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Operator: Good afternoon, and thank you for standing by. Welcome to Forrester's Third Quarter 2025 Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to turn the conference over to Vice President of Corporate Development and Investor Relations, Ed Bryce Morris. Please go ahead. Edward Morris: Thank you, and hello, everyone. Thanks for joining today's call. Earlier this afternoon, we issued our press release for the third quarter of 2025. If you need a copy, you can find one on our website in the Investors section. Here with us today to discuss our results are George Colony, Forrester's Chief Executive Officer and Chairman; and Chris Finn, Chief Financial Officer. Carrie Johnson, our Chief Product Officer; and Nate Swan, our Chief Sales Officer, are also here with us for the Q&A section of the call. Before we begin, I'd like to remind you that this call will contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Words such as expects, believes, anticipates, intends, plans, estimates or similar expressions are intended to identify these forward-looking statements. These statements are based on the company's current plans and expectations and involve risks and uncertainties that could cause future activities and results of operations to be materially different from those set forth in the forward-looking statements. Factors that could cause actual results to differ are discussed in our reports and filings with the Securities and Exchange Commission, and the company undertakes no obligations to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise. Lastly, consistent with our previous calls, today, we will be discussing our performance on an adjusted basis, which excludes items affecting comparability. While reporting on an adjusted basis is not in accordance with GAAP, we believe that reporting numbers on this adjusted basis provides a meaningful comparison and an appropriate basis for our discussion. You can find a detailed list of items excluded from these adjusted results in our press release. And with that, I'll hand it over to George. George Colony: Good afternoon, and thank you for joining Forrester's 2025 Q3 Investor Call. Today, I'd like to cover the following topics: one, our Q3 performance; two, an update on our go-to-market approach; three, the launch of the new AI access product; four, the research business in the age of AI; and five, feedback from our Board of clients. The macroeconomic environment continued to be challenging in Q3, highlighted by the rolling U.S. federal government pullback from consulting. Q3 is historically the largest bookings quarter for our government consulting business. We were well below our target and overall consulting revenue declined 8% from the prior year. In addition, research revenue declined 6% in the quarter, driven by bookings and challenges from previous quarters. Total revenue declined 8% from the prior year. Wallet retention was up 1 point to 86% and client retention held at 74% compared to Q2. Chris will give more detail on the quarter in a few moments. In the Q1 and Q2 calls, I noted that the final step in the product transition is transforming our sales engine to consistently sign new Forrester Decisions clients and grow existing accounts. We made progress in the quarter on several fronts. One, average time to hire reps is running at 55 days, improving on our goal of 60 days, and there's very good sales talent available in the market. Two, the sales force continues to adopt the Forrester Agile Sales Technique or FAST sales methodology. We ended the quarter with the highest percentage of reps certified and with all managers now qualified to run fast deal clinics. And three, our demand marketing engine continues to improve, driven by stronger alignment between our sales and marketing teams. The result has been increased prospect follow-up and a higher rate of opportunity creation from marketing efforts. Areas where we are focused in Q4 are: one, maintaining consistent sales activities; two, improving execution of our retention life cycle; and three, maintaining a rolling pipe of $550,000 per quota-bearing headcount. Moving now to product changes. We announced AI Access, a self-service AI offering on September 9. As you know, Izola, our generative AI model, launched over 2 years ago. Clients use Izola on the Forrester Decisions platform as an alternative to search, enabling them to quickly get answers and to create custom content from Forrester's proprietary model. Izola has become one of the primary ways that clients use our research. For clarity sake, Izola is a model built by Forrester that yields answers based on Forrester's research. This content is not available in any other generative model, including the public LLMs such as Claude from Anthropic, ChatGPT from OpenAI, and Gemini from Google. Unlike the public models, Forrester's private model is based on tens of thousands of Forrester Research artifacts, which include exclusive frameworks, ideas, data, product evaluations, best practices and benchmarks. The Forrester model yields answers that are proprietary and trusted. So where does AI access fit in our product portfolio? The current Forrester Decisions portfolio includes three levels of research access: VIP, which is research plus a dedicated advisor; leader seats, which is research plus the ability to have unlimited guidance sessions with analysts; and team seats, which offer research plus the ability to attend leaders' guidance and inquiry sessions. Clients have told us that in addition to VIP leader and team users, they want more executives using Forrester's research without access to advisers, customer success or analysts. These executives are often part of the VIP or leaders' teams, but they don't yet need continuous guidance. So AI Access provides an entry level for executives within our client companies to use our research, accessing Forrester through an AI prompt and Izola homepage. We introduced the product for three reasons: one, to attract new clients. AI Access will widen our client base and enable more executives to use Forrester; two, enrichment, AI Access provides streamlined self-service in a fast, trusted way for clients to get answers; and three, win backs. We will use AI Access to reintroduce former clients to Forrester Decisions. With the advent of AI Access, we have widened the Forrester Decisions portfolio, enabling us to land and expand with a wider group of executives and helping them align their initiatives and thinking. We are democratizing access to our research, making it easier for larger teams to get the answers they need to make collective decisions. AI Access is our entry-level research product. Volume pricing is available based on the number of seats acquired. Since the mid-September launch, we have seen significant interest with a multimillion dollar fast-growing sales pipeline. In Q3, we secured one of the largest research deals in Forrester's history with a large government agency that is modernizing their organization and is pushing toward fully AI-enabled decision-making. Our ability to offer this client an enterprise-wide pricing model via AI Access was a key differentiator, enabling thousands of users to gain access to our research in that account. We are off to a great start with AI Access and believe that the product will quickly become an important part of the Forrester Decisions portfolio. Now before I leave the topic of AI, I want to say a few words about Forrester's place in the AI future. I know that there have been many questions about the value of research in a world in which public large language models are becoming more adept at answering questions. In that future, what will Forrester's role be? Generative AI is good at enabling people to converse with broad data sets. In the case of the public language models like ChatGPT, that data set is built from what is called the common crawl, publicly available information scraped from websites. But as you know, that information does not include private data from sources like Bloomberg, Dun & Bradstreet, FactSet or Forrester. And of course, the public models do not include information like your bank account. To converse with that data in the future, you'll have to go to a private AI model built by Bank of America or Barclays as examples. Public AI will never be able to construct trusted data from thin air, just as it will not be able to conjure your bank balances without access to your bank. So in the age of AI, Forrester will be akin to a private research bank, creating and curating four proprietary assets: one, data. We will construct protected data sets and analyze them against longitudinal studies that the company has built over the last 3 decades; two, original ideas and frameworks like our Zero Trust security model; three, complex analysis that combines ideas and data. An example would be our total experience score that marries customer experience data with brand data; and four, proprietary information that forms the basis of the client Forrester relationship. Client priorities and initiatives would be an example. Of course, Forrester will leverage AI as we do with Izola to help our clients use these assets, but this information will not be available in public models. Also, while we believe that the future will be driven by AI, there will continue to be HI, human intelligence, driving knowledge and thought in society. This is not a robot moment when the Androids arrived to take all of our jobs. It is rather an Ironman moment when humans will put on suits of Generative and Agentic AI and become more powerful for their customers. Yes, there's a lot of AI at work, but inside the suit, it's still a human being that is able to channel AI to deliver the highest value. That's exactly what Forrester is doing with Izola and AI access, using AI to become more powerful and more useful to its clients and to the world, while also offering access to the analysts that created the research in our model. The word hovering over any discussion of AI is the word trust. When executives are making important business and public policy decisions, they must trust the information to train the AI model and that the model yields accurate answers backed by trusted data and trusted people. Forrester serves executives at some of the world's largest companies and government agencies. These clients are making decisions that will have long-term impact on the futures of their organizations. Yes, they will use AI to make those decisions, but they will rely on trusted AI, and that is what Forrester provides. Forrester executive team met with the company's Board of Clients in September. For many years, this Board has advised us on strategy, product and research direction. The members are trusted advisors to Forrester and Forrester is a trusted advisor to their companies. The Board is comprised of client executives who serve for 3 years. Current companies represented include Air France, AG Insurance, Ameritas, IBM, Nationwide, Travelers and SAP Concur. I'm not going to go through a full summary of the Board meeting, but I wanted to give you a few quotes in the members when we ask them, why do you use Forrester? Here are a few responses that I thought were illustrative of our value to clients. You challenge my thinking and help me define a new strategy. I use you for two things: knowledge of technical intricacies and bold advice. You give me backup and justification to move forward on projects. I love the benchmarks and associated future data mapping strategies that helps me develop. You're in it with us, setting us up for success, helping us pressure test solutions, breaking down our company silos. As a final quote, "I don't make a major decision without checking in with Forrester. It's a privilege to work with you. The Board of clients was very supportive of the launch of AI Access, and much of the meeting was devoted to Board members guiding us on pricing, positioning and packaging of the new product. So to conclude, we continue to work through the economic moment by: one, staying focused on improving our go-to-market motion; two, improving the Forrester Decisions platform; and three, carefully controlling expenses. We are very excited to be introducing AI Access. And we look forward to using AI to democratize access to our research and to further establish Forrester as the AI research company. Thank you for listening to the call. And I'd now like to hand it over to Chris. Chris? Chris Finn: Thanks, George, and good afternoon, everyone. The third quarter saw an exciting product launch with AI Access. We experienced immediate market validation with bookings and a landmark large enterprise deal incorporating this new product just weeks after its release. Although the ongoing dynamics in the marketplace continue to negatively impact all three lines of business, we delivered operating margin and EPS above consensus. And we continue to see stabilization in the research business with research revenue down 4%, excluding the divestiture of FeedbackNow, an improvement on the last quarter's performance. It is early in the sales cycle, but we are anticipating our new AI Access product to have a positive impact on Q4 and 2026 CV performance. Our Consulting and Events businesses continue to face headwinds in a tough selling environment. The consulting business has been meaningfully impacted by the cost-cutting measures enacted in the U.S. federal government, and we see these challenges continuing next year. The shift in the timing of one of our larger events negatively impacted results this quarter, and we see ongoing impediments for that business over the medium term as new leadership is evolving our offering and go-to-market motion. The fourth quarter is our largest bookings period, and we are positive of our pipeline. However, we are downward adjusting our revenue guidance based on the performance of Consulting and Events. This revenue adjustment flows through to a modestly lower margin and EPS guide for the year. Q3 saw a 7% CV decline. This is a continuation of the last 2 quarters' performance. We anticipate improved performance in the fourth quarter to come from the growing pipeline for the new AI access product. Therefore, even with the continuing uncertainty in the market, we are expecting CV to improve to a low single-digit decline for the year. For the total company, we generated $94.3 million in revenue for the quarter compared to $102.5 million in the prior year period, which is an overall revenue decrease of 8%. In terms of our revenue breakdown for the quarter, research revenue was $72.7 million, down from $77.1 million in 2024. This was a decrease of 6% compared to the third quarter of 2024, with revenue from our subscription research products down 5%. Excluding the impact of FeedbackNow, which we divested last year, research revenue declined by 4% year-over-year. Client retention of 74% was flat from the prior quarter. However, wallet retention was up 1 point to 86%. As discussed in recent quarters, wallet retention is being affected by enrichment challenges. This trend directly reflects the uncertain budgetary and macroeconomic environment we are experiencing. Our Consulting business posted revenues of $21.5 million, which was down 8% compared to the prior year. We are continuing to see uneven performance in the business by each product line. This year, Strategy Consulting has been negatively impacted by its degrading government business, but advisory grew double digits this quarter. We are expecting this mixed performance to continue for the remainder of the year and into next year. And finally, regarding our events business, we shifted one of our three major North American events, technology innovation into Q4, which resulted in insignificant events revenue this quarter. As noted last quarter, the outlook for the events business remains challenged, specifically the outlook for sponsorship revenues. The events team continues its work in addressing these issues. Continuing down our P&L on an adjusted basis, operating expenses for the third quarter decreased by 11%, primarily driven by lower compensation and related costs. Specifically on headcount for the third quarter, we were down 8% compared to the same period in 2024. We continue to monitor costs very closely with particular attention focused on headcount, hiring, and attrition. Operating income increased by 21% to $9.9 million or 10.5% of revenue in the current quarter compared to $8.2 million or 8% of revenue in the third quarter of 2024. Higher operating income and margin were in part driven by the shift in event timing and also by very careful cost management in the quarter. Interest expense for the quarter was $0.7 million, down slightly from the $0.8 million in the third quarter of 2024. Finally, net income and earnings per share increased 30% and 28%, respectively, compared to Q3 of last year, with net income at $7.2 million and earnings per share of $0.37 for the current quarter compared with net income of $5.6 million and earnings per share of $0.29 in the third quarter of 2024. Looking at our capital structure, year-to-date cash flow from operating activities was $24.3 million and capital expenditures were $1.9 million. We did not pay down any debt in the quarter. We did repurchase approximately $2.4 million worth of shares in the period. We have over $77 million of our stock repurchase authorization intact. Our balance sheet remains strong with cash at the end of the quarter of approximately $132 million and debt of only $35 million. As mentioned earlier, we are modestly lowering our guidance range for the year. For 2025, we now expect revenue to be $395 million to $405 million or down 6% to 9% versus 2024. The reduction in the range by $5 million is driven by ongoing headwinds in the consulting and events businesses. The outlook for the Research business remains a mid-single-digit decline for the year. The consulting business is now a high single-digit to low double-digit decline and the Events business is now a decline in the high 20% range. We now expect our operating margins to be in the range of 7.5% to 8.5% for 2025, and interest expense is expected to be $2.7 million for the year, and we are guiding to a full year tax rate of 29%. Taking all of this into account, we now expect EPS to be in the range of $1.15 to $1.25 for the full year. This quarter, we took a significant step on our continuing journey with the AI research company. The release of the AI Access product and the first major contract win associated with the new offering has shown we have a differentiated product in the marketplace. As George discussed, we continue to believe Forrester will play a key role in the age of AI. Our research and analysts will offer trusted, proprietary, strategic and actionable advice. This type of trusted guidance is now ever more important in both an uncertain world and a world impacted by AI. Thank you all for taking the time to join us today. And with that, I will hand the call back to George. George Colony: Thank you, Chris. To summarize, the company is excited to be introducing the AI Access product, and we are pleased with the early market reaction. It widens the Forrester Decisions portfolio, makes it easier for our clients to get trusted advice fast and it democratizes access to our research. Thank you for joining the call, and we will now take questions. Operator: [Operator Instructions] And I show our first question comes from the line of Andrew Nicholas from William Blair. Thomas Roesch: This is Tom Roesch on for Andrew Nicholas. I really appreciate the color you guys gave on AI during the prepared remarks. But I was just wondering if you could expand on your thoughts on the perceived disruption from AI, specifically as it relates to the -- just the research part of the business of like without the guide access like those type of licenses. And also, I'm just curious like what is the typical customer demographic that chooses to go with just the research access and not the guide level? Or like what's the reasoning usually behind it when that's kind of like the sale that you do? Nate Swan: It's probably a little bit too early, Tom, to make that call. I mean AI Access has only been available for a couple of weeks. So I would expect the demographic to be lower, to be a younger demographic for AI Access, but it's really too early if that was your question. What I would say is if you don't have AI Access to your product, you're going to have a hard time attracting that younger demographic. So another good reason why we like having the product. Thomas Roesch: Got you. And then switching gears, I was wondering if you could kind of expand on what you're seeing in the sales pipeline in the fourth quarter. And then also, I believe last quarter, you had mentioned kind of underperforming on conversion rates. So it sounds like you guys have been making strides in your go-to-market strategy. So I was wondering if you've seen any improvement on conversion as well. Nate Swan: Yes. Great question, Tom. So we are seeing some improvement, specifically our emerging tech team. We just did a global call with our sales organization today where we called out their conversion rates dropping by 27% year-over-year -- sorry, their time to conversion. That was a misstatement on there, time to conversion dropping 27%. So they are seeing really good conversion. And what they're doing is what we call a social contract, where they are confirming with the buyer early on in the sales cycle that they would like to be evaluating Forrester. It's an opportunity to hold the client accountable, hold ourselves accountable to the steps to walk through a sales process and seeing really, really good process -- progress with that. Time to close one for that team in particular, dropped from roughly 80 days down to about 59 days, so a significant decrease. And the rest of our teams are also in that rough 80 days. Now they are working with some larger clients typically in some other teams. So we don't expect to have those type of dramatic results, but we do expect to see some pipeline acceleration as our teams are really coaching in this type of methodology to drive faster conversion. As far as size of pipeline, we are roughly the same size year-over-year, so plus about a couple of percent on there. But we're seeing a better conversion. So we're very hopeful that in Q4, we will see continued improvement in conversion, one, speed; two, and I think to echo both George and Chris' comments on AI Access. AI Access is opening doors for us. So we're seeing more clients respond. They want alternatives out there. They want to be able to spread research out to larger parts of the organization. Not every person in an organization needs to have the guidance that we give. But if they have guidance at the top of the organization and access to the same research throughout, that really creates alignment for our clients and has been really well received. So not just on our large government deal, we're seeing it around the world. The international team has done a fantastic job securing winbacks from clients that like this model. And so we think there's a lot of momentum from that. We're very hopeful that Q4 will drive some more business. Thomas Roesch: If I could just slip in one quick follow-up. Just on like the large language models, have they come up at all in customer conversations you guys have had? Or have you gotten any pushbacks from clients that have tried to use maybe one of the public -- switch the public one or a different type of large language model? Nate Swan: Yes, absolutely. I think a lot of customers bring it up and say, I can use things like ChatGPT or Claude, et cetera, and I get really good answers. And while I say they get really good answers, do you really trust where they're coming from? I am certainly not an analyst. I'd let George and Carrie probably answer more on that. But a lot of that information is not coming from reliable sources that have models, data and research that Forrester has. In fact, none of them have what Forrester has. So just to be clear about that, they're not backed by those things. And so if you're going to make million dollar, multimillion or $100 million decisions, going out there and trusting ChatGPT or other sources, while that is good information to get, I really don't think that's a reliable way to make a decision for your business model. And so you're going to need a trusted source like Forrester to be able to do that. Carrie Fanlo: If I could -- this is Carrie. If I could add one thing on to Nate's comments. For every pushback or client or prospect conversation that we have asking to compare us to the public models, we have more than that asking to actually put our data and insights into their employee environment where they're getting trusted insights to empower their employees. That's actually where most of our conversations are happening, where they're seeing this opportunity to say, "Hey, we've been tasked with providing a world-class set of insights to our employees to make decisions, to go win deals. How can we make sure that Forrester data and insights are in our protected environments because we don't want our employees relying on the public models to make business decisions. So more opportunity than threat on this front because we think that companies understand the impact and the importance of trusted data sources. Nate Swan: Just to add on to Carrie, as she brings up an excellent point. I've been involved in several conversations. I know Carrie has, I know George has with clients that are looking to do exactly that, and they're very excited when they see what the previous Izola feature and now AI Access does and allows them to do. The reaction has been incredible. I mean, I've sat in a meeting with a Chief Digital Officer from a large brand agency and they were -- they wanted to go to commercials almost immediately as they saw this. So we are seeing some very good response from clients. So we're excited about that. I mean, there's going to be a lot of AI used just as there's a lot -- the moment reminds me a little bit of 2002 when people would say, well, we don't need Forrester anymore. We're going to use Google. And my come back with that was always great, glad that's your plan. You're going to make a $100 million technology decision. Tell me how that board meeting is going to go. When you tell them the research I did to make this decision was made on Google. So obviously, Internet search helps a lot. AI search will help a lot. But at the end of the day, when these are critical decisions which will require critical data and trusted data, and that's where Forrester, as I described, that will be our place in this future. Operator: And I show our next question comes from the line of Michael Mathison from Sidoti & Company. Michael Mathison: My first question is whether there are any particular verticals or industries where you're seeing better success at gaining new clients or deepening client relationships? Nate Swan: Well, yes, absolutely. So number one, while it's been a challenging opportunity in the government, we actually think there's a massive opportunity in the U.S. federal government. So retention challenges this year as agencies were having those come in and cut budgets. But the response to how Forrester is making our offerings available to people and the support that we've gotten from Forrester to go out in front of the government and talk about what we're doing specifically with AI Access, we've had a number of agencies very interested in what we're doing. So we've seen really good success there in the U.S. Again, coming back to the international markets, we're seeing really good success in the international markets on the end user side. So growing that end user business, which is really our goal is to grow the end user business even stronger. We're seeing great success in the international markets, capturing clients from the CPG industry, manufacturing, financial services. So lots of success there. And we're starting to see some breakthroughs as well as some manufacturing opportunities in North America as well. Our end user new business team really struggled for about 6 months, starting to see some raise of sunshine from them as they go into the fourth quarter. We're seeing some net new logo opportunities in financial services as well as manufacturing and CPG. Michael Mathison: Okay. Great. Second question, your effort to increase the contract value per client is a major strategic goal. You were still down here a couple of percent this quarter. Can you comment on when you feel like that effort would bear a little bit more fruit? Chris Finn: Yes. Thanks for the question. This is Chris. Yes, look, I think as we move forward here, we're seeing some traction, obviously, with the new product in AI Access and a stabilization of retention rates. And so I think as we move forward, our expectation is we've got a big quarter in front of us in Q4. But as we get into next year, we should start to see some improvement there in the first half, especially as the new product gains traction, and we continue to see stabilization on retention. Nate Swan: Average CV per client has -- just looking at up 5% in the year. Did you get that, Michael? So average CV per client up 5% in the year. Michael Mathison: I'm sorry, I didn't have it in front of me, but I'll take your correction. Nate Swan: Yes. So we're up to $162,000 per client. Operator: And I show our next question comes from the line of Vincent Colicchio from Barrington Research. Vincent Colicchio: Yes, Nate, on the better conversion this quarter, can you attribute that to something in particular? Or is that too difficult to do? Nate Swan: No. As I was mentioning, this emerging tech team has been working what we call our social contract for the better part of 9 months, and they're really starting to see some success. And I think the team is gaining confidence in it, Vince. When you first started, it might feel a little bit awkward to you as you go through a sales process. But now that team is really clicking and they're doing it every single time. Anytime they get engaged with a new prospect, they are saying, "Hey, it seems like there's genuine interest. I think we can help you." This is what this process looks like over the next 6 to 8 weeks. Is this something you're interested in doing? This will be something that would cost money, clearly to invest in Forrester. Typically, the budgets would be between X and Y for something like this, although we don't want to predetermine what it would be. And is this something that you're interested in and can provide access to your team who has the initiatives to execute that are part of your priorities for the business. If you are interested in doing that, we are interested in working with you to see if that works. You can disengage at any time. That it's not a commitment to buy. And I think they've gotten really good at that talk track. And we had, as I said, a global call earlier today, really encouraging the rest of the team that you need to do this. This is working. They are having success. They are seeing their -- not just their close won get better, but they're closed lost. Even when a client agrees to go through a social contract, you still don't have the 100% conversion of your Stage 1 opportunities. You're just entering the pipeline. It's just a commitment to look and view and it allows the sales rep to hold the client accountable and the client to hold the sales rep accountable and hold Forrester accountable. So we've seen really good luck in it. And I think that we'll start seeing more of that. When you marry that with our Forrester Agile selling technique, I think it's calling high, making sure that we understand the value sweet spot that we are looking for from our -- for our clients, making sure that there is alignment. And that -- at the end of the day, they don't want to waste their time. We don't want to waste their time. And we believe that we can really drive a better conversion. So dropping our close loss from -- in that group from 130 days to about 105 days is significant. You're not wasting time on opportunities that are never going to close. Vincent Colicchio: And then, George, one for you. Any -- what are your thoughts on the Carahsoft partnership? When do you expect it to start contributing? And what makes you optimistic? Nate Swan: Yes. George -- sorry, Vince, I'll jump in for George because that is part of a sales play. One of my sales leader for the government team, Dana Barnes has done a really nice job. So he has worked with Carahsoft in the past with the government teams. What that allows us to do is in previous software companies that he was with. And what that allows us to do is open up markets. They help with marketing and opening doors and contract vehicles that we might not be able to get on. So we've just gotten started with them. We're starting to see a lot of traction in the government space. And so while it's been really tough sledding in the government market, we had a big win, number one. We've been in front of over 200 buyers at one of the -- I can't remember. Chris Finn: I think through Carahsoft. Nate Swan: Not through Carahsoft, but through a event called FedTalk that we were at when our CTO was there. And Carahsoft is getting us into states that we haven't been doing business in and agencies that we haven't been doing business in. So we haven't seen a return yet, but I expect that we will relatively soon. That was signed in the middle of Q3. Vincent Colicchio: Are there other partnerships like this that may be useful to other parts of your business? Nate Swan: It's a great question. I think we want to see what success looks like. We have our -- where Forrester doesn't have a direct presence, we have our IVD model, and we have gone through partners there. And that business has been really successful. That's been in markets that Forrester is not in, in Latin America and other countries, Middle East, et cetera. So pretty successful on that side. I'm sure that we could explore other partnerships. To start, we thought Carahsoft was a good place for us to go. And they've been really responsive to us. Operator: That concludes our Q&A session. At this time, I would like to turn the conference back to Chris Finn, Chief Financial Officer, for closing remarks. Chris Finn: Yes. Thanks, everyone, for joining today. As always, if you have any questions or follow-up, please reach out to Ed or myself. Thank you. Nate Swan: Thank you very much. Operator: Thank you. This concludes today's conference call. Thank you for participating. You may now disconnect.
Operator: Greetings, and welcome to Weave's Third Quarter 2025 Financial Results and Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. [Operator Instructions] I would now like to turn the conference over to your host, Mr. Mark McReynolds, Head of Investor Relations. Thank you. You may begin. Mark McReynolds: Thank you. Good afternoon, and welcome to Weave's Third Quarter 2025 Earnings Call. With me on today's call are Brett White, CEO; and Jason Christiansen, CFO. During the course of this conference call, we will make forward-looking statements regarding the anticipated performance of our business. These forward-looking statements are based on management's current views and expectations, entail certain assumptions made as of today's date and are subject to various risks and uncertainties described in our SEC filings. We've disclaims any obligation to update or revise any forward-looking statements. Further, on today's call, we will also discuss certain non-GAAP metrics that we believe aid in the understanding of our financial results. Unless otherwise noted, all numbers we talk about today will be on a non-GAAP basis, which excludes onetime acquisition-related compensation. A reconciliation to comparable GAAP metrics can be found in today's earnings release, which is available on our website and as an exhibit to the Form 8-K furnished with the SEC before this call as well as the earnings presentation on our Investor Relations website. Before I turn the call over to Brett, we want to let you know that we'll be participating in the Stifel 2025 Midwest One-on-One Conference on November 6 at the Waldorf Story in Chicago and also at the Raymond James TMT and Consumer Conference on December 8 at the Lotte New York Palace Hotel in New York City. And with that, I'll now turn the call over to Brett. Brett White: Thank you, Mark, and thank you to everyone joining us today. We are very pleased to report that the Weave team delivered another strong quarter, marked by accelerating revenue growth, non-GAAP profitability and free cash flow as well as significant advancements across our product road map. Weave is a vertical SaaS platform that delivers AI-powered patient engagement and payment solutions, purpose-built for the unique needs of small and medium-sized healthcare practices. Our platform powers communication, scheduling and payment workflows that free teams from repetitive manual work, giving them time to focus on meaningful patient relationships and higher-value activities. We combine operational insights into one seamless experience to help practices grow and improve the efficiency of their teams. The result is a fuller schedule, stronger revenue capture, happier patients and teams empowered to focus on people rather than paperwork. We solutions work around the clock to convert missed calls into booked appointments, helping to ensure practices never miss an opportunity. Our AI is trained on over a decade of real-world patient interactions, including billions of phone calls, voice messages and text messages. This gives us a deep understanding of how practices and patients actually communicate. Weave integrates directly into a practice's system of record through authorized APIs, which allows us to deliver automated workflows that feel like an extension of the practice. This quarter, we generated $61.3 million in revenue, accelerating our year-over-year growth rate to 17.1%. This also marks our 15th consecutive quarter of exceeding the top end of our revenue guidance. Gross margin reached a record high of 73% this quarter, more than 15 percentage points higher than our gross margin at our IPO 4 years ago. We again exceeded the high end of our operating income guidance. This strong performance translated into another solid cash flow quarter with $5 million of free cash flow. This continued improvement reflects our disciplined execution and underscores the efficiency and scalability of our business. The SMB healthcare market is evolving rapidly with technology playing a greater role in how practices attract, engage and retain patients. We believe the future of software and SMB healthcare will deliver intelligent automation that works hand-in-hand with office staff to improve patient experiences. As we execute on this vision, we are laying the foundation for our next chapter of growth. Patient care will remain deeply personal, while routine operations quietly run in the background. We believe that the most successful practices will adopt technology purpose-built for modern patient interactions with automated workflows, actionable insights and intelligent agents that anticipate and act. Dental service organizations or DSOs and other group practices understand and share our vision for a connected automated front office. Industry momentum is clearly moving in this direction as healthcare practices look to adopt unified, intelligent solutions built with compliance, reliability and patient experience at the forefront. Weave is uniquely positioned to lead in this next phase of transformation. Our scale, brand and deep expertise in SMB healthcare gives us an advantage. Our platform is differentiated by our authorized integrations with leading practice management systems. In an environment where lawsuits are putting unauthorized integrations at risk, Weave's secure architecture and HIPAA-compliant infrastructure gives practices confidence and peace of mind. Security, regulatory compliance and reliability are table stakes in healthcare, but we believe they are also barriers that our competitors may not understand and cannot afford to meet. One of our largest customers recently shared with me at a trade show. He said, "We're so glad you acquired TrueLark because of your proven scale, security and reliability." When I looked at some of these other companies, we have no idea what's under the hood. Weave's vertical focus gives us a unique advantage. Unlike horizontal platforms and general purpose automation tools, we understand healthcare workflows, regulatory requirements and the nuances of patient interaction. That level of precision is critical in an industry where even small errors or misbooked appointments can damage patient relationships and business performance. No other vendor serving SMB healthcare combines unified communications, deep system integrations, intelligent automation and enterprise-grade privacy and security in a single trusted platform. We believe this combination creates a durable competitive moat and positions Weave to capture long-term market share as practices modernize the patient experience. Our strategy builds on this strength by focusing on deepening customer reliance on Weave and expanding our share of practice spend. With each new feature, we are striving to enhance automation, engagement and efficiency for our customers, driving stronger retention and expansion across our base. As intelligent automation becomes more deeply embedded within our unified platform, we believe it will unlock new recurring revenue opportunities and strengthen the long-term economics of our business. This advantage is not theoretical. It's already transforming how healthcare practices operate. Across healthcare, the front desk is the hub of the patient experience. For years, practices have been constrained by staffing shortages, fragmented software, disconnected workflows and missed call from patients seeking to book appointments. Staffing remains the #1 challenge for SMB healthcare practices. More than 70% report difficulty in hiring and retaining front desk staff, a problem that disrupts patient communication and daily operations. By helping practices operate reliably regardless of staffing levels, weave solves one of the biggest operational risks in healthcare today. One of our largest customers, a leading dental group comprised of hundreds of practices nationwide, was facing these same challenges across its network. Before Weave, their average answer call rate hovered around 60%, meaning 2 out of every 5 patient calls went unanswered. A regional leader who oversees 50 of their practices decided it was time for a change. She and her team turned to Weave to bring patient interactions together, phones, messaging and scheduling, all in one place. The results have been extraordinary. Today, nearly all of those practices run on Weave with answer rates now exceeding 90%. In addition, 17 of these practices have recently adopted our AI receptionist powered by TrueLark to automate the handling of after-hours calls and scheduling. In just 1 quarter, those locations booked more than $320,000 in additional appointments with 75% of those appointments scheduled without any staff involvement. As a result, new patient volume has increased by over 25% year-over-year. This is a powerful example of how Weave unites communications and automation to help practices grow efficiently while delivering a superior patient experience. Results like this demonstrate how Weave is delivering the next generation of intelligent communication. We are solving the real problems that every practice faces. Throughout the patient journey, our AI receptionist delivers always-on engagement and ensures consistent service even when staff levels fluctuate. It acts as a true extension of the practice, answering questions, confirming appointments and managing scheduling 24/7. Over the next few quarters, we intend to expand its capabilities meaningfully. Later this quarter, we plan to introduce voice capabilities, enabling the AI receptionist to handle incoming patient calls directly and intelligently route complex inquiries to staff. It will complete tasks via voice or text, including scheduling, confirmations, backfilling cancellations, all within the same unified conversation thread our customers rely on every day. We continue to deepen the integration between TrueLark and Weave. As we laid out in our last call, we began the go-to-market integration by introducing our AI receptionist product to the mid-market accounts. And this month, we extended sales efforts to our existing single location customers, where we are already seeing strong interest. In November, we plan to launch sales to new single location customers, incorporating our AI receptions directly into our standard sales motion. In addition to our AI receptionist, we are building a range of AI solutions that reinforce Weave's position at the forefront of intelligent automation in SMB healthcare. Over the last year, we've seen strong adoption of call intelligence, an AI-powered analytics engine that transforms every phone interaction into actionable insights. Call intelligence analyzes call recordings, detects customer sentiment and identifies both patient needs and additional revenue opportunities. One recent customer example illustrates its impact. Call intelligence flagged a missed call from a patient who reached out about a dental emergency and staff followed up the same day. The patient received the treatment and decided to move forward with an $80,000 cosmetic treatment. As the practice manager explained, opportunities are everywhere and tools like this help you catch them before they slip through the cracks. In coming quarters, we're expanding call intelligence capabilities to provide visibility across every conversation, whether automated or handled by staff. It will proactively surface action items to guide next steps for the AI receptionist or the front desk. By unifying all human and intelligence-driven interactions into a single conversation thread, Weave uniquely enables practices to capitalize on opportunities for revenue growth, improve patient experience and continuously coach teams for better performance. Finally, our AI-powered in-app assistant serves as a true copilot for busy front office teams, helping practices work smarter, faster and more efficiently. In the coming quarters, it will simplify setup and assist with customized workflows to help practices get the most out of Weave's advanced features. The opportunity ahead of us is significant. The combination of strong demand, a proven platform and AI innovation positions Weave to drive sustainable growth and long-term shareholder value. Weave is leading this transformation, unlocking the full potential of intelligent automation to power the next generation of connected, efficient, patient-focused practices. In addition to the developments in AI, we continue to make positive strides in the other growth vectors we outlined earlier this year. Specialty medical continues to emerge as a key growth driver for Weave. This vertical delivered record results again this year with the highest number of medical location additions in company history. As a reminder, the specialty medical vertical is more than triple the size of the dental, optometry and veterinary combined, underscoring the significant long-term opportunity it represents for Weave. Mid-market also continues to be a powerful growth engine for Weave with expanding traction across multiple healthcare segments. Our mid-market pipeline continues to diversify with meaningful contributions coming from outside the core dental base. For example, we've recently signed a contract with a 600-plus location specialty medical group. The initial phase includes roughly 50 locations, which have already begun onboarding. This account has the potential to be one of our largest customers. This group came to Weave through an EMR partnership and is a great example of the opportunities that we can unlock when we partner closely with practice management systems. Over the past several quarters, we've launched multiple new integrations. In the first year after launch, sales of the integrated solutions have grown 2x to 5x year-over-year, demonstrating strong demand and the immediate impact of integrated offerings. These integrations are expanding our reach and reinforcing Weave's position as the most connected platform in small and medium-sized healthcare. Payments continues to be one of our strongest growth drivers with Q3 revenue growing at more than double the rate of total revenue. We continue delivering on our payments platform road map, focusing on the most requested customer features. At the top of this list, were surcharging and bulk collection features, both of which were recently launched. Surcharging helps our customers manage rising costs by enabling them to pass credit card fees on to the payer if they choose. Bulk payments allows practices to initiate multiple payment requests simultaneously. This capability saves significant time for office staff and strengthens our value proposition for multi-location and enterprise customers. To conclude, I want to thank our customers, partners, team and shareholders for your continued trust and belief in Weave. Looking ahead, we are incredibly excited about the future we are building with our AI platform, which we expect to transform how practices communicate, automate workflows and deliver care. With the foundation we've built and the innovation ahead, I'm very optimistic about the future for Weave. I'll now turn the call over to Jason for a deeper discussion of our financial results. Jason? Jason Christiansen: Thanks, Brett, and good afternoon, everyone. It was another solid quarter for Weave, reflecting continued momentum in our key growth initiatives and disciplined execution across the business. We delivered revenue of $61.3 million, exceeding the midpoint [Audio Gap] an acceleration of our revenue growth rate to 17.1% year-over-year. Excluding TrueLark and the effect of last year's price increase, Q3 revenue grew more quarter-over-quarter than any quarter in the past 4 years. Specialty medical, where we are still less than 1% penetrated, grew more than -- more in Q3 than in any previous quarter as it continues to ramp. Payments revenue again grew more than double our total growth rate. Gross revenue retention held steady at 90% in Q3. Net revenue retention was 94%. We have discussed the resiliency of the end markets we serve, and that remains true today. Demand remains strong, and we continue to be successful in customer acquisition. I would like to highlight a few aspects of our retention metrics. First, our net revenue retention in the second half of 2024 and the first half of 2025 was bolstered by the effects of a price increase in Q2 of 2024, which accounted for approximately 250 basis points of uplift. We have lapped the effect of that price increase and our net revenue retention rate has decreased commensurately back to within 1 percentage point of Q3 of 2023 prior to the price increase. Second, when we enter new verticals, it is typical for us to see higher churn and lower average sales prices initially. In the early phases of a new vertical, we are selling newer integrations and often nonintegrated solutions, which have a slightly higher churn profile. That is true for specialty medical, our fastest-growing vertical, where strong new customer adoption creates pressure on overall retention metrics, similar to what we experienced in the early stages of more established verticals. Over time, we expect churn to normalize and average sales price to increase as we achieve greater product market fit and industry presence through more mature integrations and greater integration coverage. Lastly, it's also important to note that our reported retention metrics are measured on a location basis, not a customer or logo basis on a weighted 12-month average. For example, adding another location to a multi-location customer does not improve our retention metrics as each location is viewed separately. If we were to report net revenue retention on a logo basis, it would be higher than our net revenue retention on a location basis. Let me now turn to our operating results for the quarter. Gross profit grew to $44.8 million, an increase of nearly $7 million year-over-year. That represents a gross margin of 73%, up 50 basis points year-over-year and 70 basis points sequentially. The improvements were largely driven by leveraging cloud data center costs and hardware amortization. Sales and marketing expenses were $24.3 million or 40% of revenue. We increased Q3 demand generation expenses to capitalize on strong momentum in specialty medical, recently announced integration partnerships and mid-market. This included demand generation for the solutions recently acquired in the TrueLark acquisition. Research and development expenses were $9 million or 15% of revenue. Our focus includes integrating TrueLark into the Weave platform and accelerating the development of our product road map and AI strategy. General and administrative expenses were $9.9 million or 16% of revenue, which provided the most year-over-year operating leverage in our business as these expenses improved from 17.5% in Q3 of 2024. Operating income for Q3 was $1.7 million, an improvement of $300,000 compared to Q3 of 2024 and exceeds the high end of the guidance range we provided in July by $700,000. This represents an operating margin of 2.7%. Turning to our balance sheet and cash flow. Weave's liquidity remains strong. We ended the quarter with $80.3 million in cash and short-term investments, an increase of more than $2 million sequentially. The third quarter was another period of strong cash generation with $6.1 million of cash provided by operating activities and $5 million of free cash flow. Year-to-date, free cash flow totals $8.5 million, representing a $4.3 million improvement compared to the same period last year. Looking ahead, we are raising the midpoint of our full year revenue guidance and updating the range to $238 million to $239 million. We are also raising our full year non-GAAP operating income guidance to be in the range of $3.3 million to $4.3 million. This outlook reflects meaningful year-over-year improvement in profitability. For the fourth quarter of 2025, we expect total revenue in the range of $62.4 million to $63.4 million and non-GAAP operating income in the range of $1.5 million to $2.5 million. Our expected weighted average share count for the full year is approximately 76.3 million shares. In closing, our business continues to perform well and momentum across the company remains healthy. Q3 was a strong quarter marked by accelerating revenue growth, record gross margin and solid free cash flow. As we look ahead, we're confident in our ability to balance growth and profitability as we execute on our strategy. Thank you for your continued support. And with that, we'll now turn the call over to the operator for Q&A. Operator: [Operator Instructions] Your first question comes from the line of Alex Sklar with Raymond James. Alexander Sklar: Brett, maybe first for you on payments and then some of the additive functionality that TrueLark bring, particularly around payments. Can you just talk about what you're seeing from that solution broadly? How are you doing in terms of new lands in specialty medical with landing with payments out of the gate? And when do you think you're going to be in a position where you can integrate some of that TrueLark functionality on the revenue cycle management opportunity and automating some of the collections processes? Brett White: Alex, sure. So first, we'll talk about payments. So we had very strong volume growth this quarter. So we continue to improve there. As we mentioned, we had revenue growth in aggregate was greater than -- more than double the total growth rate. So continue to add customers, continue to add volume. Average volume per customer continues to be strong. As far as when do we think we can add TrueLark capabilities, that's absolutely on the road map. Our road map is really to release the stand-alone product, which is not yet integrated with payments, but it's on the road map. We're going to be upselling -- we just started upselling it to our existing customers. We're going to introduce the sales to our new single locations this month. And then we're going to be building an integrated solution that we're calling internally called infusion, where we integrate the TrueLark technology into the Weave inbox. So you have one combined inbox. And then shortly after that, we'll follow with what we're calling intelligent actions, which one of those will be working payments and RCM type activities into the automated workflows. So follow-ups on past due payments, active outbound invoicing, intelligent insurance verification and insurance eligibility. So over time, probably next couple of quarters, be building that functionality into a lot of the intelligent actions that the system is going to deliver to our customers. Alexander Sklar: Okay. Great color there. And I don't know if this one is for you, Brett, or Jason, but really strong commentary on specialty medical again this quarter. You had a nice group win. Can you just kind of update us on how some of these group integration or implementations have gone? We're about 12 months past, I think, the ACI one. Where does that one stand? How is the overall pipeline for middle market kind of larger practice opportunities stand within the overall growth algorithm? Jason Christiansen: Great question. So we continue to make great progress in the mid-market. Sales are very strong. On ACI specifically, we continue to make progress. We continue to see adoption and rollout. We have seen great growth in that business. If you'll remember, they also selected Weave because of the payment workflows and solutions that we're able to integrate with the overall Weave offering. And that's been a nice contributor and a benefit to us. And one of the things that they're really excited about and looking forward to is this integrated inbox that Brett shared. he's had -- he could speak to this better, but he's had several conversations with a number of these large group practices. And as they understand what we're developing as we acquired TrueLark and what we're now building together, they really get excited about what that can mean for their business, the ROI can deliver, the centralized reporting and analytics. And so we continue to remain quite optimistic about the opportunity ahead of us in the mid-market front, where it still feels like we're very early in that life cycle. Brett White: Yes. I'll add a little bit there. We just recently had dinner with our management team, and the rollout is on track. So that's great news. And then we shared with them kind of our plans for the automated front desk, and they were very, very interested in the value that, that can bring to their practices. So the relationship is very strong, and I'm very optimistic about our future there. Operator: Your next question comes from the line of Hannah Rudoff of Piper Sandler. Hannah Rudoff: Nice to see that subscription growth reaccelerate this quarter. Just wanted to follow-up on Alex's first question around payments. It's nice to hear about that strong growth in payments, but it seems like the base is still relatively small there. I guess what is it going to take for payments adoption to really accelerate? And how much will it benefit from this TrueLark integration you're talking about? How much will it benefit from the surcharging and bulk payments functionality added in? Is there other functionality you need to build in to really get a step function change in payments adoption? Brett White: Sure. Thanks, Hannah. So I think we've been saying all along, the real unlock for our payments business is the workflows, really nailing the workflows and then also nailing the integration with practice management software. I listed 2 of the top features that customers were looking for, especially multi-location customers. In my prepared remarks that they really wanted, and we've delivered on those. We've actually -- on surcharging, we've actually seen in the short period that's been live, very positive results there. So again, it's nailing the workflows and then nailing the integrations. We've just ticked off 2 of the major items on the list. And then the integrations, we continue to make really good progress there. Our strategy of only going through authorized front door integrations, only using authorized APIs is paying off. So I think we just keep delivering the features and functionalities that we need. And then I think the automation technologies that are coming from TrueLark, but also being developed organically with the 2 combined teams should also be a pretty significant unlock, and we'll see how that rolls out over the next few quarters. Hannah Rudoff: Good to hear. And then how do you think about balancing the rollout of new integrations on the specialty medical side and different subverticals you're expanding into versus growing the ASPs and customers in existing specialty medical subverticals that you're in? Brett White: Well, it's interesting. So we take a very programmatic approach to rolling out new integrations. We kind of start with where the largest presence are when it comes to practice management software, work with them, develop those integrations. And unlocking those integrations actually drives quite a bit of ASP growth. So a non-integrated Weave is generally -- let me say it differently, integrated Weave is more valuable to our customers. So it has a higher ASP, and it has a higher retention rate. And so one kind of begets the other. We get the integration done, we roll them out and then we can either upsell existing customers who are on a nonintegrated version or we can go to market with the integrated version, which [Audio Gap] Operator: It seems we have Lost the main speaker line. Please hold. Brett White: Okay. Are we back? Operator: You are back. Loud and clear. Brett White: Awesome. Are there any additional questions? Operator: Yes. Your next question comes from the line of Matthew Kikkert of Stifel. Matthew Kikkert: Specialty Medical continues to outpace the overall growth. Can you break down the driver of that success? Is a lot of the success coming from deeper penetration within existing subverticals like med spas or is it expansion into new subverticals? And then maybe more importantly, how can you replicate that success across other verticals? Jason Christiansen: Yes. Thank you for the question, Matthew. We continue to remain focused on the primary verticals that we've been talking about around med spa, plastics and aesthetics, physical, opto, physical, occupational therapy. And so there's a significant opportunity there just within the 4 specialties that we're targeting, the size of the opportunity is roughly the size of dental, optometry and vet combined. And we're still less than 1% penetrated. So our approach to opening up the verticals we look at, one, the integration opportunity and our ability to go get those integration unlocks with the EMRs in the healthcare space. And then two, the economics and the demand from the customer base. And so there's a lot of opportunity where we're at. We remain focused there. Integrations lead our expansion. And so while we're growing there, it's -- we have a business development group who continues to evaluate other opportunities. And that's something that we'll continue to assess is where we expand. It is something that we can replicate. But for now, right now, we're just -- we're targeted on capturing the opportunity ahead of us there. Matthew Kikkert: Okay. And then secondly, I'm curious, as you embed payments more deeply. Could you give a deep dive into how you're differentiating Weave payments from both legacy payment processors and then modern vertical SaaS players who are also bundling their own payments? And then are you able to share roughly what percentage of the customer base is now using Weave for payments? Jason Christiansen: Yes. We haven't broken out payments separately. You know it makes up about -- it makes up less than 10% of our revenue because we don't break it out. It continues to increase as a percent or a mix of our overall revenue. The real differentiators for us is when you think about the industries that we serve, increasingly, the point of collection where payment happens is outside of the walls of the practice. And so offices are stuck trying to collect either on the front end or the back end when the patient is not right in front of them. And so you could say payment happens at the point of interaction. Weave owns all of those interactions. We manage the trusted business phone numbers when you think about the text-to-pay capabilities and the ability to deliver online bill pay links through e-mail or through text. Weave sits right at that intersection of the day-to-day operations and workflows that the front desk staff who's trying to collect those dollars is already managing. And so the points of differentiation for Weave is the ability to integrate and bring the payment or collection process into the existing interactions and communications that the front desk is already having with the patients. And that's just going to improve over time as we execute on the vision Brett laid out with bringing those collection workflows in through the AI receptionist as well. Operator: We're going to check back with Hannah Rudoff of Piper Sandler for a follow-up. Hannah Rudoff: I think, Brett, you dropped a little during the answer. You were talking about the programmatic approach you're taking in integrated versus nonintegrated solutions and integrated driving higher ASPs. I was just wondering if there's anything else you wanted to add to that. Brett White: I think that's -- those are the key points that integrations drive higher ASPs, higher retention. And we focus our integration activities, think of large to small. So go for the largest players in the space first and then just kind of have a rolling thunder of integrations from there. And then also an important concept is we get a fair bit of upsells when we introduce an integration. So we'll put up -- we'll go to a trade show and we'll say, put up sciences. We are now integrating with XYZ EMR practice management software, and we'll get a lot of interest from existing customers saying, yes, I want to upgrade to the integrated version. And it's just a better performing product for them, and it's just kind of a win-win. Hannah Rudoff: Got it. And it sounded like that 600-plus location deal in specialty medical was due to an EMR integration. Is that correct? Brett White: That's correct. And this one is interesting because it was actually -- the deal was struck in concert with the EMR. Operator: Your next question comes from the line of Kylie Towbin of Citi. Kylie Towbin: You've got Kyle on for Tyler Radke. It was good to see the beat and raise on profitability, especially the step down in G&A spend as a percent of revenue. Where are you expecting to find leverage from here? Is that sustainable moving beyond Q4? And was this through synergies or curious, any details on profitability? Jason Christiansen: Yes. Thanks, Kylie. We've talked about 2025 as a year where we are making some targeted focused investments, especially on the go-to-market side and the engineering side to enable these integrations and whatnot. The leverage in the model, we believe the investments that we're making are things that will ultimately provide additional leverage within our model. As we look at 2026, we're in the middle of our planning cycles right now. We'll provide a lot more color on what 2026 will look like in our next call. But we continue to be committed to striking that balance between growth and managing incremental profitability. We have a bias towards growth, but it's something that we remain very focused on making sure that we can strike the right cord on both sides. Kylie Towbin: Got it. And then just on the AI receptionist adoption. Can you talk about the competitive landscape for this product? Does it replace the need for a practice to hire a receptionist outright or more alleviating the lower-value tasks? Brett White: Yes. It's definitely the latter. What practice owners want to do is get their front desk staff much more engaged in patient care, increasing their acceptance rates on proposed treatment plans, basically engaging in much higher value activities and leave a lot of the kind of paperwork, administrative follow-up tasks to automation. And we're seeing a lot of interest there, a lot of traction. It works great. And over the next couple of quarters, we're going to be delivering an increasing level of functionality to really up-level the roles and then provide a much higher level of patient service and then just capture more revenue for the practice. Operator: Your next question comes from the line of Mark Schappel. Mark Schappel: Brett, in terms of the success you're seeing in your payments business this year, how much of that success would you attribute to, I guess, you could say the new go-to-market focus that you put on that solution over the past year or so versus, say, the new product capabilities that have been added to the product over, say, the last 18 months? Brett White: I think they all go hand-in-hand. The #1 driver is really creating a stand-alone business unit that encompasses all aspects of the payments business. So understanding at a very, very detailed level how a practice actually operates, designing the product, figuring out what are the key workflows, building those, standing up the appropriate go-to-market engine, whether it be sales reps, marketing, comp plans, having the right kind of onboarding, having the right kind of customer support. So it all works together synergistically. And so it's -- obviously, having the product is paramount and knocking a number of these top requested items off the list is great progress. And then also advancing our partnerships with practice management software platforms is also great progress. Mark Schappel: Great. And then as a follow-up, this year, you've seen accelerated investments, particularly in go-to-market, integrating TrueLark and just the deeper integration with the practice management systems. I realize it's still a little bit early, but I was wondering if you could just maybe comment on how you see next year shaping up, whether it's going to be as big of an investment year. Jason Christiansen: Yes. Thanks, Mark. As I said with Kylie, we're right in the middle of our planning for 2026. As we look at the next year and how we're going to frame that. A lot of it comes down to the opportunities that are ahead of us. And a couple of things as we look at the go-to-market investments, these are generally small, targeted investments in a handful of sales reps in like the mid-market side. And the thing I'd highlight is even with those, we've really been able to leverage some of the scale within like our G&A line to help facilitate that so that here in 2025, we're delivering more profitability than we did in 2024 while also growing nicely. And so that's a balance that we're going to continue to strike. We're going to look at where our opportunities lie. We still have a bias for growth, but very conscientious about profitability and our ability to deliver incremental profitability. And so more to come on that in our next call, but hopefully, that helps you understand how we're thinking about it. Operator: There are no further questions at this time. I will now turn the call back to CEO, Brett White, for closing remarks. Brett White: Thank you all for joining the call, and thank you again [Audio Gap] Operator: This concludes today's call. Thank you for attending. You may now disconnect.
Operator: Ladies and gentlemen, greetings, and welcome to the Perimeter Solutions Q3 2025 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host for today, Seth Barker, Vice President. Please go ahead. Seth Barker: Thank you, operator. Good morning, everyone, and thank you for joining Perimeter Solutions' Third Quarter 2025 Earnings Call. Speaking on today's call are Haitham Khouri, Chief Executive Officer; and Kyle Sable, Chief Financial Officer. We want to remind anyone who may be listening to a replay of this call that all statements made are as of today, October 30, 2025, and these statements have not been nor will they be updated subsequent to today's call. Today's call may contain forward-looking statements. These statements made today are based on management's current expectations, assumptions and beliefs about our business and the environment in which we operate, and our actual results may materially differ from those expressed or implied on today's call. Please review our SEC filings, particularly any risk factors included in our filings for a more complete discussion of factors that could impact our results, expectations or assumptions. The company would also like to advise you that during the call, we will be referring to non-GAAP financial measures, including adjusted EBITDA, adjusted EBITDA margin, LTM adjusted EBITDA, adjusted EPS and free cash flow. The reconciliation of and other information regarding these items can be found in our earnings press release and presentation, both of which will be available on our website. With that, I will turn the call over to Haitham Khouri, Chief Executive Officer. Haitham Khouri: Thank you, Seth. Good morning, everyone. Thank you for joining us. We're pleased to report Perimeter's third quarter and year-to-date results. Third quarter adjusted EBITDA was $186.3 million and year-to-date adjusted EBITDA was $295.7 million. The 3 primary drivers of these results were: number one, execution on our operational value drivers with particularly strong results in our international retardant business, our suppressants markets and IMS; two, the impact of our efforts to drive more consistency and predictability in our retardant business with reduced dependence on the North America fire season; and number three, a more proactive initial attack strategy by our customers, which drove greater retardant use. We continue to deploy capital during the third quarter, investing nearly $17 million across capital expenditures and the purchase of product lines at IMS. I will provide a summary of our strategy, followed by an operational update, then discuss our new forest service contract. Kyle will then walk through our financial results and recap our capital allocation in the quarter. Starting on Slide 3 with a summary of our strategy. Our goal is to fulfill our critical mission by providing our customers with high-quality products and exceptional service, while delivering our investors private equity-like returns with the liquidity of the public market. Our strategy is built on 3 key operational pillars. First, we own exceptional businesses. These are niche market leaders that play critical roles in solving complex customer problems, qualities that support high returns on invested capital and durable earnings growth. Second, we rigorously apply our 3 operational value drivers to the businesses we own. We drive profitable new business, achieve continual productivity improvements and provide increasing value to our customers, which we share in through value-based pricing. And third, we operate our businesses in a highly decentralized manner, granting our business unit managers full operating autonomy, paired with accountability to deliver results with a tightly aligned incentive structure for our managers to think and act like owners. We believe that our operational pillars will optimize our durable long-term free cash flow. We then seek to maximize long-term per share equity value through a clear focus on the allocation of our capital as well as the management of our capital structure. Turning now to our financial results on Slide 4, and starting with Fire Safety. Fire Safety's strong third quarter and year-to-date results were driven by 3 key factors. First is continued progress on our operational value drivers. We grow our sustainable earnings power through the rigorous implementation of our 3 value drivers. This improvement is evident in our Q3 and year-to-date 2025 results. Sales increased as we drove profitable new business and earned the right to share in the customer value creation across both retardants and suppressants. Margins expanded as we improved the efficiency of our operations via productivity initiatives, and revenue and margins benefited from our increased operating investments and capital expenditures. We expect the impact of our value drivers to compound over time and drive sustainable growth in our earnings power. Looking across our products, our international retardants business and our Suppressants business continued their momentum in the third quarter, with particularly strong volume performance from our profitable new business initiatives and meaningful top and bottom line impacts from our productivity and value pricing efforts. Our U.S. retardant business also saw contributions across all 3 operational value drivers, driving top and bottom line growth, despite a relatively mild North America fire season. The second driver of our financial results are the structural changes we've made towards greater consistency and predictability in our retardants business with reduced dependence on the severity of the North America fire season. We renewed substantially all of our key retardant contracts over the past 2 years. And in doing so, prioritized contractual adjustments to drive greater consistency and predictability in our business and financial results. These adjustments were well received by our customers who, like us, benefit from greater consistency and predictability. While the correlation of our fire safety results with the North America fire season is not eliminated, we believe it is notably reduced, relative to history as is evident in our 2025 financial results. The third driver of our 2025 results is a shift in our customers' approach to wildfire response. Our key U.S. customers adopted a more proactive approach to wildfire management this year, which we believe contributed meaningfully to lower acres burned, and to significant associated cost savings. With support from Secretary Brooke Rollins of the Department of Agriculture; and Secretary Doug Burgum of the Department of Interior, Tom Schultz, Chief of the US Forest Service, issued a wildfire letter of intent in May, which directed the Forest Service to suppress fires as swiftly as possible and to focus on safe, aggressive initial attack. This directive from Chief Schultz drove greater mobilization of resources, including aerial resources deploying retardant to quickly attack nascent fires. By quickly getting retardant on fires, agencies were able to limit their spread and mitigate the devastation they cause in our communities. This more aggressive initial attack posture helped limit acres burned despite the increase in fire starts while driving meaningful use of retardant. The actions taken this year by Secretary Rollins, Secretary Burgum, and Chief Schultz, and the men and women of our agency partners undoubtedly saved lives, property and our environment. As always, Perimeter is proud to play a part in our customer success. Moving on from this year's operational development and looking to the future. We were pleased to have signed a new contract with the US Forest Service during the third quarter. This contract, amongst the most significant in our company's history, builds on Perimeter's 60-year legacy of working with the Forest Service to protect lives, property and environment. By combining our customers' unwavering commitment to the mission with the best of private sector efficiency, this contract delivers a win-win outcome by: first, delivering substantial savings to the U.S. taxpayer; second, driving Perimeter's continued financial momentum; and third, enhancing our national wildfire preparedness and response capability. A key element of the contract is the savings it provides to the Department of Agriculture, the Department of Interior, the US Forest Service, and ultimately, the American taxpayer. The contract lowers the price of retardant in its first year and delivers additional savings by expanding the services Perimeter can efficiently deliver over the contract 5-year term. One example of the contract's mutually beneficial outcome is the transition to our full-service model. Substantially all federal bulk bases, which we serve with product will transition to our full service model, which we serve with our comprehensive solution spanning product, service, staffing, equipment and maintenance. We capture meaningful operating efficiencies by incorporating these bulk bases into our full-service network and simultaneously drive savings to the customer as well as profitable new revenue streams and incremental productivity opportunities to Perimeter. In a similar win-win, federal bases are transitioning from a mix of liquid and powder product to an all-powder footprint. Our powder product is lower priced and more efficient to handle than our liquid product, which drives direct customer savings. Simultaneously, powder conversion enhances our profitability through a lower cost and complexity manufacturing, distribution and logistics footprint. Finally, this new contract enhances national wildfire preparedness and response. The contract unprecedented 5-year term allows Perimeter and the Forest Service to jointly plan and invest behind meaningful multiyear initiatives, such as the all-powder product conversion. To safeguard future air tanker fleet uptime and reliability, Perimeter has also committed to aiding the Forest Service on the development of retardant testing standards that ensure all retardant products match Perimeter safety standards developed over the past 60 years. And building off of the supply chain resiliency advanced by our new Sacramento facility, Perimeter is working to build that same continuity, further up the supply chain by enabling more domestic supply of raw materials. Together, these features deliver the safest, most resilient and best-performing retardant solution our nation has ever had. We'd like to acknowledge and thank our agency customers for the collaborative engagement on this landmark contract. We look forward to continuing our successful 60-plus year collaboration over the next 5 years and beyond. Switching now to our Specialty Products segment. During the third quarter, the significant operational and safety events that have plagued our Sauget, Illinois plant since One Rock Partners purchased the Flexsys assets in 2021, not only continued but escalated. There was once again a substantial amount of unplanned downtime, which significantly impacted Specialty Products' financial results in the third quarter. While that was disappointing, significant safety events during the third quarter are of greater concern. These events demonstrate the urgent need to get these assets out of Flexsys' control as soon as possible for the safety of workers at the plant. Unfortunately, Flexsys and their parent, One Rock, continue to fight our efforts to take operational control of the plant, despite their clear contractual obligation to do so. Recently, Flexsys made a bad faith proposal that we lease the land under the plant for more than 10 to 20x the cost to purchase identically zoned and similarly configured and resourced land in the same general vicinity. We will not capitulate to these tactics. We will continue to doggedly pursue our rights under the contract in court as our previously disclosed litigation progresses. We know that it may take an extended period before there is a resolution, and we caution our investors to expect a continued financial impact until this issue is resolved. Regardless, we remain fully committed to taking over the plant no matter how long it takes or how difficult the path is. We are doing this not only for the benefit of our shareholders, customers and the community where we operate, but also for the safety of the employees at the plant. We are confident that we will eventually operate the plant and consistently and safely produce the highest quality product. Lastly, IMS. The business continues to perform well, and we again acquired new product lines during the third quarter. Our IMS acquisition team remains active, and we expect to continue to drive IMS' profitability through enhancing our operating value drivers on both existing and newly acquired product lines. With that, I'll turn the call over to Kyle for a more detailed review of our financials, earnings power and capital allocation in the quarter. Kyle Sable: Thanks, Nathan. I'll begin on Slide 8, where growth figures shown are versus the prior year comparable period. Starting with Fire Safety. Revenue for the quarter came in at $273.4 million, reflecting a 9% year-over-year improvement, and $430.8 million year-to-date, a 15% gain. The segment's adjusted EBITDA for the quarter was $177.2 million, representing a 13% increase over last year, and $265 million year-to-date, marking a 24% gain. Our operational value drivers were the primary driver of the year-over-year increase, with strong performance across our various products and geographies. Our suppressants team was successfully expanding sales, booking new volume wins at attractive pricing with overall suppressants revenue increasing $12.4 million from the prior year quarter. We continue to make excellent progress in winning airport conversions to our newest products while building a base of replacement volumes sold into the installed base. Meanwhile, our retardant products were strong in our markets outside North America, growing sales $5.5 million from the previous year. Historically larger markets such as Australia and France had robust performance, while our team made progress on expanding into more nascent markets such as Italy, where the team focused on new applications for retardant products deployed along rail lines. In the U.S., our retardant revenue grew modestly despite the pronounced decline in U.S. acres burned. We saw strong performance across all 3 OBDs in our retardant business, driving new business as we extend our footprint to new bases and faster loading equipment, productivity across a variety of sourcing and logistics areas, and value-based pricing where we have earned the right to share in the value we create for our customers. As Haitham noted, we worked to decouple our revenue from fire activity as we renewed contracts. We have purposely shifted sales towards fixed services revenue and proportionately away from variable products revenue. The net effect is to make our revenue less sensitive to volume movements as was historically the case, thereby improving the quality of our revenue base and contributing to Q3 strong performance. Finally, the increasingly aggressive initial attack strategy employed this year by our customers, coupled with an even distribution of acres over time and geography, almost fully offset the decline in volumes from fewer acres burned. The resulting adjusted EBITDA growth demonstrates how the many levers of growth across the business, along with improved contract structures can effectively reduce our sensitivity to acreage burned in any given year. In our Specialty Products segment, Q3 net sales came in at $42.1 million, representing 15% growth from the prior year quarter. This performance reflects a $10.8 million contribution from IMS acquisitions, which was offset by a $5.3 million decrease from the base business. Year-to-date net sales reached $119.3 million, up 20%, driven by a $27.7 million from IMS acquisitions, partially offset by a $7.6 million decline attributable to ongoing unplanned downtime at the Flexsys-operated Sauget plant. Specialty Products Q3 adjusted EBITDA fell to $9.1 million compared to $12.9 million in the prior year quarter, and slightly declined year-to-date, down to $30.8 million compared to $34.5 million. Q3's operational challenges are a continuation of the issues initially discussed in Q1, and the ongoing downtime contributed to lower sales and higher costs in the business and dampened adjusted EBITDA. While it's impossible to predict the plant's performance under Flexsys and their parent One Rock's control, we anticipate a continued drag from operational issues until we assume operational control of the plant. Our IMS business continues to progress well with 4 product lines acquired year-to-date. The business continues to outperform our expectations from the time of the initial deal and the add-on product line acquisition process has already shown to be effective in converting its pipeline into closed transactions. We expect to implement our operational value drivers to drive adjusted EBITDA on existing product lines as well as continue to expand into new product lines via M&A. Viewing the segments together, consolidated third quarter sales grew 9% to $315.4 million, while adjusted EBITDA also improved 9% to $186.3 million. Year-to-date, consolidated sales reached $550.1 million, up 16%. And adjusted EBITDA rose 20% to $295.7 million. Finally, bringing our adjusted EBITDA down to EPS. For Q3 2025, our GAAP loss per share was $0.62 versus GAAP loss per share of $0.61 in the prior year quarter. Q3 2025 adjusted EPS was $0.82 compared to $0.75 in Q3 2024. On a year-to-date basis, GAAP loss per share was $0.45 compared to a GAAP loss per share of $1.03 for the same period last year. Year-to-date adjusted EPS was $1.24 as compared to $0.99 for the same period in the previous year. Turning to our long-term assumptions as shown on Slide 9. Our assumptions are unchanged from Q2, and with normally quarterly variation, Q3 is consistent with those expectations. Q3 interest expense was $9.9 million, while taxable depreciation, amortization and other tax deductions totaled $5.8 million. Cash paid for income tax was $15.4 million in Q3 as compared to $27 million in the prior year quarter. [indiscernible] variation in factors is typically timing related in any given quarter and our full year tax expectation was unchanged. Capital expenditures for the quarter were $5 million. Our working capital needs fluctuate seasonally and Q3's capital levels and the associated source of cash are consistent with our expectations, given the level of activity in Q3. Our year-end net working capital outlook is unchanged. We ended the quarter with about 147.9 million basic shares outstanding. We define free cash flow as cash flow from operations less capital expenditures. In total, we had free cash flow in Q3 of $193.6 million and free cash flow of $197 million for the 9 months ended September 30, 2025. 2025's cash flow generation seasonality is in line with our expectations and consistent with history, where we invest significantly in working capital in the first half of the year in preparation for the fire season and convert those investments into cash in the second half. Our full year adjusted EBITDA to cash generation conversion is consistent with the assumptions shown on this slide, aside from potential cash tax timing differences. Finally, I will reiterate that we expect our business to remain well insulated from policy and economic shifts. Trade policy effects are tracking at or below our initial expectations, amounting to less than 2% of consolidated adjusted EBITDA. At the same time, our business is seeing minimal government funding disruption since it's tied to essential federal emergency response initiatives. And more broadly, our portfolio continues to show resilience against economic conditions, given the nondiscretionary nature of most of our products. Turning from operations to capital allocation. We invested nearly $17 million of capital in the quarter, the returns on which we expect will exceed our minimum targeted equity returns of 15%. We continue to reinvest in our business organically with $5 million allocated to capital expenditures in the quarter. The majority of these capital expenditures supported our growth and productivity initiatives. Our pipeline of projects continues to build and is an important element supporting our long-term organic adjusted EBITDA growth trajectory. Moving to M&A. As discussed previously, we invested $12 million in Q3 to acquire product lines for IMS, consistent with IMS' original investment thesis. The acquired product lines are being integrated into our manufacturing footprint, and our team is working to implement our operational value driver strategy. IMS product line acquisitions will continue to be an important avenue to deploy capital at attractive IRRs, and we believe we can deploy tens of millions of dollars of capital into IMS product line acquisitions annually for many years to come. Our M&A capacity far exceeds what we expect to allocate to IMS, and we are actively evaluating larger M&A targets. As Haitham outlined at the beginning of the call, our plan is to own a portfolio of high-quality businesses where our operational value drivers drive meaningful post-acquisition improvement in financial performance as has occurred at Perimeter's portfolio of businesses over the past few years. Our portfolio is not industry-specific, but rather strategy-specific. Business quality and the applicability of our operational value drivers are what tie our portfolio together. Having a chemical, fire or safety aspect of the business does not make a business a potentially good fit for Perimeter, and we expect future deals will come from new subverticals within the broad industrial space. Let me reiterate the strategic characteristics of the businesses we expect to add to our portfolio. Our first and most important characteristic is that the business produces a small but essential component of a larger solution. We begin by evaluating whether that broader solution addresses a critical complex problem for customers. We further assess whether the target serves a narrow need within that broader solution, creating the niche market. Lastly, we confirm that no alternative offers comparable value to the customer. Together, these qualities align with our value creation strategy, solve customers' most important challenges better than anyone else, while sustainably sharing the value created between our business and our customers. This allows us to drive profitable new business, seek out efficiencies that drive productivity, and earn the right to share in value creation through value-based pricing. In addition to the primary criterion of shared value creation, we prefer companies with recurring revenue, secular growth, high free cash flow generation and correspondingly high returns on capital and the potential for add-on M&A. Successful M&A at Perimeter demands finding targets with these characteristics, confirming the applicability of our operational value driver strategy and diligence in closing the transaction. Then the real work begins, as we work to implement our operational value drivers and strive to replicate the same success we've seen in the businesses we acquired 4 years ago. Our team is actively working to source [ indulgence ] in new targets that meet these criteria, and we are committed to expanding via M&A as a key part of a long-term value creation strategy. Turning to Slide 11. The second half of our capital strategy is to maintain moderate leverage that amplifies equity returns. Here, we benefit from a favorable debt structure, a single series of fixed rate notes at 5%, maturing in the fourth quarter of 2029 with no financial maintenance covenants. As of Q3, we were levered 1x net debt to LTM adjusted EBITDA, driven by $675 million of gross debt, $340.6 million in cash and nearly $329 million of LTM adjusted EBITDA. We also have substantial liquidity with an undrawn $100 million revolver as of quarter end in addition to our cash. Before we wrap up, I will share that the company plans to participate in Baird's Industrials Conference in November, where we will webcast our presentation for the benefit of our shareholders. To conclude, our purpose as a company is to fulfill our mission and drive shareholder value. The US Forest Services’ decision to extend its trust in Perimeter for another 5 years stands as a testament to our colleagues' unwavering commitment to fulfilling our vision. Simultaneously, our increased earnings power in Q3 stems from our team's disciplined execution of our operational value drivers, combined with continued improvement in our contracts, which combined to generate enough improvement to more than offset the headwind from a milder fire season. We are deeply proud of how our team continues to embrace both our vision and the mandate to drive value with enthusiasm, discipline and pride, and we look forward to building on this momentum in the quarters ahead. With that, I'll hand the call back to the operator for Q&A. Operator: [Operator Instructions] Our first question comes from Josh Spector with UBS. Joshua Spector: Congrats on the strong results. So I wanted to try to ask first was really what do you think is the normal, I guess, earnings power within the Fire Safety segment overall? So understanding kind of the more aggressive tactics, pulled more gallons into a weaker fire season. If we think next year would be normal, which would maybe be a 30% to 40% increase in acres burned, will you have any increase in your gallons as you go to that level? Or are you tapped out in terms of capacity? Kyle Sable: Josh, it's Kyle. I think there's 2 in there. So let me take them one at a time. When we think about the earnings power of the Fire Safety business, this year is pretty indicative of what the earnings power should be in more or less a normalized environment. That's the first piece. And there's puts and takes to that, as you've highlighted. Our volumes had a headwind, obviously, from the acres side that, as we said in the script, was entirely offset by this more increasingly aggressive tactics. As we translate to next year, and think about the second half of your question, we would get an additional benefit if acres were to rebound from this year's levels, but with 2 caveats. One, that that acres benefit wouldn't be as strong as it otherwise would have been because of the initial attack posture. And two, we don't know exactly what that posture will look like. Last year -- it was very highly successful this year. We hope that we see a continuation of that trend, but we just actually don't know what that's going to look like quite yet. Joshua Spector: Yes. I guess, I mean, related to that is, I mean, did you benefit in terms of the amount that you were able to load, because of maybe a more dispersed and less chaotic fire season in that, if we have more unplanned fires, it becomes harder? Or has your ability to load increased enough where, again, if the activity is maybe slightly more unpredictable, you could load similar to more gallons? Kyle Sable: You're hitting on exactly the right factors here, Josh. Disaggregating them is tough. So yes, we definitely benefited from a more even dispersion of acres burned across both geography and timing. There was less, less large fires concentrated in a very tight band where our resources were fully utilized. That said, there is a benefit coming from both the growth in the air tanker fleet, which obviously comes from the agencies and our partners in the air taker community as well as our own ability to load more retardants out of our basis. So there's a tailwind from that. Disaggregating those out, and to be able to quantify them for you is pretty difficult to do, just because they all interact with each other. Haitham Khouri: But Josh, to be clear, we were not tapped out on capacity this year and wouldn't expect to be tapped out on capacity in a stronger fire season. Joshua Spector: That makes sense. And if I could ask just one more broad one, just on the new USDA framework that you have for next year. I don't know if you can give a little bit more framing on 2 components of it is to, I guess, first, between the price down and services up, how do you think about the net impact to your earnings potential '26 versus '25? And then second, with that, in terms of a split between services, which would maybe be more of a fixed fee versus a dollar per gallon type charge, how has that transitioned in this contract and that does the makeup look materially different in '26 on versus what it's looked like over the last few years? Haitham Khouri: On the first part, Josh, we expect to grow our various financial metrics, certainly, EBITDA in our North America fire business in a like-for-like acre season in '26, inclusive of this contract. As I mentioned in the prepared remarks, this contract continues our positive financial momentum. As far as your second part of the question, this contract further moves our business towards consistency, predictability, and stability by increasing the proportion of revenue and EBITDA that comes from services and other fixed components, and due to the year 1 price cut decreases the proportion that comes from fewer gallons. Operator: Our next question comes from Dan Kutz with Morgan Stanley Investment Managers. Daniel Kutz: Congrats on the results. So I wanted to talk about another kind of government update that we got 1 month, 1.5 months ago, and that was around the plans to form the U.S. Wildland Fire Service, which would effectively combined the USDA's US Forest Service and then all of the DOI wildfire agencies. Just wondering, I know it's early stages, but just any initial thoughts on the implications of this, I guess, merger for lack of a better term, and 2 customers that are previously spaced on acres burned data, they each kind of represent 1/3 of the Lower 48 market. So those 2 organizations coming together, would love any thoughts on potential for debottlenecking and maybe more resources or efficiency, which could lead to more robust firefighting efforts and increased retardant demand. And I guess the other question we've been getting on this merger is that they mentioned in the press release that one of the goals is joint contracting and procurement. So I've been getting questions around whether the contract that you guys entered with USDA could potentially extend to the DOI agencies as these organizations combine. Haitham Khouri: So in many ways, our existing federal contract is the template for this new Wildland Fire Service. And what I mean by that is our contract has historically and continues in the new contract to combine all 5 federal firefighting agencies into one contract. We refer to it as a Forest Service Contract, but it really applies to all 5 federal firefighting agencies equally and will continue in that way going forward. The merger, as you call it, of these agencies is very much in line with the spirit of what our contract has always done, and we view that as a material positive for the industry, certainly for the air tanker companies, certainly for us, most importantly, for national wildfire preparedness and response and our wildland firefighters. It's just much more efficient and effective and streamlined to have one empowered agency and have the industry and our federal partners speak with one voice. So we're very supportive of this change. Daniel Kutz: Awesome. That's really helpful. So maybe just a broad question on contracting, in general, because it seems like across several of your product lines, you have some large customers or customers that kind of represent a big portion of demand for your products. You had the USDA, and then it sounds like it's actually more broadly the U.S. wildfire agency's contract. You had the PFAS-free U.S. military contract for the present business. The question is, in the same way that you kind of target economic criteria and operational value drivers that inform your M&A and operational strategies, any general thoughts or tactics or items that you prioritize when you're negotiating big contracts with customers, just kind of the puts and takes between stability and hedges, and durability versus contract term and cost pass-through, pricing or maybe there are some markets where product lines where flexibility or spot pricing or cost exposure could make more sense. Just wondering if you could kind of walk us through generally some of the puts and takes that you think through as you're negotiating larger contracts. Haitham Khouri: I'm going to have to give you a bit of a high-level answer, Dan, just because there are so many contracts in the different parts of our business. But what I'll say is contracting is remarkably important. You can drive or frankly, destroy a very significant amount of value through optimal versus sloppy contracting. And so when we take it, we take it really seriously, and we always approach contracting and train our folks to approach contracting in a highly, highly collaborative manner. First thing you do with contracting is you understand the customers' needs, the customers' pain points, the customers' constraints and you try to present them with an optimal outcome for them that, at the same time, touches on what we care most about as far as the stability, predictability, growth, et cetera, of our business. And those principles are extrapolatable across contracting in all of our businesses. And when you look at our financial results in 2025, and the general, I would call it, outperformance of revenue and EBITDA versus various end market metrics, that reflects to years of applying that contracting attitude or approach across our businesses. Daniel Kutz: Great. Also really helpful. And then maybe if I could just sneak one more quick one in. So a couple of comments that you guys had about the international retardants business being strong. I think it was a year-to-date comment. But just wondering if you could kind of unpack the international business results a little bit this year, just kind of relative strength year-to-date versus 3Q? And then just remind us what the key markets are in the northern versus southern hemisphere and kind of the relative strength of those markets and Perimeter's results this year. Haitham Khouri: Yes. international has been strong for us for the past several years. And given where international retardant is in the very long-term maturity curve, we would expect international retardant to remain very strong for us for the foreseeable future. Both 2025 year-to-date and Q3 were a continuation, Dan, of that trend. Our business in Europe was excellent in Q3. Our business in the Middle East was excellent in Q3. Our business in Asia was strong in Q3. And then our business in the southern hemisphere, both Australia and South America was strong in Q3. Our international retardant business really is firing on all cylinders. Part of that is self-help and strong execution, part of it is it should be very strong. It's very early in the adoption cycle. The economics of adoption make a whole lot of sense, and we're riding that wave. Operator: [Operator Instructions] Ladies and gentlemen, as there are no further questions, I would now like to hand the conference over to Haitham Khouri for the closing comments. Haitham Khouri: Very good. Thank you for the nice job hosting today, [ Elrick ]. Thank you, everybody, for taking the time to join us. As a reminder, as Kyle mentioned, we'll be at the Baird Industrial Conference in a couple of weeks, and we'll webcast our presentation, and thank you all for the support. Operator: Thank you. Ladies and gentlemen, the conference of Perimeter Solutions has now concluded. Thank you for your participation. You may now disconnect your lines.
Operator: Good day, and welcome to the Arrow Electronics Third Quarter 2025 Earnings Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Michael Nelson, Arrow's Head of Investor Relations. Please go ahead. Michael Nelson: Thank you, operator. I'd like to welcome everyone to the Arrow Electronics Third Quarter 2025 Earnings Conference Call. Joining me on the call today is our Interim President and Chief Executive Officer, Bill Austen; our Chief Financial Officer, Raj Agrawal; our President of Global Components, Rick Marano; and our President of Global Enterprise Computing Solutions, Eric Nowak. During this call, we'll make forward-looking statements, including statements about our business outlook, strategies, plans and future financial results, which are based on our predictions and expectations as of today. Our actual results could differ materially due to a number of risks and uncertainties, including due to the risk factors and other factors described in this quarter's associated earnings release and our most recent annual report on Form 10-K and other filings with the SEC. We undertake no obligation to update publicly or revise any of the forward-looking statements as a result of new information or future events. As a reminder, some of the figures we will discuss on today's call are non-GAAP measures, which are not intended to be a substitute for our GAAP results. We've reconciled these non-GAAP measures to the most directly comparable GAAP financial measures in this quarter's associated earnings release. You can access our earnings release at investor.arrow.com, along with a replay of this call. We've also posted a slide presentation on this website to accompany our prepared remarks and encourage you to reference these slides during this webcast. Following our prepared remarks today, Bill, Raj, Rick and Eric will be available to take your questions. I'll now hand the call over to our Interim President and CEO, Bill Austen. William Austen: Thank you, Michael, and good afternoon, everyone. I am humbled, honored and excited to serve as Interim President and CEO of Arrow Electronics. I have been a Director at Arrow since 2020, and I deeply believe in the management team and strategic direction that we have been charting. I, along with the full board, are committed to maintaining continuity, driving execution and delivering results for our customers, partners and shareholders while we search for a permanent successor. During my first few weeks, I have been meeting with employees, customers, suppliers and investors. The message is simple. There will be no change in Arrow's commitment to excellence and customer service, which has been foundational within this business for 90 years. I have also taken the opportunity to listen to all parties to get an understanding of what makes us unique, respected and sets us apart from the competition. Our management team remains committed to our strategic direction. We remain focused on delivering high-quality innovative technology solutions for our stakeholders. As we review today's results and outlook, you'll see that we are executing well in a market that continues to gradually recover from a prolonged cyclical correction. The fundamentals across both our global components and enterprise computing solutions or ECS businesses remain resilient, and we believe we are positioned to emerge with improved momentum. I would like to comment on the U.S. Department of Commerce's Bureau of Industry and Security, or BIS, placing 3 of Arrow's Chinese subsidiaries on its entity list in early October. The Arrow team took decisive action and 10 days later, BIS informed us that it intends to remove these subsidiaries from the entity list and granted a letter of authorization to resume normal business activities. I am pleased with the prompt resolution to this matter, which underscores Arrow's robust and continuously evolving trade compliance program, a significant reason why suppliers and customers choose Arrow. Starting on Slide 3. In the third quarter, we delivered revenue above the midpoint of our guide as well as earnings per share above the high end of our guidance range. With contributions from both our global components and ECS segments. While we are taking decisive action to navigate the current environment and continue to improve operational and financial performance, I want to remind the investment community of Arrow's strengths and opportunities for growth. Turning to Slide 4. Arrow is a leader in electronic components and enterprise IT industries underpinned by a platform-based data-driven business model. We play a pivotal role in connecting the world's leading technology manufacturers and service providers. Our business operates in a large and growing market. We know that there are ample opportunities to grow our core product distribution business by leveraging our global logistics footprint to deliver the latest technologies to the market. The distribution total addressable market, or DTAM, for our core distribution business is over $250 billion, with demand for value-added services, extending Arrow's addressable market even further. Supporting the DTAM is the strength of 6 primary end markets that we serve, transportation, industrial, aerospace and defense, medical, consumer electronics and data center. We are well aligned with all 6 core markets and believe our strategy is on point for delivering long-term sustainable growth. As our business continues to evolve, we intend to drive profitable growth through a deliberate shift toward an increased mix of higher-margin value-added offerings in relation to the product distribution services. Suppliers and customers can rely on Arrow for a broad range of services, deepening our legacy relationships and opening the door to new opportunities. This has been a natural extension for Arrow, building upon our core distribution platform with accretive value-added offerings like supply chain services, engineering and design services and integration services, drilling down into a few examples. First, within our global components segment, our supply chain services offering is well established and positioned to support growth in AI infrastructure build-out. For example, many of the hyperscalers and even some of the other players that are making massive infrastructure investments in large language models need help with sourcing, managing, staging and provisioning of electronic components globally. Arrow supply chain services provides the support so hyperscalers get the right source in the right region of the world at the right time so they can build out their points of presence. In short, our customers stick to their competency and releverage ours, staging and moving materials throughout a very complex global supply chain, and we do it with confidence and ease. We are effectively enabling customers to outsource a piece of their entire supply chain or a piece of their bill of material to Arrow. They can then focus on what they do best, like research and development or go-to-market, we focus on what we do best and the result is a win-win. Supply chain services are accretive to our core business, and we expect that the global trend toward investment in AI will create a significant tailwind. Second, let's focus on our engineering and design services. Engineering and design services is another area where we become an extension of OEMs and suppliers product development and design team, not for days or weeks, but for quarters and potentially years to help them design the next generation of their product portfolio, gives us a completely different way to not only serve our OEM customers, but in some cases, even our traditional suppliers. Like supply chain services, engineering and design services carry a higher margin profile than the core business. And lastly, in our Intelligent Solutions business, we are involved in designing, building and testing discrete compute hardware and associated software that enables our suppliers to quickly bring unique appliances to the market. This is a growing unit and margin accretive to the core business. Another lever for margin expansion is our ability to create a productivity flywheel that focuses on driving costs out, which in turn creates reinvestment capacity for growth and margin expansion. Our efforts to date have focused on simplifying operations, consolidating resources and geographic realignment. Our productivity and cost-out efforts are becoming part of everyday life at Arrow as it creates reinvestment capacity and leverage in the business. One of Arrow's key differentiators is our diversified business model which enables Arrow to become more relevant to suppliers and customers, and it provides us the right to play more completely throughout the technology life cycle. In other words, we participate from design and planning to deployment and further to management and support of technology solutions. Our ECS business is a nice complement to our electronics business and is comprised of hybrid cloud and infrastructure software, hardware and services to deliver solutions, such as cyber security, data protection, virtualization and data intelligence, much of which is on the ramp to AI. This reflects our ongoing alignment to the higher growth demand trends across enterprise IT, many of which are now served on an as-a-service basis. This continues to contribute to the growth of our recurring revenue volumes, now roughly 1/3 of our total ECS billings. Within our ECS business, we are capitalizing on an opportunity to expand our addressable market and accelerate growth through evolving strategic outsourcing arrangements, which we have implemented with multiple large suppliers. Under the strategic outsourcing model, Arrow becomes the brand and the exclusive partner of the supplier in the region, taking control of the go-to-market activities. Our diversified business model that includes electronic components and enterprise IT solutions contributes to our capital allocation strategy because it creates more resilience on the balance sheet and helps us to continue to generate strong free cash flow over time. Our capital allocation strategy is focused in 3 areas: reinvesting in organic growth opportunities, M&A opportunities and returning excess capital to shareholders. As a reminder, we have returned approximately $3.5 billion to shareholders via share repurchase since 2020. As always, we are committed to carefully and rigorously evaluating all uses of capital with the ultimate goal of generating the highest risk-adjusted return on investment over the long term and maintaining an investment-grade credit rating. Before I turn the call over to Raj, I want to emphasize that Arrow remains committed to disciplined execution, strengthening our supplier and customer partnerships and delivering sustainable value for our shareholders. With that, I'll now hand things over to Raj, who will walk you through the financial results in more detail. Raj? Rajesh Agrawal: Thanks, Bill. On Slide 5, sales for the third quarter increased $890 million year-over-year to $7.7 billion, exceeding the midpoint of our guidance range and up 13% versus prior year or up 11% year-over-year on a constant currency basis. Third quarter consolidated non-GAAP gross margin of 10.8% and was down approximately 70 basis points versus prior year, driven primarily by regional and customer mix and global components and by product mix and a $21 million charge we took in ECS, which I'll detail in a moment. The charge reduced consolidated non-GAAP gross margin by 30 basis points. Our third quarter non-GAAP operating expenses declined $15 million sequentially to $616 million. The decline was largely driven by a reversal of stock-based compensation expense and cost savings initiatives, which more than offset higher variable costs to support top line sales growth as well as the impact of currency exchange rates. In the third quarter, we generated non-GAAP operating income of $217 million, which was 2.8% of sales. Margins remained flat sequentially due to continued headwinds from our regional mix and customer mix. offset by growth in our accretive value-added offerings and continued productivity initiatives. Interest and other expense was $55 million in the third quarter, and our non-GAAP effective tax rate was 22.5%. And finally, non-GAAP diluted EPS for the third quarter was $2.41, which was above our guided range, driven by a number of factors, including favorable sales results and a lower interest expense. The aforementioned charge lowered EPS by $0.31. Turning to Slide 6. Let's take a closer look at our global components business. Global components sales increased $610 million year-over-year and $271 million sequentially to $5.6 billion, above the midpoint of our guidance range and up 5% versus prior quarter. We continue to believe that the business remains in the early stages of a modest cyclical upturn reported by several key data points. Our book-to-bill ratios remain above parity in all 3 regions. Our backlog continues to improve, growing again in the third quarter. All 3 of our operating regions continue to perform at or better than seasonal trends. Sales for both semiconductor and IP&E components grew sequentially in the third quarter. Activity levels across our industrial and transportation markets remain healthy. These are our 2 largest verticals globally. Our value-added offerings, namely supply chain services, engineering and design and integration services performed well and remain margin accretive to our business. Stated lead times remain at low levels, and despite our continued backlog growth, visibility is needed relative to a normal environment. Inventory levels in aggregate have normalized, however, mass market customers are not recovering as quickly as compared to larger OEMs, which is a headwind to profit margins. This is not a typical to prior cycle, and we believe this sale of the market remains healthy and we're still seeing destocking among mass-market customers. Lastly, our APAC business was first in and first out of the downturn and continues to outpace the Americas and EMEA at this stage of the upturn. This again is not atypical, however, it does create a headwind to overall profit margins. Taking a closer look at each of the regions. In the Americas, sales were flat sequentially at $1.7 billion and strength in industrial and transportation markets drove our results. Sales in EMEA were $1.4 billion with industrial and aerospace and defense markets including resilient despite macroeconomic and geopolitical headwinds. And finally, our sales in Asia grew sequentially 12% to $2.4 billion, our growth was once again broad based, highlighted by strength in industrial, compute and consumer, along with continued EV momentum in the transportation sector, similar trends to what we observed in the second quarter. Global components non-GAAP operating income increased $10 million sequentially to $199 million, representing 6% growth. Non-GAAP operating income margin was flat sequentially at 3.6%. Turning to Slide 7 in our global ECS business. Global ECS sales increased $300 million year-over-year to $2.2 billion, above the midpoint of our guidance range and up 15% versus prior year. Global ECS billings were $5.2 billion, up 14% year-over-year. We experienced continued momentum in hybrid cloud infrastructure software, hardware and services to deliver solutions for cybersecurity data protection and data intelligence related to data center activity for AI investment. We again enjoyed healthy backlog growth in excess of 70% year-over-year to an all-time high as our mix of business continues to shift to more recurring multiyear revenue. As Bill mentioned, our ECS go-to-market strategy is broadening as we continue to improve the value that we provide in the distribution channel. From technical expertise and project management to mid-market channel enablement through our Aerosphere digital platform, which supports cloud and AI scale and acceleration, our ECS business is growing beyond the traditional distribution model and expanding our addressable market through new strategic outsourcing engagements. This new motion provides aero exclusivity, cross-sell opportunities and stickier relationships as Arrow becomes the sole operator in the market. From a margin point of view, if we are successful in selling the product well in the strategic outsourcing model, engagement is accretive. In the third quarter, we took a $21 million charge, largely due to lower profit expectations on multiyear contracts that have underperformed. Broadly, we believe these strategic outsourcing agreements will be margin accretive at a key part of our long-term business. We are learning from each agreement and believe it will better position our ECS business for the future. ECS non-GAAP operating income declined $12 million year-over-year to $65 million, driven by the $21 million charge. Non-GAAP operating income margin was 3% as the charge lowered margin by 100 basis points. On Slide 8, net working capital grew sequentially in the third quarter by approximately $450 million, ending the quarter at $7.3 billion, driven primarily by sales growth that led to higher accounts receivables. Our cash conversion cycle increased sequentially by 5 days in the third quarter to 73 days as a result. Inventory at the end of the third quarter remained at $4.7 billion, and our inventory turns continue to improve. We will maintain our focus on matching our inventory to associated demand trends as the current cyclical recovery continues. Cash flow used for operating activities in the third quarter was $282 million. On a year-to-date basis, cash used for operating activities was $136 million, which supported revenue growth of approximately 6%. Gross balance sheet debt at the end of the third quarter was $3.1 billion. Now turning to Q4 guidance on Slide 9. We expect sales for the fourth quarter to be between $7.8 billion and $8.4 billion representing an increase of 11% year-over-year at the midpoint of the range. We expect global component sales to be between $5.1 billion and $5.5 billion, in enterprise computing solutions, we expect sales to be between $2.7 billion and $2.9 billion, which is up approximately 13% at the midpoint year-over-year. We're assuming a tax rate in the range of 23% to 25% and interest expense of approximately $60 million. Our non-GAAP diluted earnings per share is expected to be between $3.44 and $3.64 and Details of the foreign currency impact can be found in our earnings release. I want to provide some color as you build your 2026 model. At this stage, the pace of the cyclical upturn is proving to be gradual given the level of broader macroeconomic uncertainty, many of the primary end markets that we serve are finding momentum and achieving year-over-year growth. However, regional and customer mix dynamics are presenting headwinds to profitability. It is our belief that similar to cycles of the past that the West will catch up to the east along with a recovery among mass market customers. We're seeing this in the leading indicators that we've highlighted. However, the pace of this shift appears measured as we look into 2026. We will provide more color during the fourth quarter earnings call. I'll now turn things back over to Bill for some closing thoughts as we look ahead. William Austen: Thanks, Raj. Turning to Slide 10. Looking forward, our key priorities are clear. First, we are seeing trends in our global components business that suggest we are in the early stages of a gradual recovery. Second, we will continue to leverage the strong secular trends in cloud and AI that is driving strong growth in both our Supply Chain Services business and in our ECS segment. Third, we are focused on delivering profitable growth through a persistent shift toward an increased mix of higher-margin value-added offerings and a continued execution of our productivity initiatives. Finally, we will continue to allocate capital to the highest return on investment opportunities with the goal of increasing returns for our shareholders. With that, Raj, Rick, Eric and I will now take your questions. Operator, please open the call for questions. Operator: [Operator Instructions] We'll take our first question from Will Stein at Truist Securities. William Stein: First, Bill, thank you for this introduction. I appreciate it and congrats on the good results. I'm hoping you can maybe clarify whether you might be a candidate for the permanent CEO position or are you limiting yourself to an interim role? William Austen: Thanks, Will. Nice to meet you. Good question. I'm really happy, humbled and honored to be in the interim role and I'm in the interim role. I am not on the candidate list for the full-time CEO role. At the Board level, we put a search committee together, led by Steve Gunby, our Chair. We have several Board members, and myself, on the initial committee. We are fully moving down the path at this point to finding a candidate. We have selected a search firm, of which I will not name at this point. And we are going to be in the throes of reviewing candidates in the not-too-distant future, but I am not -- I will not be one of them. I will go back to retirement. And I will remain on the board. Thanks for the question. William Stein: Got it. As a follow-up, really sort of taken into a different direction a little bit, whether it's you or Raj, could you maybe linger on the on the charge that the company took during the quarter, maybe explain what this contract was. Is it still in force? Is it completed? Is it abandoned? And what was the economic condition that gave rise to the charge? Rajesh Agrawal: Yes. Well, it's a good question. Let me -- since Eric Nowak is here, let me give it to him first to talk a little bit about what we're -- what these contracts are in terms of the strategy, and then I'll come back to the financial impact that we've seen. Eric Nowak: Thank you, Raj. We are talking about strategic outsourcing, and this is a fast-growing part of our business. Our suppliers are contracting to us diverse noncore parts of their business to focus on their own priorities. So we are implementing these models with several large suppliers in both North America and EMEA. And as Bill said already, under this agreement, Arrow is acting on behalf of the vendor for a given perimeter and becomes the brand. We take control of the go-to-market activities. So this new merchant provide us exclusivity, cross-selling opportunities, better margin and stickier relationships as we become the sole operator in the market, including for the white space of the supplier and sometimes also in other parts of the world. Rajesh Agrawal: Yes. So Will, I would just also add that we're really excited about these contracts. We've already gotten several hundred million dollars of billings this year, and that's going to be a big growth vehicle for us longer term for ECS and for the company. We do evaluate the performance on these contracts every period and the charges related to underperformance I would think about it as underabsorption of fixed fee payments that we're supposed to be making. And what I would say is that we're going to continue to grow through some growing pains. We're going to get some margin variability. But if you were to think forward a couple of years in terms of when these things get to steady state, we should be able to achieve double the gross margins on these versus what we achieve in the rest of ECS. So that's why we're really excited about it. So it should give us really good top line growth and bottom line growth. We called out the $21 million charge this quarter only because it's more material in size. We have taken some smaller charges during the first part of the year, but this one was more material we would hope that we wouldn't have anything material like that in the future, but we're likely to have some additional charges in the future that are just going to be part of our normal P&L. Operator: We'll move next to Ruplu Bhattacharya at Bank of America. Ruplu Bhattacharya: Raj, I want to delve a little bit more into the ECS margins. Typically, you see a strong growth between the September quarter and the December quarter. Can you talk about what you're seeing in terms of mix, hardware versus software? And how should we think about that sequential change in margins given this quarter had the charge and so it was lower than expected. So how should we think about that ramp between September and December? Rajesh Agrawal: Yes. Look, I would think about -- and we quantified the impact of the charge in the third quarter. So it was worth almost 100 basis points, so about 100 basis points. If you were to adjust for that, we would still we expect fourth quarter to be very strong for the ECS business, and that's really reflected in our outlook. You can see we gave you sort of the net sales outlook, but the billings growth, GP dollar growth and operating profit dollar growth should be quite good in the business. And margins should also be strong compared to last year. So we have no concerns about what the performance will be in the fourth quarter for ECS. Ruplu Bhattacharya: Okay. Maybe as a follow-up, if I can ask you, Raj or Bill. Bill, by the way, congrats on the interim role. If you guys can give a little bit more detail on the comment you made about things being recovering a little bit slower, which end markets or which verticals are you seeing slower growth in? And as it pertains to the outlook for regions, it looks like Asia remains strong. So just how should we think about margin progression in this environment? I know you're not giving full guide for '26 right now. But how does this temper your to 90 days ago versus what you have thought about components sgement margins and ECS segment margins going forward? William Austen: Yes. I'm going to -- this is Bill. I'm going to have Rick Marano answer that question to give you the insight as to how the verticals look in Asia. Richard Marano: Yes. So thank you, Ruplu, for the question. I would say kind of touching on what both Bill and Raj said overall, look we firmly believe we're in a recovery in the early stages of a gradual recovery in the marketplace overall. The leading indicators in all 3 markets remain robust, meaning book-to-bill, meaning backlog coverage and design starts as well are very positive for us at this point in time. Transportation and industrial, which are 2 very large verticals for us continue to respond in positive results for us, and they are leading the way for us in our Asian markets as well. And again, as Bill and Raj touched on earlier, we truly believe that based off of what we're seeing in APAC today as the market recovers in the West and the mass market recovers, we'll see both increased sales and margin accordingly as the year goes on in '26. Rajesh Agrawal: Yes. And Ruplu, let me just add on your question around the '26 trajectory. I did make some comments towards the end of my prepared remarks. . Primarily because we continue to see a gradual recovery. As we look at our leading indicators and how we see the business playing out during the course of next year, we do believe that it is recovering, that will be a gradual recovery. As we've looked at some of the models that are out there for the space that we operate in, they seem to be quite aggressive. And so we just wanted to make a point that we see more of a gradual recovery in the business next year. Ruplu Bhattacharya: Okay. If I can sneak one more in. Given the recovery that you're seeing in hardware and maybe it's a gradual recovery, you also talked about some new type of contracts. How would this impact your working capital and inventory requirements going forward? How should we think about cash conversion cycle in this environment? Rajesh Agrawal: Yes. I mean this is more on the ECS side with the newer contracts, newer distribution agreements that we talked about. Yes. I mean, look, we -- as I mentioned, we're still in the early stages. So we're learning from how these things will ramp up. There may be some more working capital required in some of these contracts, but we're still learning in its early stages. I think the key point to remember here, Ruplu, is that these things can be very margin accretive. And so it's okay to deploy a little bit more working capital if we have margins that are coming with it. And that's how we really think about it. So we're certainly going to manage the working capital appropriately. But ECS overall is relatively light working capital business, and it provides us higher returns, and I wouldn't see that changing time. Operator: [Operator Instructions] We'll go next to Joe Quatrochi at Wells Fargo. Joseph Quatrochi: Maybe just a couple, if I could. How big is the supply chain services today and some of the focus that you talked about in the prepared remarks is going after some of these AI insertion opportunities. What type of investment do you need to make on your side to address those? Rajesh Agrawal: Yes. Let me just start off. When we talk about value-added services, one of the items is supply chain services, the other couple areas are engineering design and then the integration services business that we have. Supply chain and most of these are not going to be that impactful from a revenue standpoint, but they're higher-margin businesses because we typically will get paid a fee for the supply chain services offering, and then for the engineering and design services. So we don't really talk about them in terms of what's the mix of the business. And -- but from a profit standpoint, all of these are very margin accretive. And they could easily be, in some cases, double or the gross margins that we get in the regular part, if I can say it that way, in the components business. And the great thing about these things is that we get paid fees for the services that we're providing. So whatever investment we're putting into this, we want to get compensated for it. And yes, and we certainly want to make sure that our costs are being covered in this kind of an offering. So these are -- this is really a win-win, win for all parties involved here. We're getting paid for the services we provide, and we're making money on that, but the parties that we're serving here, the large customers are also benefiting with our supply chain services. So we like the business, and it's a really good margin accretive part of our components business. Operator: And that concludes our Q&A session. I will now turn the conference back over to Bill Austen for closing remarks. William Austen: Thank you. And thank you, everybody, for joining the call today. Once again, I'm excited, humbled and happy to be here. Looking forward to being the interim CEO at Arrow until we find the permanent CEO and I'm really glad to be leading this team amongst this big global powerhouse of Arrow Electronics. So thanks for joining. Operator: And this concludes today's conference call. Thank you for your participation. You may now disconnect.
Operator: Good day, and thank you for standing by. Welcome to Owens & Minor's Third Quarter 2025 Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Will Parrish, Vice President, Investor Relations. Will Parrish: Thank you, operator. Good evening, everyone, and welcome to Owens & Minor's third quarter earnings call. Our comments on the call will be focused on the financial results for the third quarter of 2025, all of which are included in today's press release. The press release, along with the third quarter 2025 supplemental earnings slides are posted on the Investor Relations section of our website. Please note that during this call, we will make forward-looking statements that reflect the current views of Owens & Minor about our business, financial performance and future events. The matters addressed in these statements are subject to risks and uncertainties, which could cause actual results to differ materially from those projected or implied here today. Our expectations, beliefs and projections are expressed in good faith, and we believe there is a reasonable basis for them. However, there can be no assurance that our expectations, beliefs and projections will result or be achieved. Please refer to our SEC filings for a full description of these risks and uncertainties, including the Risk Factors section of our annual report on Form 10-K and quarterly reports on Form 10-Q. Any forward-looking statements that we make on this call or in our earnings press release are as of today, and we undertake no obligation to update these statements as a result of new information or future events, except to the extent required by applicable law. In our discussion today, we will refer to non-GAAP financial measures and believe they might help investors to better understand our performance or business trends. Information about these measures and reconciliations to the most comparable GAAP financial measures are included in our press release. Today, I am joined by Ed Pesicka, Owens & Minor's President and Chief Executive Officer; Jon Leon, the company's Chief Financial Officer; and Perry Bernocchi, the EVP and CEO of the company's Patient Direct segment. I will now turn the call over to Ed. Ed? Edward Pesicka: Thank you, Will. Good afternoon, everyone, and thank you for joining us on the call today. Earlier this month, we announced a definitive agreement with Platinum Equity to sell our Products & Healthcare Services segment, which includes both the Medical Distribution and Global Products divisions. Built on a strong foundation, we believe P&HS will be better positioned to compete in today's evolving market under Platinum Equity's private ownership model. We are also excited to be retaining an equity interest in the business due to Platinum's operational expertise and commitment to building on the customer-centric legacy of the business, which will be critical to the future growth of P&HS. The Owens & Minor name has long been associated with our P&HS business and thus will follow that business in the transaction. As we near the close of the transaction, we are excited that we will be rebranding the public entity to better represent our trajectory going forward. So as I think about the future, following the divestiture of a Product & Healthcare Services, I am thrilled that we can fully align around a single business. Our capital allocation, strategic priorities and execution are no longer split. They are unified around advancing the future of home-based care through Patient Direct. And by retaining our higher-margin Patient Direct business, we will generate improved and more consistent cash flow. Accordingly, we will prioritize debt repayment in the near term to grow our financial flexibility while investing in technology to lower our cost to serve and improve the customer experience. Now I would like to begin by sharing some of the opportunities we're seeing in the market and how these trends we're tracking continue to support our business, a business that we have grown and strengthened over time. Beginning with our acquisition of Byram in 2017, we have spent the past 8 years firmly establishing ourselves as a leader in the home-based care space. During this time, we have expanded and diversified our payer relationships while broadening our product offering and capabilities. This, combined with our coast-to-coast network gives us the reach and infrastructure to provide support for patients across multiple chronic conditions, including diabetes and sleep apnea. These conditions are not only widespread, they're growing, which creates a tremendous opportunity for us to make a meaningful impact. Over 37 million people in the United States have been diagnosed with diabetes and an estimated 96 million adults aged 18 and older are living with prediabetes according to the National Institutes of Health. In order to capture future growth from these tailwinds, we will focus our investments on technology and automation, which will, one, improve the patient's experience; two, allow us to quickly scale our business; three, increase awareness; and four, further reduce our cost to serve. Another core area for us is sleep apnea, where it is estimated that 85 million adults in the United States have some degree of OSA with approximately 70 million of those presently undiagnosed or undergoing the diagnosis process. While the use of GLP-1s has increased in recent years, recent studies published by the Lancet expect the use of GLP-1s to reduce the prevalence of OSA by only 4% over the next 25 years. This is a significant opportunity for us to serve these future patients. It also further demonstrates the value of our preferred provider agreements where new patients are encouraged to begin their lifelong treatment journey with us, supporting better health and a better quality of life. Earlier this year, CMS proposed rules regarding competitive bidding around home-based health care and DME. Since entering the home-based care space, our top priority has always been and will continue to be ensuring patients receive the products and services they need, reliably and on time. While competitive bidding programs have historically raised questions about patient choice and supplier access, we believe our scale, expertise and the quality of the products we distribute positions us as a standout partner in any environment. As we await further guidance from CMS, we are actively collaborating with industry partners and advocacy groups to maintain a strong, transparent dialogue that keeps patient outcomes at the center of the conversation. Before I turn the call over to Jon to discuss our third quarter financial performance and our thoughts on the year-end, I would like to close my thoughts today on where we're going in 2026. With the divestiture of Product & Healthcare Services expected to close in the first quarter of 2026, we are incredibly excited about the future as a Pure-Play business in the home-based care space. As our business grows organically through our preferred provider agreements such as our recently announced agreement with Optum and an aggressive sales strategy, we are diligently focused on controlling our balance sheet through debt paydown, managing operational cost controls and lowering the cost to serve and accelerating our cash flow generation. As we close out 2025 and look forward to 2026, we will begin the next evolution for Owens & Minor, with myself, Jon and Perry Bernocchi, the Executive Vice President of our Patient Direct business, remaining at the helm of our organization. I would like to thank all our teammates who have done a great job of staying focused on serving our customers. With that, I will now turn the call over to Jon to discuss our financial performance in the third quarter and our outlook for the rest of 2025. Jon? Jonathan Leon: Thanks, Ed, and good afternoon, everyone. We were very excited to announce the signed agreement for the sale of the Products & Healthcare Services segment a few weeks ago. I've had the pleasure of getting to know and working with the Platinum Equity team and absolutely believe they are the right owners for the P&HS business. Further, we're extremely excited about our future as a Pure-Play Home-Based Care company with all the positive attributes that come with it, as Ed detailed. We look forward to having a simpler business model and a cleaner investment thesis. We also believe our ability to dedicate investments solely into the subtractive space will lead to much greater results for all stakeholders. As you will recall from last quarter, the Products & Healthcare Services segment is being accounted for as an asset held for sale discontinued operations. So unless stated otherwise, my remarks today will focus solely on the continuing operations, which, as a reminder, is made up of our Patient Direct business and certain functional operations and identified stranded costs from the separation. Also, please note that any discussion about the financial results and outlook for the business will cover only non-GAAP financial measures. You can find GAAP to non-GAAP financial reconciliations in the press release filed a short time ago and residing on our website. Turning now to the third quarter results. Revenue was $697 million compared to just under $687 million in the third quarter of last year. Last year, in the third quarter, there was a $6 million onetime revenue benefit from a multiyear claims reprocessing matter. This impacted the growth rate by about 80 basis points. In the quarter, there was decent year-over-year growth in the key categories of sleep therapy, ostomy and urology. Diabetes was nearly flat compared to the third quarter of 2024, but showed better year-over-year performance compared to the second quarter. We continue to ramp up efforts to recapture stronger diabetes growth through improved therapy adherence and capturing more customers across our entire ecosystem of both DME and our own pharmacy channel. Overall, we would expect revenue in Q4 to show a similar year-over-year growth rate but be seasonally improved from the third quarter in absolute dollar terms. For the 9 months ended September 30, revenue was nearly $2.1 billion, up 3.4%, with last year's Q3 onetime benefit that I just mentioned, having a 30 basis point impact on growth compared to 2024. Similar to the quarter, growth for the year-to-date period was led by sleep therapy, ostomy and urology as well as smaller categories, including chest wall oscillation, which although is still small, has shown a phenomenal growth and demonstrates our ability to successfully expand our therapy portfolio. Adjusted EBITDA for the third quarter was $92 million compared to $108 million in last year's third quarter. Here, that same onetime $6 million benefit from last year falls straight through to adjusted EBITDA and hindered reported EBITDA growth by nearly 500 basis points. Additionally, product cost increases and higher health benefit costs were only partially offset by lower general costs such as delivery, outsourcing and occupancy expenses. It is important to realize that the third quarter adjusted EBITDA from continuing operations, of course, includes the normal adjustments to EBITDA of interest, income taxes, depreciation and amortization and less than $1 million of exit and realignment charges. So the $92 million earn is an appropriate representation of cash earnings before interest and taxes. This return to a higher earnings quality is quite different from what we've been able to report over the past several quarters. There will certainly be periods of time where there are cash adjustments in the adjusted EBITDA figure, but this is an example of what is meant when we refer to a cleaner and simpler investment story as a result of the divestiture. For the year-to-date period, adjusted EBITDA was $285 million, a reported 6.3% increase compared to $268 million for the 9 months ended in 2024. On the larger year-to-date adjusted EBITDA amount, last year's third quarter onetime $6 million benefit was an approximate 230 basis point drag on the year-to-date growth rate. Third quarter results include $11 million of stranded costs, which is the same as last year's third quarter and the second quarter of 2025. Year-to-date stranded costs were $25 million versus $39 million for the same period in 2024. We continue to believe the annualized stranded costs from the divestiture will be approximately $40 million. Adjusted net income was $0.25 per share, which compares to $0.36 per share in the third quarter of 2024. For the 9 months ended September 30, adjusted net income per share was $0.80 versus $0.64 in the same period last year. We are affirming our guidance for 2025 full year of revenue between $2.76 billion and $2.82 billion, adjusted net income between $1.02 and $1.07 per share and adjusted EBITDA between $376 million and $382 million. Based on my earlier comments around fourth quarter revenue, we expect full year revenue to come in toward the bottom of the guidance range. On the guidance assumption slide that has been posted to the Investor Relations section of our website, you will notice that the interest expense range has increased as a result of a change in the allocation of these expenses between continuing and discontinued operations. We believe the increase in interest expense will be offset by lower stock compensation expense. And as a result, the EPS guidance range is unchanged. Turning to the balance sheet and cash flow. At September 30, net debt was $2.1 billion. Since year-end 2024, the increase in debt is related to the expenses to exit the previously planned Rotech acquisition, which were paid in June of approximately $100 million and more recently, cost to remedy a challenging start-up of a new kitting facility for the Products & Healthcare Services segment, which has led to a temporary inventory imbalance. Work needed for that P&HS kitting facility is ongoing. And as a result, the net debt level at the end of this year is expected to be only slightly lower than at September 30. While detrimentally impacting third quarter cash flow, as shown in the consolidated cash flow statement, the overbought inventory from the start-up will benefit customer demand across the P&HS business lines in the coming months and reduces the cash needed to be spent over that same time period. It's important to recognize that more than 100% of the cash used from operating activity in the 3 and 9 months ended periods was due to the discontinued operations and that continuing operations, inclusive of stranded costs, generated cash from operating activity. In fact, in measuring levered free cash flow as adjusted EBITDA from continuing operations, less CapEx from continuing operations and less all interest costs across both continuing and discontinued operations, there was $28 million of free cash flow in the third quarter and $78 million through the first 9 months of the year. Before taking questions, I'd like to say we're very bullish on the outlook for the Home-Based Care business and recognize that it's a very exciting time in the history of Owens & Minor. We look forward to getting on the road, sharing our enthusiasm and having the market better appreciate the attractiveness of the home-based care space. With that, I'll now turn the call back to the operator for Q&A. Operator? Operator: [Operator Instructions] Your first question comes from the line of Michael Cherny with Leerink Partners. Daniel Christopher Clark: This is Dan Clark on for Mike. First one from us. I appreciate all the color you gave on kind of results in 3Q and how you're thinking about the rest of the year. At a high level, how should we think about the durability of these trends going into 2026? And then would love to hear as a follow-up, just kind of how you're selling into the Optum channel is going thus far. Edward Pesicka: This is Ed. I'll start. Selling in the Optum channel, it's new. We're -- we just recently signed the preferred provider agreement. We're tracking where we expect to track on that, but it's going to create more and more opportunities for us as we move forward. Regarding going forward in '26, we haven't published '26 data or information yet. We'll do that when we get closer to -- when we get -- when we report the full year results for the business. Jonathan Leon: Yes. I would just add, Dan, there's really not much secular going on that would change those trends. I'll remind you that we discussed in our 10-Q filed tomorrow morning that there'll be a large customer loss in the continuing operations in 2026 that will impact the full year. But absent that, we expect a fairly strong 2026. As I said, we'll put guidance out with the fourth quarter results. Operator: The next question comes from the line of Kevin Caliendo with UBS. Kevin Caliendo: I guess it's sort of a follow-up to that in terms of trends. Like how should we be thinking about this company's business or outlook for 2026? Is there anything you can kind of lay out in terms of how the trends are migrating, how we should think about modeling it broadly speaking? I know you're not here to provide guidance, but there's obviously so many moving parts and how to think about run rates or anything like that would be super helpful. And the same sort of around free cash flow for 2025 and maybe how to think about free cash flow trends beyond where we are? I appreciate the color on what the sort of normalized cash flow was this quarter? Jonathan Leon: Yes, Kevin, it's Jon. I'll take a crack at starting that. So if you think about the trends going forward, the continuing operations, you can see not dissimilar trends on an organic basis as you would normally see. I think we'll have -- absent the exiting one customer, which we have talked about quite a bit. And as I said, there's more detail in our 10-Q, you'll see tomorrow all of that. But absent that, I think we'll have a pretty decent top line growth rate, call it, organically, if you will, absent that loss and some margin improvement and cash flow improvement given the absence of that loss of that contract because that we've talked about before, that is not a margin attractive or necessarily cash flow positive contract that's being lost. So that will certainly improve. From a free cash flow perspective, on a continuing ops basis, as I tried to outline in my prepared remarks, I think you expect Q4 to look a lot like Q3 from a continuing ops basis. I think we will have some nice free cash flow. As we go to '26, again, the trend shouldn't necessarily change. We'll be losing the heavy CapEx burden of that one large contract, but we will have stranded costs that we have to -- we'll begin to actively take out once the divestiture closes. And as well, there's the start of the other divestiture-related costs that we'll be paying really more so in the back half of 2026. So I would expect it to be not terribly dissimilar to '25, recognizing that we'll have a number of those one-off costs around the divestiture, which we have generally sized and are part of the press release we put out around the divestiture itself. Kevin Caliendo: That's helpful. If I can ask a quick follow-up. The balance sheet -- there's so many moving pieces on here and current debt and timing. I know there's a lot going on here. So it's hard to get a full picture just on this one point in time. But relative post the acquisition or post the divestiture, excuse me, and where you sit, you have obviously talked with your credit agencies and everything else, your lenders. Are there -- is there any risk to covenants or anything that needs to change within those covenants coming out of this post sort of now that you've announced the deal and everything else is done and you're a month past -- or is that all fine? Jonathan Leon: No, we're good. Not at all. We just actually sent our covenant compliance to lenders and agencies in the last 48 hours. Very comfortable in compliance, and we expect to remain comfortably compliant throughout. Operator: [Operator Instructions] The next question comes from Daniel Grosslight of Citi. Daniel Grosslight: I was hoping you could provide a little bit more detail on how these preferred vendor agreements work and as we think about the loss of Kaiser next year, you've mentioned many times that, that's not an attractive piece of business from a margin perspective. But how many of these larger preferred vendor agreements do you think you would need to sign to kind of fill that Kaiser hole on the profitability from a profitability standpoint? Edward Pesicka: I'll start with that. And then obviously, we'll have Perry add some color onto this too. I mean, I think we did lose the large customer contract. It was a unique contract in that sense. And as Jon talked about it, when we looked at the EBITDA compared to CapEx on it, it was not a very positive cash flow generating business. So that alone will take very, very little additional revenue to pick up and cover that. And again, not to cover the revenue, but to cover the EBITDA and the cash flow. And then in addition to that, Perry, let me let you add additional color on what you're seeing and how you're thinking about those preferred provider agreements and the ramp of them. Perry Bernocchi: Thanks, Ed. And from a standpoint of the Optum agreement, it's in its early stage. As Ed said, we have 450 forward-facing salespeople that are marketing to over 100,000 potential referral sources within Optum. What it does do is give us a preferred position within the Optum closed network as Apria and Byram as the leading home care home-based DME provider. So that is a go-to-market strategy from a push and a pull perspective within Optum. To Ed's further point, it will take less contracts or less revenue growth to cover the loss of the contract that we are losing, given everything that Ed outlined and Jon outlined. It won't take much for us to replace from a margin -- from a gross margin and an EBITDA perspective. Daniel Grosslight: Got it. And just as a follow-up, I wanted to dig a little bit more into that issue in P&HS that is weighing on free cash flow. I think you mentioned with the kidney client. Can you just maybe explain that in a little bit more detail? And it is a little bit tough to look at your cash flow and balance sheet given cash flows on a consolidated basis and balance sheet is continued and discontinued operations. So maybe if you can help just parse out where in that -- in the cash flow statement, that headwind sits? Edward Pesicka: Yes. So I think there's a couple of things. I know Jon in his script, he tried to basically parse out as much as he possibly could, what the free cash flow looks like from a continuing operations basis based on continuing ops EBITDA, the CapEx as well as consolidated interest in the space. This has to do with -- we are opening up a new kitting facility outside of the U.S. There's normal start-up costs associated with that. And the biggest thing was the over acquiring of inventory to make sure we could make the kits and had it on there for scale. It's something that will work itself out through the next quarter plus, but it really is associated with a brand-new start-up of our kitting facility outside of the U.S. to make sure we have the ability to have diversified kitting both in the U.S. and external U.S. for our customers. And the bulk of that will show up in inventory as well as the change in payables we saw in this quarter. So Jon, I don't know if you want to add additional... Jonathan Leon: No, it's basically right. In my remarks, I mean, what we're doing now is making sure that, that burns off effectively that we serve all the customers' needs in the kitting business. And that has -- that defers other need for other capital across the business, both kitting and otherwise for the rest of the year. So it should burn itself off, but it will take a few months to do so. Operator: This concludes the question-and-answer session. I'll turn the call to Ed for closing remarks. Edward Pesicka: Great. Thank you, operator. It's really an exciting period in the history of Owens & Minor. We're incredibly excited about the future as a pure-play supplier in the home-based care. And I look forward to sharing this progress with everyone early next year. So thank you, everyone. Operator: This concludes today's conference call. Thank you for joining. You may now disconnect.
Operator: Good day, and thank you for standing by. Welcome to the Prysmian's 9 Months 2025 Integrated Results Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Massimo Battaini, CEO. Please go ahead. Massimo Battaini: Good morning, everyone, and welcome to the earnings call of 9 months 2025. I'm very excited today to share with you this fantastic success. Quarter 3, EBITDA, '25 is the best quarter ever. It is over EUR 100 million higher than the same quarter last year, '24, in spite of the EUR 30 million -- almost EUR 30 million adverse impact. So you should raise on a like-for-like EUR 670 million versus EUR 540 million. Remarkable also the EBITDA margin that reached the outstanding level of 14.8%, 1 percentage point higher than the 9 months comparison to last year. The organic growth in the quarter has been outstanding also with a 9% increase that brings the overall 9-month growth for '25 at 6%. We also continue our successful journey towards sustainable targets. 39% has been the CO2 emission reduction in Scope 1 and 2 versus deadline and recycled content of material in our cables risen to 21%. Let me now enter into each business unit to explain you the strength and the performance of the individual business. Transmission, first of all, strong backlog, EUR 16 billion. We had it in line with what was in the past despite additional revenue consumption. And on top of this EUR 16 billion backlog, we have been pretty successful in the order intake in quarter 3 with EUR 3 billion worth of projects awarded in this quarter. They will turn and convert into backlog in the coming months as this project will be awarded in notice to proceed. Amazing has been the growth of Transmission, 40% in the quarter, which confirmed a solid growth in the 9 months, almost 39%, 40% also for the 9 months and outstanding is the EBITDA that has risen from EUR 90 million last year, same period to EUR 150 million. And by the way, this EUR 150 million, probably already is in 1 quarter, what one of our competitor makes in the full year. Extremely rewarding for us is the EBITDA margin achieved in the quarter, almost 18%. You'll remember that we set goals for 2028 for value, we need to achieve a range of 18% to 20% EBITDA margin by 2028. So we are well ahead of that trajectory. 17.8% is 2.5 points higher than same quarter last year and if you take the 9-month view is the same. We are 3 percentage points higher than last year. Thanks to outflows as a cushion, thanks to better margin in our backlog and thanks to entire team, regions in the Transmission BU working hand in hand to maximize the results and maximize the execution of the CapEx and the relevant projects. Let me now move into to Power Grid space. The organic has been significantly high 15%, basically driven by all countries, with North America actually outpacing this 15% growth, more than 20% was the growth in the United States. When you look at EBITDA, you see a moderate growth in EBITDA, but you have to take into account 2 effects in this EUR 6 million only increase in EBITDA in quarter '23 -- in quarter '25 or '24. There is a ForEx impact of close to EUR 8 million. And there is a Midwest impact driven by tariffs that hit one element, one family of products in our portfolio business in U.S., the overhead business. It's a project-driven business, where we have a firm price and we've been hit by projects landed in quarter 1 and quarter 2, where we could not stand a chance to increase and adjust the price to reflect the Midwest premium impact. So you see a temporary blip in the EBITDA margin, 15.2% last year, 14.7% this year. This will be recovered in the coming months as we flush out the old project backlog and we will end the new project. The rest of the Power Grid business in U.S. is immune to Midwest premium because we have formula in frame agreement to transfer the cost to the market. The organic growth in the 9 months has also been pretty successful with a solid 6%. Moving to Electrification. In spite of this moderate growth in I&C Global, you have to see behind this strong organic growth in United States, 10% year-over-year growth in quarter 3, remarkable growth in EBITDA in U.S. in quarter 3. Despite a weak start with July still affected by negative tariffs, thanks to August, September, we had performed a 15% EBITDA increase quarter 3 '25 over quarter 3 '24 in the U.S. in the I&C space, namely more than EUR 30 million in absolute value. Unfortunately, this has been offset by ForEx and has been offset by some pricing normalization in LatAm, where we had spikes last year in quarter 1, quarter 2, quarter 3 in Argentina, which has normalized over the period -- this period of time. The EBITDA margin, we achieved sustainable 14.5% level. And when you look at the 9-month view, you see the upgrade and the accretion of the EBITDA margin associated to the -- attributed to the acquisition of the accretive and profitable perimeter over Encore Wire. Specialty, I cannot say that we are happy. Actually, we are disappointed about this, nothing that was not foreseen. We are still struggling with the automotive performance. The demand is very weak. Price pressure is very high. We are still working on the disposal of a few plants and a process is -- unfortunately, I have taken longer than expected. We will resolve this in the next months. And we also continue to see some level of softening in the elevator space in the U.S. attributed to the weakness of the residential market in the U.S. Moving to the last business unit Digital Solution, we reported a significant organic growth stand-alone legacy Prisma, 13% in the quarter. And you see the EBITDA left from EUR 45 million to EUR 88 million, thanks also to the perimeter change. There is the inclusion of more or less EUR 40 million coming from the Channell integration. This is the first quarter where we have the full consolidation in the treatments of the Channell perimeter. Amazing is the EBITDA margin. We never had better than 14% EBITDA margin in the business in the past. Now we raised this level of margins sustainable in the future to 20% with additional scope, with additional connectivity in the U.S. space. Before I hand over to Francesco for more financial insight, let me draw your attention to maybe one only of these KPIs in the first one on the top of right-hand side of the page, revenues linked to sustainable solution. We raised this revenue from 43% last year to 44%, 45% already. In 12 months, we will show another improvement over this level. We have a target of 55% by 2028 as per our Capital Market Day. This is our important way, it is an important way, it's an important KPI to read our ability to innovate to drive EBITDA margin improvement. And the 14.8% EBITDA margin achieved in quarter 3 is a real reflection of the efforts that commercial, R&D, operation and rest of the team has put in innovating our portfolio, innovating our solution to increase share of wallet on the one end and improve profitability. And now Francesco. Pier Facchini: Thank you, Massimo, and good morning to everybody. As usual, let me recap our profit and loss and summarize some messages that Massimo has already passed. The -- an outstanding quarter, this 3 quarter. Starting from the revenues, EUR 14.7 billion with an organic growth in the third quarter, very robust, over 9%, which was driven by an outstanding growth in Transmission and a very strong improvement in the growth of Power Grid by the way, across the board, as Massimo said, both in North America, but also pretty strong in Europe. The highest quarter ever in terms of EBITDA. You see the bridge on the right of this page, quarter-by-quarter. I would focus on quarter 3, EUR 644 million, an increase of over EUR 100 million versus Q3 2024 in spite of pretty significant adverse ForEx effect of EUR 27 million, which is mainly in the Power Grid and the Electrification business, but also Digital Solutions business. In terms of margin, I don't have much to add to what Massimo said. At constant metal in the quarter, we grew 1 percentage point from Q3 2024, mainly driven by the growth of the margin, but also of the revenues in transmission, which is obviously changing the mix in the positive sense. It was driven definitely the increase of margin by the full inclusion of Channell in our third quarter results. And I would add also a pretty robust Q3 in I&C in North America, in particular. On the lower part on profit and loss, you see group net income, which is almost doubling compared to the first 9 months of 2024, over EUR 1 billion, EUR 1.022 billion. Of course, this was heavily impacted, positively impacted by the disposal of our 23.5% stake in YOFC, which generated gains in the region of EUR 350 million. But let me say that even taking out this obviously one-off effect on our net income, the net income was very robust. And I like to confirm what I did already in the first half of the year that in terms of growth of our EPS, we are definitely above the level that the CAGR, you remember the midpoint of this CAGR was 17% for the period '24, '28 that were setting last March in New York as a target. I would say we are more in the region in the first year of a 25% EPS growth for the full year versus 2024. Okay, I flip quickly to the cash flow generation. That's the usual bridge of our net financial debt from September '24 to September '25, it's a strong deleverage, which was obviously fueled by the cash proceeds coming from the YOFC disposal. You read the number on the right of this page, EUR 566 million, which were definitely much higher than we expected, thanks to the incredibly strong share performance of the company, specifically in the month of July and even more August. In terms of last 12 months free cash flow, we are a bit below the level that we saw in the last few quarters. You remember that we were last 12 months, half 1, slightly below EUR 1 billion, let me say. And this is not very concerning, in my opinion, because it's almost entirely attributable to a different distribution of cash flows in our Transmission business. To be more specific, last year, specifically in the first 9 months, Transmission was generating very strong cash flows because it was benefiting of a very, very large down payments and milestones that this year are more skewed on the fourth quarter. So no concern. I think that we will come back and we will regain our nice level of EUR 1 billion plus, by the way, in line with the guidance that Massimo will comment in a while. Also in terms of net debt, the boost of -- other than our strong cash flow, the boost of the transactions like YOFC will generate a faster deleverage than we originally expected. And I anticipate a net debt by year-end in the region of the EUR 3 billion, which was -- which is definitely much lower than the, thanks also to YOFC, of course. Back to Massimo for the outlook and the final conclusion. Massimo Battaini: Thank you, Francesco. So let me walk you through the upgrade of the guidance. On the right-hand side chart, you see the evolution of our guidance for the EBITDA. We started the year with a EUR 2.3 billion midpoint for full year guidance. We raised it to EUR 2.40 billion in light of the perimeter change, which was particularly set by the ForEx. So the EUR 40 million additional is the organic growth of the EBITDA of the legacy Prysmian perimeter, excluding the Channell benefit. And now we are happy to raise it to EUR 2.4 billion, so another solid EUR 60 million additional EBITDA coming from the strength of quarter 3 and the expectation of the quarter 4, of course. Free cash flow also you don't see the upgrade here, but we had a EUR 1 billion low range EUR 1.075 billion, now we raised EUR 25 million, the bottom range and by EUR 50 million in the top range. So making a net increase of circa EUR 40 million in free cash flow for the full year. Let me move to the final remark and wrap up the meeting and leave time for you to address comments and questions. So definitely, a quarter, which reported an excellent performance, as flawless execution in Transmission, also supported by a good order intake. The benefits of the accretion of the EBITDA margin coming from the Channell acquisition and a strong driver of the business growth coming from North America, Power Grid, I&C and Transmission with now North America really posed to benefit from the tariff benefit in the coming quarters. So thank you. I'd like now to open the Q&A session and get more insight into the business. Operator: [Operator Instructions] We will now take the first question from the line of Vivek Midha from Citi. Vivek Midha: I hope you can hear me well. My first question is around the I&C margin in the third quarter. Would it be possible for you to give a little bit more color around where the profitability of the U.S. low voltage business stands and how that progressed over the course of the quarter? You mentioned that July was lower and August, September improved. And then also on that, you mentioned just now about the benefits of the tariffs in the U.S. coming through in the coming quarters. Could you maybe give some color around how you expect that to phase in over the coming quarters? Massimo Battaini: Yes. Thank you, Vivek. So the I&C space in the United States, we had many turbulence in the very months -- in many months of 2025 due to the different dynamics interpretation of tariffs in the market. In July, we were still in the old scheme where tariffs were applied to metal, so imported metals, imports of metal and not on import cables. From August 20 -- from August 13, all the tariffs were set in a way that's also the meta content of cable imported were charged with 50% in addition to this called country tariff. So from August 13 onward, we had a full recognition of the fact that we are looking for local producer. So given that circumstances, in August, September, we've seen a reverse in trend. While in July, we saw pricing pressure because we had cost that importers didn't have from August -- from beginning of August onwards, we had certainly more even and normalized competition. Another pressure is on importers. So the I&C margin in quarter 3 in U.S. is the best ever margin achieved by Encore Wire best ever. Despite July was weak due to the former setting of tariffs. We are at least 1 percentage point ahead of the same quarter last year, 2023, which, by the way -- 2024, which, by the way, was a strong quarter, as you recall. Now how we are going to benefit from the tariffs in the coming quarters? We don't know what is going to happen. Certainly, the supply chain from imported is a long one because they're shipping cable from every place in the world. It's normally -- we consider it a supply chain of treatment. So it will probably take another 1.5 months or so before this -- the quantity of product has been shipped and our in stock in U.S. will gradually run down. And so we should be seeing hopefully, certainly from quarter 1 onwards, less lower pressure from importers and more opportunity for us to gain share of wallet. So we think that in the aluminum building wire space, the market started already and will more progressively shift from importers, whose price is not going to give them any more benefit into for -- into local suppliers. So we will certainly have a share of wallet opportunity. Whether this will turn in additional profitability, we will see. We'll have to gauge it. It depends more -- it doesn't depend on tariff. It depends more on the possible dynamics of shortage of cable availability in U.S. vis-a-vis the local demand. Local demand is expected to grow beyond that in '25, driven by the usual data center expansion, but also by some expectation that the residential market in light of the further reduction in interest rate will rebound a little bit in quarter 1, quarter 2 next year and also thanks to our solidity of the nonresidential market. I hope I answered your first question, Vivek. Vivek Midha: Absolutely. Just to clarify to make sure I heard correctly. I think you said was it was from -- at some point in the quarter, that was the best ever margin in Encore Wire, given that they had some very, very good margins after the pandemic. Did I hear that correctly, best ever margin? Massimo Battaini: Yes. July was not the best margin but August, September was few points higher than the same period 2024. So yes, you're right. Vivek Midha: Okay. And my second question is around the Power Grids margin. Just a clarification. Thank you for the color on the Midwest premium impact. Could you maybe confirm then was the margin in the power distribution business and high voltage AC, i.e., the business outside overhead, stable relative to the second quarter? Massimo Battaini: As you noticed, the blip in the EBITDA margin was really minor. The rest of the product -- the rest of the family side of Power Grid, so high voltage AC, power distribution and network components were not suffering any sort of margin contraction. It's only the overhead business in U.S., where we win projects is similar to the transmission space. We win one-off projects. We win projects and the price and the project is firm until you completed there's a cushion. And the Midwest premium has risen in the last 2 quarters due to the additional aluminum tons supplied to metal imported in the U.S. We could not transfer this to those firm price project. While we've been completely successful transferring this Midwest premium increase to the rest of the business, call it I&C, low voltage, medium voltage distribution, no way. We have no issue there. We have formula to reflect the cost inflation coming from Midwest premium, copper rod, all the rest to our customers in the existing frame agreement. In this specific niche on the portfolio Power Grid, we didn't have this chance. We actually renegotiated some contracts, but vast majority at firm price. So when we get past the end of this year, it is a backlog of old projects that suffered this price pressure -- sorry, this margin contraction due to cost increase will fade away and will enter 2025, '26 with a different speed. That's why I call this blip in 1 -- in '26, sorry, quarter 1, this will be fully reverted back to the original level of margin, 15% plus. Operator: We will now take the next question from the line of Daniela Costa from Goldman Sachs. Daniela Costa: I'll ask two, one on Electrification and the other one on Transmission, but given we just talked on Electrification, just following up on the comments there you made before. I think when you think about sort of this potential impact that you'll be better positioned versus the importers going forward on the Section 232, what's your view in terms of like will your intent be to mainly just grab share because they will be much more expensive? Or are you also planning to leverage pricing? Has that gap becomes so wide now out there? Massimo Battaini: Yes, it's a complicated answer because the tariff -- due to tariffs, first of all, been only applied to imported cables in the aluminum space. We expect the same treatment, the same approach to happen from December onwards where also for copper products imports, there will be the same logic. So the metal content of cable or copper cable import in U.S. will be charged with the same 50%. So -- but this still has to happen. Our interaction with the administration suggests that also for the copper space, this will happen. Should this happen, we'll have Electrification, Power Grid overhead, high-voltage businesses, where we see our position in the U.S. strengthened by the fact that importers have additional cost to live with, to bear with. Some of those importers decided to eat this cost to digest it. So they didn't increase the price. By now, after 3 months, we noticed the attitude or the chance to hold the same price and getting charged with is 50% of metal content and on top of country is becoming; too overwhelming for them. So we expect to see a reduction of imports of cables across the board for all importers in U.S., in high voltage, low voltage, medium voltage and electrification. So this reduction of supply to the U.S., driven by the extreme cost impact due to tariff will certainly create some imbalance in the market. So we think that the first immediate benefit will be the share of wallet. It is too early now to say whether on top of the share of wallet, we also have a price benefit. But be reassured that every time we had a chance to increase price and to improve profitability without losing share in the market, we go for it as we've done in the last 9 months. The market was not that strong, but we haven't seen a particular EBITDA margin erosion in any space in the United States, despite tariffs were not in favor of local producer. So price we will see. Certainly, share of wallet is within reach. Daniela Costa: And moving to the question on transmission. I mean, as you've mentioned, you're pretty much there sort of at the 18% and there's upside, as you said, to the 18% to 20% or that you're comfortably in there in the 18% to 20%. But the backlog is not dramatically different to the backlog we had at the CMD. So I guess you had visibility on sort of like what the gross margin on those projects were. So can you elaborate what you changed in execution and whether this is something that we kind of see has more longer lasting? And in that case, what is the ultimate ceiling of transmission margins? Massimo Battaini: To be honest, we also have to be more accurate in setting the target for '28. So the 17.8 today is based on standard metal. Should we base also the 18%, 20% target on the same standard metal, so the historical metal 10 years ago, we should naturally raise 18%, 20% to 18.5% to 20.5%. So in my view, the natural ceiling is 20.5% is the top of the range. It's the top of the range because it is true that the backlog is what it was 6 months ago. We've definitely been more successful or better -- sorry, more successful than anticipating in the execution, let me say. And some of the risks that were in our execution and that we quantify and we assigned to provisions didn't materialize or we handled them with lower cost than anticipated. So it's again back to this execution. The strong team, strong assets. So don't forget, we have now plenty of new assets. And the new Monna Lisa is a new super performing installation asset with different capabilities and Leonardo da Vinci. Alessandro Volta, the asset will join our fleet in December '26 has a different set of capabilities as well. So we have different tools for installing/burying cables underground. We have new factories. We have new vertical lines in Pikkala that has come to -- that came on stream at the beginning of this year. We have a new production line in Arco Felice. We have a fantastic new asset. Our cohesive team working with a strong focus on execution, and this is what has driven the significant uptake in EBITDA margin in quarter 3. And this has given us confidence that the 20.5% top of the range is also achieved over by 2028. Operator: We will now take the next question from the line of Max Yates from Morgan Stanley. Max Yates: Just my question is on capacity utilization in your Encore facility. So you've kind of mentioned there may be the opportunity to take share and take customer wallet share from -- as a result of the tariffs. So could you just give us a sort of indication of if 25% of the market is going to be challenged by these tariffs, how much can you ramp up your Encore facility in the next 1 to 2 years to maybe take advantage and knock out some of that competition that then has to put through higher prices. So where is capacity utilization and sort of how much room do you have? Massimo Battaini: Our strategy is pretty simple. We have spare capacity in the range of 30% in Encore Wire. We are not there in idle wire because we like to have spare capacity. It's there to guarantee the service. But in case we need it to respond -- to fast respond to market demand, we can utilize the Saturday and the Sunday shift to expand this capacity and leverage this available at incremental output. Of course, in the short term, this will be the answer. But as soon as we see stronger structural demand growth, we will resort to the short-term action to gain share and then we back up this action with additional investment, which might take 12 months, 18 months, it depends on what we're going to do in terms of where we want to spend capacity. Of course, it would be [indiscernible] which line. So short term, we respond with the shifts -- available shifts on Saturday and Sunday to avoid to compromise in the long term, the service level, we will immediately activate the CapEx deployment to increase the structure of the capacity. So we are the only one with this benefit, thanks to Encore. We didn't have it in Prysmian because Prysmian run facility at full capacity on 7 days a week. And the same does the other -- the same to the other players in the United States. So with this opportunity, we can certainly leverage the tariff in a better way than the other people and hopefully to gain share in the market. Max Yates: Okay. And maybe just a second question around what the competition are doing in North America? Because I guess when we look at Encore margins, they're clearly at very attractive levels. Obviously, your biggest competitor, Southwire is private, so it's harder to keep a track on kind of what they're doing. But when you speak to your sort of salespeople, what do they say about what the competitors are doing on capacity? How much availability do they have to ramp up? And are you seeing kind of new entrants or people expanding capacity that maybe you didn't see before given how attractive margins are now in this North America business? Massimo Battaini: Yes. The margin attracted new entrants from outside are really not coming because of the challenge. So there could be new entrants from inside, I doubt it. The copper building wire market is in the hand of 2 players, Southwire and Cerro and the aluminum in the hand of us and Southwire, the rest are importers. So behavior in the market is pretty simple to define. Southwire is very disciplined when it comes to price. Of course, they are suffering more than in the past because they are too exposed to the residential market. They have a significant exposure to residential market. This market has been sluggish and flattish over the last 2 years. And so they're probably not enjoying what we've been enjoying on the contrary of our side because with the electrification space, again, from Encore Wire, we have a huge exposure larger than before to the nonresidential space. And on top of the nonresidential space market, we have access to data center, stronger than anyone else because we have a product range, very broad, large and complete, from telecom to Electrification, to Power Grid, to Transmission, which is unique, not common to a telecom player like Corning on Costco, not even common to Sourthwire. So they are disciplined. They always follow our price. Sometimes they are the first at price increase in the market. For example, in the last 2 weeks, we've seen copper increasing -- increases that forced us to increase the price, but Southwire anticipated us. They came with a price increase in the market first. So we are happy about the level of competition. Whether they have spare capacity, I don't know. But what matters to this market is the service level. So if you have gained so much share in the center space, is because we serve these demanding companies, the likes of Microsoft, Meta and so on with our 24-hour service. It is because with 3, 2 days spare idle capacity we can respond with massive output increase that other people cannot respond to. So we are well positioned to leverage now the settlement achieved by the tariffs in the market to leverage our strength, our portfolio and the asset of McKinney and gain additional share in the market. Operator: We will now take the next question from the line of Sean McLoughlin from HSBC. Sean McLoughlin: Can I just build on the previous answer. Maybe could you specify what kind of growth you've seen in data centers, maybe across the different divisions? And my second question is related to fiber, particularly if you could maybe split out the growth in Digital Solutions in the U.S. versus other regions. And particularly, if we're looking at fiber shortages in the U.S., what kind of positive pricing impacts do you expect this might have over the coming quarters? Massimo Battaini: Thank you, Sean. In data center space, we've seen our revenues 9 months to date versus 9 months last year, doubling in value. And this is pretty much across 2 main spaces, Electrification, U.S. and Optical Digital Solutions U.S. So now in the optical space, 40% of our volume -- trade volume in U.S. belongs is for serving this data center business. And in Electrification, I say that we have 25% of the total Electrification business, I&C business U.S. attributed to the data center expansion. This is not the same that we've seen in other regions yet. We are still working in Europe, in LatAm and APAC to become more relevant, to become more engaged with the go-to-market with a proper supply chain to win more share in data center space also as well. As far as fiber is concerned, you are totally right. There is a shortage of fiber in U.S. to the point that we are really backfilling our capacity in the U.S., we have a factory in U.S. producing fiber with fiber production coming from Europe, price improvement happening -- has happened in quarter 1. Quarter 2 is happening as we speak. And so we count on this pricing and profitability enhancement in the coming quarters to set a new level of EBITDA for Optical Digital Solutions business U.S. next year. Operator: We will now take the next question from the line of Monica Bosio from Intesa Sanpaolo. Monica Bosio: I hope you can hear me. The first question is on -- from a strategic standpoint, Massimo. If I'm not wrong, in occasion of a recent interview, you anticipated that Prysmian could be ready for a big acquisition in 2026 in LatAm or Europe. Can you please give us more flavor on this side? And just a question, would you see as reasonable and external growth in the digital solutions space or in other areas? That's the first question. The second one is related to Sean's question in the Digital Solution space. So pricing is coming -- so what kind of margins could we expect on a steady state in the Digital Solution space and more in general, given the exponential growth of the data center, do you see any supply constraints or disruption that could bring to some stops and growth along the trajectory? Massimo Battaini: Thank you, Monica. So yes, our position regarding M&A is the usual one. We consider M&A, the natural to top up our organic actions, organic plans. We think we are well positioned based on our track record of M&A to leverage additional opportunity. We will be ready for large ones. And by that one, that means something closer to the size of Encore from 2027 onwards, not in 2026. We have some more financial flexibility also in '2026 due to the disposal of YOFC shares, the treasury share. So we have still some room for minor midsize acquisition in '26. Another point is to work in identifying the specific targets, the one that we can start the highest level of synergies. And certainly, we are looking at North America, LatAm and Europe as main priorities to expand leadership, expand portfolio and become more relevant within the customer base. I didn't capture the question about the standard growth in Digital Solutions. You mean internal -- the organic -- so there is growth in U.S.A. in Digital Solutions, again, partly driven by the rollout of Fiber to the Home and also complemented by rollout of data center expansion. There is not that much level of growth in the other countries because they are much more advanced in the fiber-to-the-home implementation. France is almost at the end. The U.K. is almost at the end. Spain is made way too. So Europe will not probably give us satisfactory organic growth. North America will continue for 5 years at least to support organic growth of Digital Solution space. Monica Bosio: Yes, my question was -- sorry, Massimo, my question was given the pricing that is coming in the U.S. in the digital solution, this could be a lever for further margin improvement. What you... Massimo Battaini: Okay. So the margin was coming to the point of mind. We reached a 20% EBITDA margin. So I think it's the level we consider sustainable. There will be upside in U.S. There will be probably stability or slight reduction in Europe. So I would not bank on significant expansion beyond 20%, which is already very accretive vis-a-vis the past trend. Of course, there will be additional synergies that we want to leverage, thanks to the acquisition of Channell. Because now we own a satisfactory portfolio of connectivity products with the ones that we had in Europe, with acquisition that we made, a small acquisition that we made in Australia, the Warren & Brown and Channell. Now we can leverage the full portfolio and eventually further enhance the profitability of the business unit. Operator: We will now take the next question from the line of Alasdair Leslie from Bernstein. Alasdair Leslie: I had 2 questions on Transmission. So you talked about 2028. I was just wondering whether you could help us a little bit in terms of kind of calibrating how transmission scales up here in maybe the next 6 to 12 months? I mean how should we think about top line growth margins both in the balance of 2025, but maybe also 2026 as well? Any early thoughts there as consensus only has around 15% like-for-like growth in '26. It feels like maybe that's now too conservative? And maybe also just a little bit more detail around the phasing of capacity coming online, please. I don't know whether you can kind of update us on those lines of Pikkala. The first one, I think you highlighted again, that's up and running. But the second 1 maybe an update there. Can that be brought forward a little bit? And maybe if you can, what's the kind of run rate on that submarine cable now in Pikkala? I think you were talking about starting with 32 tons and wanted to double that. So where do we stand now? Massimo Battaini: Your question is too detailed. I don't like to share all this stuff with -- not with you, but with the other people connected to the earning calls. I'll tell you a simple explanation what is going on. You draw a line from '26, '25 through 2028. You take the, let's call it, EUR 580 million EBITDA this year and take almost EUR 1 billion by 2026. This growth from EUR 550 million, EUR 580 million to EUR 1 billion is supported linearly by additional capacity increase across many sites. There is Pikkala with 3 lines. There is drone for HVDC interconnects with 3 lines. There is Naples with 1 additional line. There is capacity in Abilene, United States for HVDC capability. The capacity will grow linearly from this level of 2025 through 2028 from EUR 550 million, EUR 580 million EBITDA this year to EUR 1 billion. To complement this cable capacity across different submarine interconnectors, offshore and land interconnectors, you have the installation capacity that will grow hand in hand with the manufacturing capacity. So you draw this line, you can figure out what the organic growth for next year will be and for '27 and for 2028. Bear in mind that while we grow, expand the business organically with capacity and with expansion of installation capability, we also benefit from -- as we did in quarter 3 this year execution and better margins in our backlog. So move from the 17.8% margin today to 20%. I hope this clarifies the trajectory. And forgive me if I can enter into these tons kilometers details that really we don't like to share with our peers. Operator: We will now take the next question from the line of Uma Samlin from Bank of America. Uma Samlin: My first 1 is fairly short term. You mentioned that for Encore, you saw record margin profile in September and August this year. So what are you seeing in terms of Encore demand and pricing so far in October? If you could comment on that, that would be really helpful. And also for your raised '25 guidance, how much have you accounted for in terms of the tariff impact on I&C in Q4? And how should we think about this benefit going into 2026? That's my first one. Massimo Battaini: The record margin August, September is certainly an important -- is certainly important trend in the market. It is not really related to the tariff to the reduction of imports related to the fact that there is clarity in the market about where the market stands in terms of tariffs. October is coming in with a strong volume with some pricing or margin pressure due to the cost of copper cost increase that has been kind of sudden and sharp. And of course, us supplier, all keen on passing into the market. So October is coming up in a nice way as well. The big chunk of the 2025 upgrade -- guidance upgrade comes from North America due to the strength in Power Grid and I&C but also it comes from Transmission business. So those 3 family of products, I&C North America Power Grid, North America and also Europe, to a certain extent. And transmission is what has driven the 60-meter increase in 2025 guidance upgrade. Uma Samlin: Yes, super helpful. My second question is a slightly more longer term. Is that -- how should we think about the sustainability of the tariff benefit that you're seeing now? Do you expect to see further consolidation of the market? And what kind of long-term pricing benefit do you expect there? Massimo Battaini: It is a million-dollar question because we've never been in a situation like this where finally the U.S. market is -- that's historically been super protected against importers will be even further protected. So give us a couple of quarters to really assess what the situation would be. I think that things went in the way we think that we go, there will be significant reduction on the imports of cable in U.S. in favorable of local producers. As said before, we have capacity available to respond to the sharp market demand. And we have a CapEx and capital allocation available to be released to support the organic growth of the market in U.S. As we've done in the past, we'll do in the future, the market becomes more solid, more protected in the end of a few players. It's already kind of highly consolidated. And we made the last moving consolidation with the acquisition of Encore Wire. Operator: We will now take the next question from the line of Nabil Najeeb from Deutsche Bank. Nabil Najeeb: My first question is on data centers. Your direct sales into data centers have, of course, been very strong. And I think you previously said that you're on track to double data center-related revenues. Can you give us a sense of how you might look at the overall opportunity within data centers? I wonder if you've got any thoughts on the share of data center CapEx, you can maybe capture across low and medium voltage cables as well as fiber and connectivity. And the second question is on the New York listing. Do you have any updates on your plans there? I think earlier, you wanted to focus on the integration of Encore and Channell, which seems to be well underway. There were also some headlines that pressed on a potential revival of these plans. So just wondering if you can comment on that. Massimo Battaini: So data center, we've seen a significant growth in '25 or '24. We think that growth will continue. We have a visibility of long pipelines of projects and we become stronger and stronger, as time goes by because we add the innovative solution to our product range that can really benefit the data center. In the optical space, they require high-density cables with very compact standard diameter. And we just -- we cannot announce it today, but we have a breakthrough that we disclose to the market shortly in terms of size of fiber for compact cables for data centers. So we will be really benefiting from data center expansion. I think the growth, per se, will probably slow down because this year, we've seen a 150% growth over last year. So the pace of growth will probably slow down, but it still remaining -- this will still remain an important driver of EBITDA expansion and EBITDA margin increase in U.S., for sure, massively and also in other regions. U.S. listing is not an abandoned project. It's something that we parked for a few -- for the moment. I think you are correct. The integration of Encore is proceeding well. The Channell integration is also proceeding well. We will reopen the discussion in 2026. The project is extremely valuable to us. It will give more -- it will give us access to this company to many U.S.-based investors. So it is a priority for us. At the moment, we made the proper decision. Operator: We will now take the next question from the line of Chris Leonard from UBS. Christopher Leonard: Yes, hopefully you can hear me. Just digging in maybe on the margin differential again between North America and Europe. And I wonder Electrification division for Q3 if weakness in Europe was dragging margins down? And could you maybe speak to the potential for you to bridge the gap in the future and grow European margins? And is there anything in your strategy you're looking at to try and improve that? And maybe is M&A into '26 or '27 an avenue that you would pursue within Europe? Massimo Battaini: Yes. You're right, there is a significant difference in and between North America and Europe. Why in other regions, for example, a time a similar margin to U.S. So -- but Europe is not one margin fits all. It's a strong margin in the Nordics, weaker margin in the South Europe. Now how to bridge this gap? We are trying to implement similar mindset as the one we have in Encore Wire, also in Europe. So to leverage -- or to value the service more than the other part of the factory. So to make sure that we become more appreciated by customer for the short-term lead time, for the short-term service than anything else. Differentiation in sustainability and innovation in this space is also important. We have guide to cover, and we are really working across all drivers -- fixed cost organization, factoring footprint and possibly consolidation of the market in Europe to bridge this gap. Bear in mind, there is a structural difference between the fragmentation of the U.S. market, which is minimum and the fragmentation of the European market, which is extremely large, both on customer side and supply side. But we are working hard to reduce and minimize as possible as we get. Hope I answered your question, Chris. Operator: We will now take the next question from the line of Akash Gupta from JPMorgan. Akash Gupta: I got a couple as well. The first one is the clarification on your remarks earlier. I think you said that Encore had all-time high margins. And clarification, is this all-time high since you acquired or in their history? And given question -- given in 2022, they made more than 30% EBITDA margin. So just wondering if you can provide some context to these record margins at Encore? Massimo Battaini: Thank you, Akash. There is an important clarification of cash. Yes, you're right. This is not the all time ever. It's no time not since we acquired, it's no time since the level of EBITDA margin at Encore normalized, level of margin at Encore normalized after the spike in '22 and '23 towards the end of 2023. And since then, so let's say, quarter 4 '23 onwards, we had this kind of a stable EBITDA margin of 15% with some peaks and troughs, especially in 2025. So the EBITDA margin highest ever mentioned quarter 3 is the highest since quarter 4, 2023. Akash Gupta: And my second question is on your guidance range. I think if you recall last year, you had a bit of softness towards end of the year in Electrification because of some weaker volumes in end of the year, which also continued in early this year as well. So just wanted to understand the framework behind the guidance range that have you incorporated a similar scenario as well for this year? And maybe if you can also talk about what will take you to the upper end of the range and what will need to happen to come at the bottom end? Massimo Battaini: Yes. Thank you, Akash. So yes, you're right. Last year, we had a soft volume performance in November, December due to seasonality, but also due to some shortage in demand. October started very strong in volume. And we have visibility of a part of November. Don't forget that this is a very short-term business. We have weighted the month and we gained the orders of the month through the month itself. But prospect is positive, probably volume in October is the first reflection of some slowdown in cable imports, so that there is more demand for local producer. Volume is positive. We think that quarter 4 this year will also be extremely satisfactory versus quarter 4 last year. And so this expectation for quarter 4 I&C has played an important role in the guidance of a grid, but also the performance of Power Grid that at the global level, was in the quarter, 14% organic growth, by North America much more. And the growth we expect to see from North America in quarter 4 is in line with what we've seen in quarter 3. So also Power Grid U.S. has played its important role in convincing us to upgrade the guidance to a midpoint '24. And we think we will end up around the midpoint. So to be in the top part of the range we have to think of something that we don't think is realistic. So an extremely important shift change in the market to a local producer, importers decided to work away pricing going to a different level. So a scenario that we don't see realistic. So the tariff will play an important role benefiting us, but this will gradually kick in, in the market. So I don't see this spike possibly happening in quarter 4. Gradually, we will gain, as I said before, more share of wallet, more relevance and the importers will be neglected. They will be really considered the last resort also because they won't have the only leverage that they had in the past to enter the market, the price. The price will go because the cost they have to bear is immense. So this is how I see how we drafted the guidance and how I see we will end up vis-a-vis the different business movement. Operator: We will now take the next question from the line of Alessandro Tortora from Mediobanca. Alessandro Tortora: I have 3 questions, okay. The first 1 is on the Channell performance on a stand-alone basis. If you can comment a little bit on the organic performance of the company, but also the underlying profitability? This is the first question. The second 1 relates to the around EUR 3 billion net debt indication I got in the conference call. So if you can help understand the underlying assumption on CapEx and also, if you are assuming, let's say, significant advance payment in the last part, I may recall to the [indiscernible]? And then the last question is on the -- let's say, sorry, I don't recall lately, but if you can also give me some ideas on the tax rate level for this year because it was let's say, low in the 9 months and also on the level of financial charges. Massimo Battaini: Channell benefits from the strong rebound of the telecom market. The Channell performance in quarter 3, 2025 is well ahead over quarter 3, 2024 as also North America, our performance in optical cable business, '25 is ahead of that of last year. The market has rebounded. So Channell benefited from organic growth -- benefited organic growth upside, but also profitability side, the level of EBITDA that used to be in the range of 40% in 2024 has risen to a more solid 43%, 44% for quarter 2 this year. So we had this twofold the benefit coming from Channell, which, again, given the strong demand of optical business, U.S. supported by use cases like data center and fiber-to-the-home, we believe that it's going to be sustainable in the coming years. I will hand over to Francesco for the NFP, and tax rate question. Pier Facchini: Yes. The assumptions are pretty simple on the EUR 3 billion debt. First of all, let me highlight that the EUR 3 billion debt, of course, assumes -- is based on the treatment of the hybrid bond as equity, just to be very clear on that point, which is according to IFRS. So nothing new, but better to clarify. The assumption is that we are in the midpoint of the guidance of the free cash flow that Massimo highlighted. And of course, in this assumption, there is the down payment of AGL 4, no doubt. By the way, I commented that the reason why we are confident to recover the level of the free cash flow on a full year basis after the drop down to EUR 859 million last 12 months, September is exactly a very strong cash generation of Transmission business, which is more skewed on the fourth quarter than compared to last year. Nothing else on the extraordinary transactions which has been completed. And so this will not impact -- will not have a different impact from the one that you see in September. You are right. The tax rate is very low. The reason why it's very low is a technical reason, I would say, an accounting reason, which once again has to do with the disposal of YOFC, basically, the big gain of EUR 350 million has a pretty low level of taxation. And so I expect this to be stable also in the full year around 22%. It's a good point that you make because it's not certainly our sustainable long-term rate, it would be too naive to be true, Yuri. I go back to the indication that I gave at the Capital Market Day where our sustainable tax rate is more in the -- between 25% and 27%, I would say. And the financial charges are reflecting, obviously, the acquisition than in the past. The new financing are progressing quite steadily at EUR 70 million, EUR 70-something million a quarter. So an easy projection is in the region of EUR 285 million, let me say, between EUR 280 million to EUR 290 million for full year versus the EUR 216 million year-to-date September. Operator: We will now take the final question from the line of Xin Wang from Barclays. Xin Wang: I'm not sure if I'm the only one confused here, but I want to clarify one thing. So on the tariff impact, I think you explained how the aluminum tariff works, which is in July, it's applied to metals, not to cable. Therefore, you saw cost pressure in July. And then by 16 or 18th of August, is expanded to cables and you saw the best margin of Encore. And then you said we expect the same logic to apply to copper. Does this mean that we haven't really seen the tailwind from the copper side this quarter yet? And do you expect this to come in the coming quarters, please? Massimo Battaini: Yes, you are totally correct. The 232 section tariffs applied to metal has been expanded to import cables as far as aluminum cables is concerned from 18th of August, and our interaction with the administration suggests the same logic will apply to copper. This will probably take another quarter to be implemented. So we expect this to happen from somewhere in quarter 1, 2026 onwards. Then, of course, the copper space is not that relevant as aluminum space. So 80% of the aluminum I&C market is in the hand of importers. In terms of copper wire market, they are barely importing copper cable in U.S. in electrification, in I&C, but there are cable imported into the U.S., copper made in middle-market space and by distribution in HVAC. So we will not see a significant benefit of the total tariffs applied to import cables in I&C space, we will see some benefit in Power Grid and high-voltage should this approach be implemented at some point in the coming months. I hope I clarified the difference between the 2 family of products, aluminum and copper. Xin Wang: Yes. No, the first part is very clear. The second part, I just want to clarify, this is what I heard. Potentially, when we look at the benefit from copper and aluminum tariffs being on the I&C front or the Power Grid or Transmission front, you expect aluminum imports to be a more structural benefit that takes some time to flow through. Obviously, part of that is because aluminum import penetration is higher than copper and also is less exposed to the spot market. Massimo Battaini: Yes, correct. So the aluminum space -- I mean, aluminum cables are lighter than the copper cable. That is why U.S. is importing as other regions are importing more aluminum cable than copper cables. The aluminum space is inside the electrification space and that's the construction. The aluminum cables are also inside the Power Grid. For example, overhead lines are mostly made of aluminum conductors. And so a chunk of our transmission business that we own in U.S. compete head-to-head with importers bringing overhead transmission line from India, from China and other countries. And now also these importers that entered into the Power Grid space through overhead transmission line will feel the extra cost of the 50% tariff applied to metal content. And the conductor lines is only made of conductor, not insulation. So there are other benefits to come through. But again, I really suggested to pause a bit on tariff, it's not too big of a deal. We just had finally settlements in aluminum that will be copy pasted by copper approach in the next months, we will really need a few months to gauge the entire benefit. But be aware that we are really structurally poised to benefit from it. We have capacity available. We have a larger engagement with all major distributors and utilities in the U.S. So we have a strong connection with all customers. So we will be the beneficiary of the tariffs in a way or the other. And this is already starting to open in August and September for the I&C space, and this will carry on in the future. Xin Wang: It is very clear. We can totally afford to be a little bit more patient. My last question is on the high-density fiber cable and system. You talked about the opportunity out there because your peer Corning obviously is also talking about the same thing. I know you have made a technical breakthrough. But you -- but do you -- can you already share some thoughts on if there is any customer dialogue starting already? Or how do you think about the investment that is required out there? And on top of this, I think you made progress with Channell acquisition, but you previously also said you intend to grow -- to expand the portfolio offering on Digital Solutions. Do you have any progress to share, please? Massimo Battaini: So we keep working on innovation and Corning does the same, of course. So we have extremely -- we think that we have at least two breakthrough vis-a-vis Corning, but please don't make me share what we think of the other competitors. We have strong effort in innovating in fiber making very thin fiber solution and very compact cable solution. We're working on the local fiber, which is a new generation of fiber to increase speed of transmission of data, which is key for data center rollout. And we're working on very super compact cables that is also key for data center because there are little spaces in ducts, and they want to squeeze as many fiber as possible in the short space. So innovation is our key driver of profitability and volume and share enhancement in Digital Solutions space. You mentioned also Channell. Channell give us a range of products in connectivity and is completely complementary to that we are in Europe. And so now we will do a cross-selling. We would like to use the Channell product and sell them in European market using our go-to-market channels and do the opposite, the complementary use in our European portfolio connectivity and bring it to U.S. benefiting from the Channell to the market that Channell has. So the go-to-market Channell, Channell is go-to-market that this company we acquired has, which we didn't have before. So cross-selling our connectivity ranges, European one in U.S. and U.S. one in Europe is what we expect to deliver to our EBITDA in the coming quarters. Operator: We will now take the next question from the line of Luigi De Bellis from Equita SIM. Luigi De Bellis: Just one quick question for me. Could you share your current strategic view on the submarine telecom business? So are there any plans to renew the interest in expanding or investing in this area, considering market trend or potential synergies, if any, with your existing transmission and telecom activities, but also different business model, if I'm not wrong, so if you can share some view, please? Massimo Battaini: Let me share what I can because talking about strategy -- strategic decision, I cannot share much. We have a business inside the Transmission space, that is a telecom submarine. We are a small player because we can only play in regional connections, so short length, submarine telecom connection. We noticed that the market has certainly increased a lot in size because the data center expansion plays a significant role in expanding the market between -- especially in terms of long-haul submarine telecom interconnects, so planting interconnects between U.S., Europe and so on. Some players, the key players in the market have neglected the regional space. So we are thinking of expanding our presence in our portfolio in the regional, so short distance, midsized, short distance submarine telecom connection through organic moves and additional investments. I have to stop here. But we want to make this another opportunity for supporting transmission growth with another stream of revenues, more solid and more growing than what we are currently in our portfolio. I hope I gave you the sense of the strategic direction without giving too many details. Operator: There are no further questions at this time. I would like to hand back over to Massimo Battaini for closing remarks. Massimo Battaini: So thank you for your time and for your attention. We really want to give the sense of what's happening, a strong quarter and by more than some quarter a good selling for quarter 4 and what we think is going to turn out for us an opportunity in terms of Channell, organic growth, transmission growth in the coming quarters. So thank you very much for your time, and talk to you soon. Operator: This concludes today's conference call. Thank you for participating. You may now disconnect.
Operator: Good afternoon. My name is Natasha, and I will be your conference operator today. At this time, I would like to welcome everyone to the Amerigo Resources Q3 2025 Earnings Call. [Operator Instructions] Mr. Graham Farrell of North Star Investor Relations, you may begin your conference. Graham Farrell: Thank you, operator. Good afternoon, and welcome, everyone, to Amerigo's quarterly conference call to discuss the company's financial results for the third quarter of 2025. We appreciate you joining us today. This call will cover Amerigo's financial and operating results for the third quarter ended September 30, 2025. Following our prepared remarks, we will open the conference call to a question-and-answer session. Our call today will be led by Amerigo's President and Chief Executive Officer, Aurora Davidson; along with the company's Chief Financial Officer, Carmen Amezquita. Before we begin with our formal remarks, I would like to remind everyone that some of the statements on this conference call may be forward-looking statements. Forward-looking statements may include, but are not necessarily limited to, financial projections or other statements of the company's plans, objectives, expectations or intentions. These matters involve certain risks and uncertainties. The company's actual results may differ significantly from those projected or suggested by any forward-looking statements due to a variety of factors, which are discussed in detail in our SEDAR filings. I will now hand the call over to Aurora Davidson. Please go ahead, Aurora. Aurora Davidson: Welcome to Amerigo's earnings call for the third quarter of 2025. Q3 2025 was a quarter of strong execution and resilience for Amerigo and our MVC operation in Chile. On July 31, El Teniente faced a tragic accident resulting in MVC ceasing to receive fresh tailings for 10 days. Since the accident, MVC has received lower throughput from fresh tailings than normal under the original annual budget. This condition led to a decline in monthly production in August, followed by a production recovery in September. The timely adjustments made by MVC to reduce the impact of lower fresh tailings throughput included increased historic tailings processing and fine-tuning of the concentrator plant. The lower August production forced us to adjust our copper production guidance from 62.9 million pounds to a range of 60 million to 61.5 million pounds. Our production results in October have been strong, and we remain confident in the revised guidance. Despite the impact of El Teniente's accident, during the third quarter, MVC maintained a high plant availability of 98% and continued to operate without lost time accidents or environmental incidents. These metrics reflect the strength of our operational planning and the dedication of our underground team. Stable copper prices and strong moly contributions supported total revenue of $52.5 million in the third quarter. The LME copper prices rose from an average of $4.32 per pound in the second quarter to an average price of $4.44 per pound in Q3, peaking at a monthly average price of $4.51 per pound in September. I will provide my comments on the copper market later in the call. Net income for the quarter was $6.7 million with earnings per share of $0.04. The company generated operating cash flow of $12.4 million, excluding changes in working capital and free cash flow to equity of $11.1 million. In line with the company's capital return strategy, or CRS, a quarterly dividend of CAD 0.03 per share of $3.5 million was paid. Amerigo's quarter end position was $28 million. Moly production was 350,000 pounds and moly prices averaged $24.11 per pound during the quarter. When looking at the cash cost metric, this resulted in a credit of $0.57 per pound, enabling MVC to post a cash cost of $1.80 per pound, which was lower than the $1.82 per pound of the second quarter and the $2.22 per pound of the first quarter. Based on the strong cash cost results, we have maintained our original annual cash cost guidance of $1.93 per pound. This guidance excludes MVC's collective bargaining costs. Amerigo's financial performance continues to reflect the strength of our business model and the resilience of our operations. Carmen will walk you through the detailed financials shortly. I want to discuss 3 important events that occurred in October subsequent to the end of the third quarter. On October 27, MVC fully repaid its outstanding debt. At the end of September, this debt totaled $7.5 million. Eliminating outstanding debt was one of the objectives for this year and marks the conclusion of a transformational 10-year period for Amerigo. When the company took on $100 million in debt, it was part of a strategic decision to invest in Chile and MVC's growth. This decision laid the foundation for a long-term copper producing operation that could navigate market cycles without diluting shareholder ownership. But from the beginning, we were clear, debt should not be a permanent fixture. It was a tool and like any good tool, it had a purpose and time line. Every debt repayment was a step towards greater financial strength and flexibility. Our final debt repayment affirmed the correctness of that strategic decision. It also reflects the company's resilience and commitment to shareholders. Also on October 27, Amerigo's Board of Directors increased the quarterly dividend paid to shareholders to CAD 0.04 per share. This is a 33% increase from the prior dividend and double the initial dividend under the current CRS. This dividend increase will allocate roughly 50% of the annual additional free cash flow that will become available from not carrying debt. It is an important signal of the Board's vision for the future because, as we mentioned from day 1 of the CRS, the quarterly dividend is set at a rate that is sustainable in the foreseeable future, irrespective of short-term copper price cyclicality. This is a new floor for shareholders. And as has been the case in the last 4 years, additional distributions will continue to be made through share buybacks and performance dividends. The final significant event I want to comment on occurred on October 22. On that day, MVC signed a 3-year collective agreement with its main union, the operators' union, which has 210 members. Collective agreements play a crucial role in Chile's mining industry. These agreements maintain labor peace and provide a structured framework for negotiating wages, working hours, benefits and bonuses. The agreements must balance the strength or weakness of copper prices at the time of negotiation while ensuring access to a skilled workforce and the specific economics of the operation. We had a constructive negotiation with our workers and reached a fair agreement for both parties. Now I will move on to our commentary on the copper market. The long-term themes of surging demand and supply constraints remain significant. A third important element that cannot be ignored is geopolitical interference in the marketplace. Let's start with the obvious supply constraints and disruptions. A copper supply deficit between 300,000 and 500,000 tonnes is now forecast for this year. This has already pushed copper prices upwards as evidenced by October's average LME price over $4.84 per pound. In addition to the trend of declining ore grades, specific mine disruptions at Grasberg, Kamoa-Kakula and El Teniente have resulted in the loss of around [ 518,000 ] tonnes of copper this year. Looking beyond 2025, companies such as Antofagasta Minerals and Teck have already downgraded their 2026 copper guidance. Freeport and Ivanhoe mines will likely do the same following physical inspections of their impacted mines. As I mentioned a minute ago, the current global copper supply has tightened, resulting in a deficit. This bottleneck is driven by copper concentrate availability, which has been affected by production shortfalls at the mines. At the same time, due to overinvestment, the world now has too many smelters to refine copper concentrates. The situation is reflected by the size and the movement of treatment and refinery charges or TCRCs. These are the fees that smelters charge miners to process copper concentrates into refined copper. Treatment charge or TC is the cost to process the concentrate at the smelter. Refining charge or RC is the cost to refine the metal from the concentrate. TCRCs are subtracted from the copper price to determine how much miners actually earn per tonne of concentrate. When TCRCs are low, miners earn more and when they're high, smelters take a larger share. Until 2025, TCRCs were negotiated annually between major copper miners and smelters. The agreed terms known as the TCRC annual benchmark governed long-term contracts. There is also a spot TCRC market for short-term or one-off deals, which reflects real-time market conditions and is volatile. Smelters are currently struggling to secure feedstock, which has pushed spot TCRCs into negative territory. Despite the negative spot TCRCs, smelters have been able to survive, thanks to byproduct credits from other metals in the concentrates they process such as gold or silver. However, negative TCRCs clearly put significant financial pressure on smelters whose business models depend on virtually continuous operation. In recognition of the financial stress imposed on smelters, Freeport, which is one of the traditional benchmark sellers has just abandoned the global TCRC benchmark model and has proposed a new floor cap contract model to protect the smelter margins. This model sets minimum and maximum TCRC levels, providing greater stability in volatile market conditions such as the recent negative TCRC spot terms. So in 2026, we may see a different landscape moving from the traditional stable benchmark-based system to floor cap models. However, we could also continue to see negative TCRCs under which instead of miners paying smelters, smelters will pay miners. We may also see multi-year contracts instead of annual or shorter-term contracts and a shift from TCRCs being the primary revenue source for smelters to a reliance on byproducts. In other words, one of the longest-term features of the copper market is currently under review. And this is all because of long-term stresses in copper supply, which we do not anticipate will change anytime soon. On the demand side, the global need for copper is expected to rise year-on-year, at least until 2035. Demand may be shifting regionally, but global total demand is not slowing. The main drivers of growth fall into 2 big buckets: electrification and digitalization. A few years ago, digitalization was not even discussed seriously, it announces the future copper demand. Tariffs such as a 50% U.S. tariff on most finished and semi-finished copper products are also affecting trade flows and regional inventory balances. Speculative trading continues, and we know it was very pronounced earlier this year as shown by the differences between LME and Comex copper prices. Geopolitical conflicts or the resolutions can also strengthen or weaken the U.S. dollar, which affects copper prices. Governments are now actively investing in mining companies and in some cases, prioritizing certain projects. Political intervention, resource nationalism and regulatory shifts will impact market behavior. All of these factors could lead to a copper market in 2026 that remains volatile but elevated. To end my macro comments, I will mention that Chile will now -- will hold general elections shortly. The first round will be on November 16, followed by a runoff, which is usually the case on December 14, 2025. The presidential inauguration will be on March 11, 2026. Current polls suggest that none of the candidates will get 50% or more of the votes on the first round, and that will be the contenders to our runoff with Jeannette Jara of the center-left coalition Unidad por Chile and Jose Antonio Kast of the Republican Party, who have a part right stance being the most likely candidates. In this run-off scenario, Jose Antonio Kast, a pro-business, pro-mining candidate would likely win the election. I will conclude my remarks with a few comments about the continued success of our capital return strategy. Only a month ago, we reached the fourth anniversary of the CRS, which, as you know, comprises quarterly dividends, performance dividends and share buybacks. Over the past 4 years, we have used the 3 components to return $93.7 million to shareholders. 60% of the return has come from dividends, paying a cumulative dividend of CAD 0.51 per share and 33% from buybacks, retiring 25.6 million shares or 14% of the shares outstanding at the start of the CRS. We recently published a video that illustrates the benefits of the CRS for shareholders. The video is on our website and in it, we noted that on a total return to shareholders basis, Amerigo has outperformed mid-tier copper producers, copper ETFs and copper futures since October of 2021. Total returns measure share appreciation and dividends, but they cannot capture the benefit of share buybacks, which ultimately benefits shareholders by reducing the number of shares in which dividends are paid. To better capture the effect of buybacks, we undertook another analysis. That analysis identified another powerful aspect of investing in Amerigo. Buying Amerigo shares is a very cost-effective way to own copper. We have shown that over the last 4 years, it has been cheaper to buy a pound of copper by buying Amerigo shares than to buy it at the LME. In relation to a pound of copper produced by Amerigo in each CRS year, we have shown that it was extremely inexpensive to purchase a pound of copper through owning Amerigo shares. In other words, in relation to the underlying commodity, there was a clear undervaluation of Amerigo's share price, especially before the CRS was introduced. The other avenues of return provided by Amerigo, share appreciation, dividends and buybacks were all magnified by the positive impact of that discount on a per pound of copper produced basis. Since the CRS was launched, Amerigo's share price and therefore, the cost of its shares per pound of copper produced has increased. This is what we wanted, and that is what investors wanted as well. Consequently, that original discount to LME copper has become smaller over time. However, even if the discount has decreased, buying Amerigo shares still remains the most cost-effective way to own a pound of copper compared to a basket of benchmarks. Our analysis also showed that in all cases except Amerigo, investors in the benchmark companies have been purchasing 1 pound of copper at a premium to LME copper prices. In other words, controlling a pound of copper through holding other shares in the benchmark has a higher cost than the LME copper price. For investors seeking maximum exposure to copper per investment dollar, this outcome is crucial. It shows that Amerigo is a here and now copper play. In Amerigo, you are not paying for future growth or for investing in other metals. When buying shares of Amerigo, you have not been paying the high earnings multiple that is expected for growth stocks. You are controlling amount of copper as cheaply as possible and more effectively than peers in copper itself. So to conclude, Amerigo's returns over the 4 years of the CRS have come in 4 flavors: share appreciation, dividends, buybacks and the discount to the LME copper price. As share appreciation has increased, the discount has decreased. Dividends and buybacks have fueled this performance. Amerigo CRS has been a game changer for shareholders, outperforming other copper investments. This has occurred on a total return per share and on a per pound of copper basis. Amerigo rewards shareholders with predictable, consistent dividends, performance dividends when copper prices rise, no dilution and the most efficient way to control a pound of copper. And now we are debt-free. We look forward to many more years of success for the company and its shareholders. Amerigo's CFO, Carmen Amezquita, will now discuss the company's financial results. Carmen, please go ahead. Carmen Amezquita Hernandez: Thanks, Aurora. I'm pleased to present the financial report for the third quarter of 2025 from Amerigo and its MVC operation in Chile. During the 3 months ended September 30, 2025, the company posted a net income of $6.7 million, earnings per share of CAD 0.04 or CAD 0.06 and EBITDA of $18.7 million. The increase in net income to $6.7 million compared to $2.8 million in Q3 2024 was a result of stronger fair value adjustments to copper revenue receivables and lower smelting and refining charges in response to the 2025 annual benchmark terms. Specifically, in the third quarter, there were $1.3 million in positive fair value adjustments compared to $2.7 million in negative fair value adjustments in Q3 2024 and smelting and refining charges decreased by $3 million. Revenue in Q3 was $52.5 million compared to $45.4 million in Q3 2024. This included copper tolling revenue of $44.1 million and molybdenum revenue of $8.3 million. In Q3 2025, the gross value of copper sold on behalf of DET was $67.2 million. From this gross revenue, we deducted notional items, including DET royalties of $20.6 million, smelting and refining of $3.4 million and transportation of $0.4 million and then added positive fair value adjustments to settlement receivables of $1.3 million. Revenue also included molybdenum revenue of $8.3 million. We reported a provisional copper price of $4.54 per pound on our Q3 2025 sales. This provisional price includes mark-to-market adjustments based on the LME price curve as of September 30. The final settlement prices for July, August and September 2025 sales will be the average LME prices for October, November and December 2025, respectively. A 10% increase or decrease from the $4.54 per pound provisional price used on September 30, 2025, would result in a $6.8 million change in revenue in Q4 2025 regarding Q3 2025 production. Tolling and production costs increased 4% from $38.1 million in Q3 2024 to $39.5 million in Q3 2025. The most significant cost variances between the 2 quarters included an increase in lime costs of $0.8 million as more lime consumption is in line with more historic tailing processing, increased inventory adjustments of $0.5 million for more copper delivered than produced during the quarter and an increase in DET moly royalties of $1.3 million as the result of stronger prices and production during the quarter. The gross profit after revenue and production costs was $13 million compared to $7.4 million in Q3 2024, a $5.6 million increase. General and administrative expenses were $1.2 million compared to $0.9 million in the prior year quarter. These expenses include salaries, management and professional fees of $0.6 million, office and general expenses of $0.4 million and share-based payments of $0.2 million. Other losses were $0.6 million compared to other gains of $0.6 million in the third quarter of 2024, which were driven mainly by foreign exchange fluctuations. And finance expense was $0.3 million, down from $0.9 million with the difference driven by lower interest expense from a lower loan balance in Q3 2025 as well as a $0.3 million expense in Q3 2024 related to the fair value of interest rate swaps. Income tax expense was $4.5 million compared to $3.3 million in Q3 2024. Included in the income tax expense in Q3 2025 is $4.9 million in current tax expense and $0.4 million in deferred income tax recovery. Deferred income tax is an accounting figure used to reconcile timing differences and in Amerigo's case, primarily arises from the differences in timing of financial and tax depreciation. Current tax expense in Q3 2025 was $4.9 million compared to $4.4 million in Q3 2024. Before moving on to the statement of financial position, I want to mention some non-IFRS measures used by the company, cash costs, total costs and all-in sustaining costs. In Q3 2025, Amerigo's cash cost was $1.80 per pound, decreasing from $1.93 per pound in Q3 2024, with the reduction primarily coming from a $0.16 per pound decrease in smelting and refining charges and an increase of $0.25 per pound in moly byproduct credits, offset by increases of $0.07 per pound in power costs, $0.07 per pound in lime costs, $0.04 per pound in maintenance and $0.03 per pound in other direct costs. Total costs increased to $3.71 per pound, up $0.17 from Q3 2024's $3.54 per pound. This was the result of an increase of $0.27 per pound in DET notional royalties as a result of higher copper prices and $0.03 per pound in depreciation, offset by a decrease of $0.13 per pound in cash costs. All-in sustaining costs increased to $3.85 per pound from $3.72 per pound in Q3 2024 due to increases of $0.17 per pound in total costs and $0.02 per pound in corporate G&A expenses, offset by a decrease of $0.06 in sustaining CapEx. Moving on to the statement of financial position. On September 30, 2025, the company held cash and cash equivalents of $28 million and restricted cash of $3.1 million with a working capital of $0.9 million, up from a working capital deficiency of $6.5 million on December 31, 2024. Trade and accounts payable decreased from $24.6 million as of December 31, 2024, to $20.2 million at the end of September 2025. Current income tax liabilities decreased from $8.5 million at the end of December to $0.1 million at September 30, 2025, due mostly to the $8 million in taxes related to 2024 that were paid at the end of April when MVC's annual tax declaration was filed in Chile. For 2025, MVC's income tax at the end of September is almost fully offset by the $5.1 million in monthly tax installment payments made by MVC during the year. You will notice that the company's debt was shown as $7.3 million net of transaction fees. This debt was fully paid in October. This puts Amerigo in a 0 debt position, providing additional free cash flow capacity. Regarding cash flows during the quarter, Amerigo generated $12.4 million in cash flow from operations. Net operating cash flow, which includes the changes in noncash working capital was $11.8 million. In terms of cash during the quarter, $1.3 million was used for investing activities, in other words, for CapEx payments and $5.7 million was used in financing activities. These financing activities included Amerigo's quarterly dividend payment of $3.5 million and a transfer of $2.2 million to restricted cash, which was used to pay the debt in October, leaving the company with a no balance in restricted cash going forward. Briefly touching on the results for the first 3 quarters of the year. Our cash cost for the 9 months ended September 30, 2025, was $1.93 per pound and was in line with guidance. Our forecast indicates that we're on track to meet the company's 2025 guidance of an annual normalized cash cost of $1.93 per pound. Our normalized cash cost guidance excludes the signing bonus paid in Q4 in connection with MVC's 3-year collective labor agreement with the operators' union. The agreement will be effective until October 29, 2028, and MVC will pay $4 million to its operators in Q4 2025 as a signing bonus. In 2025, MVC is expected to incur CapEx of $13 million, of which $4.4 million is optimization CapEx, $4.4 million is sustaining CapEx and $4.2 million is CapEx associated with the annual plant maintenance shutdown and strategic spares. In the first 3 quarters of 2025, CapEx additions were $7.8 million and CapEx payments were $9.5 million. We currently expect actual CapEx to trend slightly below our annual CapEx guidance. We will report Amerigo's full year 2025 financial results in February 2026 and want to thank you for your continued interest in the company. We will now take questions from call participants. Aurora Davidson: Operator, can you start on the Q&A? Operator: Sorry. I must have been on mute. Sorry about that. [Operator Instructions] And your first question will be coming from Dale Miller, an investor. Unknown Analyst: Aurora, I think you and your team have done an outstanding job, both from the miners all the way through your organization. However, I do have one minor question. I am surprised that the Board of Directors has been selling actively stocks as opposed to buying stocks. Now I know you can't explain why they're selling in particular, but the picture ahead seems very rosy with the debt being paid down to 0, a 3-year agreement and copper prices on a trend upward. I don't understand the lack of interest in buying your stock from the Board of Directors. Thank you. Again, thank you for your total organization and your efforts. Aurora Davidson: Dale, thank you for your question. It is a good question. There -- you mentioned that there are directors selling. There we have indications of 2 of 7 directors with sale transactions this year. So just to complete the picture here, 5 directors have not sold anything. And in fact, most of the directors when we exercise -- acquire additional options through the exercise of in-the-money -- excuse me, when we acquire additional shares through the exercise of in-the-money options, we are holders of those shares, and we keep them. If there are individual sale events from independent directors, they have their own personal reasons to do so. And you would be -- it would be probably fair to see them in the context of their total holdings and the time that they have held shares of the company. There was one significant transaction by a long-time director that has been a thorough supporter of the company to do a [indiscernible], and he had some sales to make for personal reasons. And in the process of being a decade or longer director, there may be times when you have to sell shares. So I wouldn't take it out of context. I wouldn't misinterpret it as a sign of a misalignment or lack of interest in the company. There are personal requirements for either tax planning or estate planning or diversification that come through from time to time, and we have to acknowledge them. But in overall terms, when you're looking at the overall picture, there is obviously a keen interest in directors, including myself and including the founder of a company, Dr. Zeitler, to hold on to our shares for the long term. We are happy recipients of the CRS benefits as well. I hope that answers the question. Operator: Your next question comes from Terry Fisher with CIBC. Terry Fisher: Yes. Well, congratulations again, another terrific quarter, particularly given the problems at El Teniente. But I guess we're getting used to that now. It's almost boring these wonderful quarters that keep coming out. I hope you're not building expectations too high, but we're very happy. Anyway, I only have 2 quick ones for you. Number one, moly is becoming even more important these days, and it's been notoriously volatile over the years. I'm wondering if you could give us a little bit of color on the moly -- outlook for the moly market. And my other question, I'm just going to table both questions, is that -- I heard, and I can't remember the source that Codelco is looking at maybe under some pressure perhaps from the government or to get a bit more active with CapEx and adopting more modern technology in order to expand production and also to reduce the risk of accidents and so on. And I'm wondering if that is true. And if so, would it open up any further opportunities for Amerigo? Aurora Davidson: Terry, on the moly market commentary, it has been quite stable for the last years. We saw a price spike in moly prices 2.5 years ago around the range of $30 per pound. If you look at our numbers for the Q3, it was -- we had an average price of $24 per pound, which is really good. we had budgeted a lower number than that. So we're happy with the results. The moly market has -- it's a volatile market. No one seems to understand it a bit of a black box. We don't consider ourselves experts on moly. You will see that I don't waste any of the shareholders' time with my commentary in the moly market because there is really nothing I can contribute to it. We try to dig for as much information as we can. And even from our clients, we don't get very clear responses. So we'll take it as positive when we see the -- sorry, the price appreciation that we saw in Q3. It's a good additional layer to have in the business. But that's about it. I think that we have to remain focused on the copper operation on the copper outlook and consider moly a good addition that we really don't have a lot of control on. With respect to your second question, the only thing I can comment on was a recent press article where the Chair of Codelco was explaining different initiatives that they're following up in terms of automation, specifically for more -- for the deeper levels of their underground mines, which, of course, is making a reference to El Teniente. That's good. That's good news. The fact that they are looking actively and investing as they have done in the past. This is not something new. I think they're just expanding or magnifying their efforts, but they're not initiating their efforts in terms of automation. So that's all good news that the strength of Codelco could represent additional opportunities for us in the future. So that's all I can say about it. Operator: [Operator Instructions] Your next question comes from Ben Pirie with Atrium Research. Ben Pirie: Congrats on another strong quarter considering the shutdown and certainly great to see the debt being fully paid down and the dividend increase. Just on the shutdown quickly, and I think I can speak for most investors that we're pleased with how you managed and minimize the production loss or at least the loss in tailings flow. So can you actually just touch on what initiatives the company took to minimize that impact and just where we're at in terms of that fresh tailings flow coming back online? Aurora Davidson: Yes. Thanks for the question, Ben. It was a challenge that the team at MVC faced quite well. So our production impact was twofold. One was the immediate one for 10 days of not receiving fresh tailings at MVC. Immediately, we ramped up on the ground the processing of historic tailings to minimize the impact. So to the extent that, that was done quickly and continues in place to that to date, that is one of the significant aspects that we did. In addition to that, we have taken advantage of having more plant capacity. The most volume-centric part of our operation are the fresh tailings, and that's where we get most of the volume. And it is the feed that takes up most of the real estate in our concentrator plant. So to the extent that we have had some of that freed up, we've been able to tweak part of the operation in terms of improving classification. We have less material to classify. We have a very good dilution at the moment that further increases the classification. We are redirecting some of the flows within the concentrator, and that has also allowed for increased residency times during the -- which have a positive impact on recovery. We also have 2 projects that have come online, which were part of our optimization projects for this year, which included improvements to the cascade operation, and that has also contributed to increased recovery. So we have lower volume of fresh. We are compensating for that with more processing of historic tailings, but we have been able to increase recoveries of fresh, and that is one of the drivers that has helped us mitigate production losses in fact. The only -- I think it's fair to state that we only had a production impact during the month of August. September was back to normal, and we have strong results as well for October. Ben Pirie: Great. And certainly impressive considering the small drop in your guidance for the annual guidance there. Just sort of reflecting on Q1 and Q2 in terms of share buybacks, we saw a lot of action on the NCIB in the first half of the year, but little to none in Q3. Was this primarily because of the shutdown and you just wanted to sort of hold back a little cash in the till? Or can you provide a little bit of color into that Q3 drop on the buybacks? Aurora Davidson: I think it's difficult to try to revise the activity on buybacks on a quarter-on-quarter basis. There are a series of factors that go into play as to how to allocate the surplus cash to additional distributions. So as you know, one of our key commitments, the minimal commitment we have with respect to buying back shares is not to have dilution for shareholders year-on-year. So it makes sense to get your commitments out of the way as soon as you can in the year. And so there was significantly more activity. In fact, in the second quarter, we had completed our sort of weaker quarter of the year in terms of production associated with maintenance shutdowns. Copper prices were doing good. We were committed to buying back at least the amount of shares that were being issued on exercise of options. And we still had 6 months ahead of us to continue with the key objective of reducing debt. So we were not in a hurry to repay the debt in the second quarter. Come the third quarter, we had this interruption in the month of August, which always makes us more careful about managing the capital. We're always careful but even more careful. And we also saw the opportunity as copper prices started to strengthen in September of basically taking care of the debt first in the third quarter. So there are a series of annual objectives. How you organize them throughout the year depends on a number of circumstances. A lot of management judgment and Board decisions get -- also have to be considered in terms of the intra-quarter allocation of the funds. But I think what's important to consider here is not so much the comparison of activity of one quarter to the preceding one, but just a general annual path of continuing to return cash to shareholders. We know our timing. So we have a good view on what's happening around us and ahead of us. So we try to organize it as best as we can. But the general objective is the important one, that is do what you said you're going to do, produce what you said you were going to produce and keep returning that additional cash to shareholders. Ben Pirie: Absolutely. I think you made the right call with paying down the debt as shareholders clearly liked that news yesterday with the stock being up so much. Just staying on this line of question, and I'll be quick here, so other people can get in the mix. Just around the conservative approach you just mentioned with allocating some of your cash flow. Obviously, with paying down this debt, now you have additional cash flow. And in the press release yesterday, you mentioned roughly 50% of that new cash flow will go to the increased dividend. Can you just touch on what you guys plan to do with that remaining 50% and that sort of goes with the conservative approach, I think you're taking your time with that decision. Aurora Davidson: Yes. Thanks for the question, Ben. So just to give some numbers and provide the context here, we were amortizing our debt at the tune of $7 million in principal payments per year. And last year, our debt expense was $2 million. So we have in front of us a figure of $9 million that is being freed up. And the decision of allocating essentially 50% of that, the additional CAD 0.04 in dividends will have a cost of $4.7 million this year -- not this year on an annual basis. So give or take, 50% of the cash that has been freed up now has a placeholder and that placeholder is the increased quarterly dividend. And the cash that remains as cash that is available to the company. The company does not have intensive capital requirements. That has been the stable position and one of the premises of having the CRS. So the obvious avenue of allocation would be additional distributions, which, as you know, are performance dividends and buybacks. So I hope that answers the question. We wanted to have a clear path of showing the shareholders how that cash was going to be allocated. And now 50% of it has been already committed in what we think is a structural change through the quarterly dividend increase and the rest remains to be allocated in the normal course of business, let's call it that. Operator: Your next question comes from John Polcari with Mutual of America Capital Management. John Polcari: Congratulations on achieving key strategic objectives. And I really only have one question, and that is what are your thoughts regarding royalty payments as the price escalates -- price of copper escalates perhaps into the mid- to [ high-$50 ] $5 a pound range or maybe even higher. I think the agreement on the royalties when it was originally constructed had limits on the upside. Can you just address that or give your thoughts on where that would go and maybe any changes to the agreement as prices escalate? Aurora Davidson: John, that's a good question. Let me pack up a little bit here to give you a well-rounded answer. So the royalty is essentially the compensation that we give El Teniente for letting us work with our tailings. And it is a significant driver of the success of the long-term relationship between MVC and El Teniente because it basically provides a mechanism for sharing of the economic benefits of the business between the purveyor of the tailings and the processor of the tailings. Our agreement has both lower and higher copper limits, which are separate for the fresh tailings and for the historic tailings. The limit for the fresh tailings is $4.80 per pound and the limit for the historic tailings is $5.50 per pound. So -- when we are outside of these ranges for 2 consecutive months, and there is also an indication that these prices will continue, then we basically have to do one thing and one thing only, and that is to discuss the continuation of the royalty scale. It is a sliding scale. So the higher the copper price, the higher the royalty factor with El Teniente. So it is not a full renegotiation of anything else other than the royalty scale. And we expect that should these conditions arise, in fact, we have -- we're almost completing October, and October is the first time in history where we've seen an average LME copper price over $4.80. So if this condition were to continue in November, then starting in December, but not before then, we have to discuss with El Teniente the continuation of the royalty factor only. I hope that answers your question. John Polcari: Yes. And just once again, I'm sure I speak for everyone on [ my job. ] Operator: There are no further questions at this time. I will now turn the call over to Aurora Davidson for closing remarks. Please continue. Aurora Davidson: Thank you, and thank you for attending today's call. The recording and the script will be available on the Amerigo website in the next few days. This is our last earnings call of the year. So we wish you all the best as we wrap up 2025 and look forward to our next earnings call in February of 2026. Please visit our website regularly for updates and feel free to contact us with any questions at our convenience, Graham, Carmen and myself, we're always there on the other side of the e-mail or the phone to answer any questions. Thank you for your continued interest in Amerigo. Operator: Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.
Operator: Good afternoon, everyone. And welcome to JAKKS Pacific Third Quarter 2025 Earnings Conference Call with Management, who will review financial results for the quarter ended September 30, 2025. JAKKS issued its earnings press release earlier today. The earnings release and presentation slides related to today's call are available on the company's website in the Investors section. On the call this afternoon are Stephen Berman, Chairman and Chief Executive Officer; and John Kimble, Chief Financial Officer. Stephen will first provide an overview of the quarter and full fiscal year, along with highlights of recent performance and current business trends. Then John will provide some additional comments around JAKKS Pacific financial and operational results. Mr. Berman will then return with additional comments and some closing remarks prior to opening up the call for questions. [Operator Instructions] Before we begin, the company would like to point out that any comments made about JAKKS Pacific future performance, events or circumstances, including the estimates of sales, margins, earnings and/or adjusted EBITDA in 2025 as well as any other forward-looking statements concerning 2025 and beyond are subject to safe harbor projection under federal securities law. These statements reflect the company's best judgment based on current market trends and conditions today and are subject to certain risks and uncertainties, which could cause actual results to differ materially from those projected in forward-looking statements. For details concerning these and other such risks and uncertainties, you should consult JAKKS' most recent 10-K and 10-Q filings with the SEC as well as the company's other reports subsequently filed with the SEC in time and time. In addition, today's comments by management will refer to non-GAAP financial measures such as adjusted EBITDA and adjusted earnings per share. Unless stated otherwise, the most direct comparable GAAP financial metric has been reconciled to the associated non-GAAP financial measure within the company's earnings press release issued today or previously. As a reminder, this call is being recorded. With that, I would now like to turn the call over to Stephen Berman, the floor is yours. Stephen Berman: Good afternoon, and thank you for joining us today. As we reflect on our year-to-date results and think about the year coming to an end, the tariff levels have varied significantly, starting at 10% and then ranging from approximately 30% to over 140% depending on source and origin, creating added uncertainty for retailers and manufacturers alike. This has continued to delay holiday purchase orders with many seasonal programs shifting from August to October. In response, we have taken a deliberate and conservative approach for the current fiscal year, prioritizing margins, applying careful pricing discipline, maintain tight cost controls and emphasize the most profitable product opportunities. Lean inventory management, target lower inventory levels and accelerate sell-through across markets to maintain balance sheet strength. Future forecast product strategy, invest in a robust and innovative 2026, '27 product pipeline designed to resonate with global consumers and support long-term brand growth across a broader category of assortments. Direct import FOB orders, the foundation of our business since inception. They are placed months in advance to ensure factory scheduling and retailer logistics. However, major U.S. retailers pushed back their Halloween and fall toy set dates by nearly 2 months, effectively removing two of the most important selling months from the calendar. This shift combined sharply with higher product costs, drove a significant reduction in Q3 sales orders, extending the softness we saw in Q2. The impact cascades across the full year. Without August and September sales, retailers lose the early read they traditionally rely on to chase winning products ahead of the holiday season. Now reorders will happen when retailers and wholesalers step in, commit inventory and bet confidently on the right products at the right price. That has never been our approach to the business. We are not changing now. Although we always selectively support a limited number of high confidence SKUs for backup inventory, with product currently tariffed at 30% of cost upon import, we have chosen to be even more selective of how much of that we want to do. Our worldwide inventory was around $72 million at the end of Q3, inclusive of some tariff expense. Although that number is higher than the $64 million from this time last year, the driver is our international expansion as our high U.S.-held inventory is actually lower compared with this time last year. We are not going to build domestic inventory in the U.S. this year on the premise that retailers will suddenly want the product they were unwilling to buy in Q3. Year-to-date, net sales in our overall business are down 21% versus last year, 24% in Toys/Consumer Products and 8% in Costumes. For the quarter, Toys and Consumer Products was down 41% to $156.1 million, our lowest Q3 in a very long time. Costumes were only down 4% to $55.1 million as we scramble to recover some of the lost sales from Q2 while also continuing to steadily grow this business internationally. We talked about this year being an exercise in patience, and I think that continues to be the case. We continue to partner closely with our China-based factory network, which I just returned from another trip to Asia to personally share growth initiatives we have in the works for 2026 and '27 and gain alignment around our shared businesses. Many of our largest factories are continuing their expansion in other Southeast Asian countries, and we will continue to work with them to ensure we have the maximum flexibility to adapt changing conditions and restrictions. We are moving forward with the presumption that products will be burdened with a 30% cost upcharge from the levels we would normally expect. This is reflective of whether the product is coming from the established, efficient China supply chain and tariffed at 30% or whether it's coming from the more in-progress, higher cost, but currently approximately 20% in Southeast Asian territories. This is now enhancing our product development decisions for 2026 and beyond. It is obviously something we couldn't plan for in 2025. In addition, we believe retailers will learn from the holiday selling season what level of price increases consumers are willing to bear, which should give them more confidence in placing orders that are consistent with the FOB product ordering time line. Since this disruption started back in early February, we have been clear on our financial objective to avoid panic, preserve cash and navigate to safer clear waters. To that end, although our top line has dropped, we are pricing for tariffs, as we said we would, and our gross margin percentages has held reasonably well accordingly. At 32% in the quarter, it is down from last year, 33.8%, but we still feel is a strong result as inevitably, the addition of tariff costs erodes a percentage even if it's 100% recouped by higher selling prices. Moving down the P&L, we have looked to reduce spending and delay or cancel projects and initiatives without clear near-term payback. Lower sales have also meant less work in our U.S. warehouse, providing additional savings. Overall, SG&A in the quarter was down 6% and is flat on a year-to-date basis. The cumulative impact was an adjusted EBITDA of $36.5 million in the quarter, down from $74.4 million in the same quarter last year and reduced our trailing 12-month EBITDA to $29 million. I will now pass it over to John for some more details on the financials, and then I will come back to further discuss some things we are doing this holiday season and have in the works for 2026 and beyond. John? John Kimble: Thank you, Stephen, and hi, everybody. Starting with an additional bit of cleanup on sales. Stephen explained some of the details about how FOB sales were particularly challenged this quarter. To add a bit more context around that, 93% of the year-over-year drop in sales came from FOB shipments. That number was actually over 100% in Q2. Uncertainty really isn't the friend of buying larger quantities of product with a longer lead time. Separately, as regular listeners know, our international business was booming earlier in the year, reflective of a multiyear effort to elevate our performance outside the U.S. As we mentioned last quarter, we knew that it would slow down a bit in Q3, and in fact, it did. As those in our industry know, the dividing line between Q2 and Q3 from an FOB sale perspective is always a bit arbitrary, yet another reason why we are always talking about full year results. So there's nothing material happening that changes the story when it comes to international. This is more the reality that looking at quarterly results in a seasonal business will often give you lumpy results. Year-to-date, international as reported is roughly flat, minus 0.3%. If we liberated Canada from our North America reported numbers, we'd be up 4% year-to-date for the non-U.S. markets. Overall, we're still very bullish about what's happening with international. We are steadily dialing up the sophistication level of how we're approaching a wide range of markets, following a walk-before-you-run approach. To make this a bit clearer, we see the U.K., Western Europe and Mexico at one level of maturity. Eastern Europe, Central and South America are beginning to take shape behind them. And from there, you can contemplate the Middle East and revisiting our approach across Asia. But we feel all these markets have a line of sight to grow faster than the U.S. in the years ahead, particularly when it comes to our core business. You can hopefully see why we continue to talk about the meaningful international opportunity for us. From a forecasting perspective, the challenge is that the European business, in particular, is more domestic replenishment-centric as it scales up, which leaves us in the more traditional we'll-know-when-we-get-there camp, planning for weekly replenishment as we approach the holidays, with added complexity around inventory management. Through the lens of the various product divisions, the macro situation is smothering most bursts of goodness that are trying to fight through and be heard. Sell-in for Disney's Moana 2 has been a favorable comparison year-to-date versus prior year. Saga's Sonic continues to do tremendous business and has had great weekly sell-through all year and the DC-Sonic mashup we teased last quarter is flying off the shelf this month as well. We do not have any toy rights to significant second half of 2025 film releases, which always makes for a challenging comparison. Many of our newer owned brand or private label launches were derisked by the retailers and by extension, have suffered from delayed planogram sets. These are essentially downgraded to fall soft launches and ideally, we'll get enough traction to reset in the new year. Touching briefly on POS and building on Stephen's comments on timing. Frankly, some of the key accounts in Q3 were representing a product line that looked more like a greatest hits of things from spring that didn't sell, more than a lineup that was particularly inspiring. Everyone has been pushing forward stock on hand that was landed prior to tariffs and customers have been scrambling to adapt their 6- to 12-month rolling outlook as the rules have moved around. When it comes to pricing direct import product that shipped immediately after the 100-plus percent window closed, many customers had to deal with paying the tariff on top of their cost of product, which would include the profit margin for a company like us, and in the case of licensed goods, also include the licensor's royalty share. This snowballs the hurdle rate that the retailer is then looking to mark up from, which is why you've seen some retail prices out in the marketplace that are 20%, 30% or 40% more than what you might have seen pre-tariff regime. Most retailers are trying to protect the lowest retail price points while balancing the product line architecture and feeling out where consumer price sensitivity reaches a breaking point. We feel it's a mixed bag as to how they're doing on this front with room for improvement. We are continuing to work with all our U.S. accounts to make sure they understand the various Customs programs that exist to minimize their tariff exposure. Although these are tedious bureaucratic processes, we are supporting them to enable the lowest consumer prices and we can continue to support our retailers with the margins they expect from their direct import business. We are also engaging licensors to recalibrate royalty rates for newly relevant selling methods especially where the customer is still buying FOB, but we are paying the tariff on their behalf. We need the licensors to recalibrate rates here to ensure we are not paying a royalty on the tariff value because if we are, we will have to further move up price which exacerbates the increase in consumer prices. That math is already unfortunately baked into any tariff-increased domestic prices and is another reason why we will continue to move customers away from domestic ordering whenever we can. With that being said, in the quarter, U.S. POS at our top three accounts tended to be relatively subpar from a dollar perspective and worse from a unit perspective. On a year-to-date basis, in aggregate, we're down mid-single digits with retail inventory up mid-single digits. Keep in mind, however, when retail changes price on product, it revalues all the inventory in their system. So I can't really give you an apples-to-apples read on year-over-year retail inventory based on the information that flows back to us. With a similar bit of logic, from an industry data perspective, we feel while there continue to be pockets of exuberance around trading cards and construction toys originating from Denmark. But for the most part, any other comments about dollars being up is more pricing than unit-driven consumer demand. Turning back to our P&L. Gross margin was a respectable 32% in the quarter and is 32.8% year-to-date. Cash spent on tariffs this year totaled around $8 million through the end of the quarter. Some of that amount has flowed through the P&