in developing some of the rare earth areas and things like that in Northern Ontario. And again, that's up to our team to participate in those opportunities and to earn our way into them. And so it'd be difficult to forecast what we're seeing there, but nice to see that there is some investment interest and I think the silver lining based on the trade discussions that we're hearing about every day. Operator: Your next question comes from Jonathan Goldman with Scotiabank. Carol Adu-Bobie: This is actually Carol on for Jonathan Goldman. So on AVL, particularly the new facility, how should we think about the level of OpEx required to support growth? John Doolittle: Yes. I mean we're -- as we talked about from a capacity point of view, we're really just building the employee base right now. We said that it's going to ramp over the course of time. So as you're ramping up the business, you would expect that OpEx would be heavy compared to revenue at the beginning, and then it will work its way out. So that's the way I would kind of model that is a little heavier on OpEx at the beginning. And then as we ramp up sales, it will come back to normal levels. Michael Stanley McMillan: Yes. And I think the only other thing I think worthy of mentioning there is, it's an owned facility. And I think we mentioned we've put about 60 into it. And so as we continue to ramp that up, that's the way you should be thinking about that facility from a fixed investment perspective. Carol Adu-Bobie: Okay. And another phenomenal quarter for CIMCO with double-digit growth. Can you talk about what's supporting growth, whether it's demand outside of your core end markets? And how should we think about the sustainability of current growth rates? Michael Stanley McMillan: Yes. It's a great question. Thanks for the question. I mean if you look at our numbers on the quarter, again, the team has done a nice job over the last 12 to 18 months and continue to show sequential growth. I think as we always mentioned, the package side is a bit lumpy just due to the nature of that part of the business, right? So the industrial side of things, construction schedules. And even on the recreational side as we do conversions to CO2 or ammonia, that side of the business can have ebbs and flows based on construction and the seasonality in our marketplace. If you look at our backlog, again, we saw some good bookings in the quarter and on a year-to-date basis, CIMCO is sitting at about $341 million, which again is a very strong number for the business, especially when you compare to historical trending and so forth. And so all that to say, what we are seeing is we certainly see ebbs and flows between Canada and the U.S. We also see it between commercial, industrial side and recreational. And I think, generally speaking, what we saw in the quarter and in the performance year-to-date is some good activity across each of the segments that we serve. Operator: Your next question comes from Maxim Sytchev with National Bank Capital Markets. Maxim Sytchev: I was wondering if it's possible to get a bit of a comment in relation to the Equipment Group's overall pricing trends. I think Caterpillar was a bit more -- provided bit more important commentary on their call. Just wondering what you're seeing in the marketplace right now? Michael Stanley McMillan: Yes. Maybe just to start on that, and John can probably give you a little color on the margin side. But I would say, again, first of all, I would say we wouldn't comment on Caterpillar in their results in the sense that they're much more diversified geographically and by a number of end markets. When we look at our particular marketplace, on the equipment side, we talked a little bit in our commentary about a bit of a movement between equipment sales, excluding mining, we're down a little bit on new but up unused. We're seeing a bit of a shift. We're quite pleased with the performance of the team in the sense that when we monitor market share and activity levels in our markets, they are down, especially in the heavier construction side, but our market share and things have done well. And so the team has done a really nice job executing there. Availability, as you know, Max, is really strong in the marketplace, whether you're looking at GCI product or the mid-tier BCP or CCE, it's very strong. So I think at the end of the day, we're adapting to our market conditions and trying to make sure that when we work with our customers, whether it's a rental, a newer or used equipment, whatever the requirement is we're there to support them, and we're very competitively positioned to help support the move in the longer term. So I can't really give you much more color than that, but... John Doolittle: Yes. Just on margins, I mean, we've talked about margins on new and used kind of coming back to more normal levels over the last little while stabilizing. We have a good mix this quarter in terms of the equipment that we shipped in terms of construction and power, a little lots on the mining side as we talked about. Rental utilizations were up a little bit, which was good news. And then product support as a percentage of the total was up. And so those all contributed to the mix issue. And as Mike talked about, our hope and plan is that product support continues to grow as the equipment that we have shipped over the last couple of years needs parts and service. Maxim Sytchev: Sure. And I guess do you maybe just touch a little bit on to the RPO, I mean that seems to be moving in the right direction as well? John Doolittle: Yes. The RPO, I'd say it's probably back to where it was in prior years before we had supply issues, Max. I think we got $101 million right now. It really is used as a cash management tool by our customers where they don't have capital, particularly in time, so it's a financing cash management issue, and we expect most, if not all, of that to convert as it usually does to sales over the course of normally 12 months. Maxim Sytchev: Okay. That's great. And one last clarification. Like free cash flow was very strong in Q3. Should we assume kind of the typical seasonality for Q4? Was there anything unusual when it pertains to this particular quarter? Or how should we think on a prospective basis? John Doolittle: Yes, cash flow -- operating cash flow was very good in the quarter, some $250 million or close to $250 million. And the inventory levels were up over the last couple of quarters, and the team did a really good job managing inventory levels this quarter. So that was a big contributor to it as well. So really pleased with the balance sheet management in the quarter and the cash flow. Maxim Sytchev: Right. But I guess for Q4, should we assume kind of like a typical seasonality that we see? Or is there anything unusual we should be mindful? Michael Stanley McMillan: Yes. I wouldn't think there's anything unusual there, Max. Like you say, I think we're sort of seeing more moderation, more normalization there. The question we always see is depending on how Q4 goes, year-end buys, we do have, obviously, equipment. We have a snow season ahead of us. But we don't -- we wouldn't predict anything unusual. Operator: Your next question comes from Steve Hansen with Raymond James. Steven Hansen: Just a clarification. Is there a reason the dividend hasn't been started to pay to the minority shareholders on AVL? Just, John, you referenced the starting point in first quarter, I was just curious. John Doolittle: Sorry, is the question on the dividend on AVL, Steve. Yes. So we're in the first year of the acquisition. And we'll have to see, of course, how the first year earnings turn out, what cash flow looks like, which cash balance looks like and then the Board will meet. We have an obligation to meet as a Board and determine how much of a dividend we should pay out based on the full year performance of AVL. So that's why it's a 2026 related issue. Steven Hansen: And it will be a quarterly regular -- or will it be lumpy year, how should we think about it? John Doolittle: Yes, I have to come back to you on that one as well. Again, the Board will meet and determine how we're going to pay out that dividend, whether it's a onetime or over the quarter. So I'll come back to keep you posted for sure. Steven Hansen: Okay. Helpful. And then just one last one, if I may, is just around the margin profile for the Equipment Group. We actually saw a nice uptick in the period. I assume part of that's mix. There's some of the disclosures suggest equipment side also had some benefit. I mean are you starting to see some stabilization in the competitive environment out there? We saw such a large swing in supply side opportunity over the last couple of years that's created some pressure, of course. But I mean, how are you thinking about the margin profile for new equipment packages going out today versus even a year ago? Michael Stanley McMillan: Yes. Maybe just to start on that, Steve. I would say it's -- again, it's -- there's availability in the marketplace is certainly much stronger and has been persistent throughout the year. And so I think part of it is, as John mentioned earlier, when you look at the mix of sales, especially if you're just looking at the quarter, but on a year-to-date basis, you'll see the product support has started to come into play. Rental has improved a little bit. And then the equipment, we're seeing movements, especially on the mining side. Keep that in mind because as we see deliveries in mining, again, they're generally slightly lower margin but larger dollars and so forth. And so there's even mix within the new segment. And as we talk about the backlog and fulfilling that backlog, I think you're going to see some ebbs and flows there. But I would say it's certainly a well-supported market in terms of availability broadly. Operator: There are no further questions at this time. I will now turn the call over to John Doolittle for closing remarks. John Doolittle: Okay. Thank you very much, Joelle, for helping us out today. Thanks for joining us, everyone, and for some great questions as usual. And that concludes our call. Please be safe. Go Blue Jays. Have a great day. Operator: Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines.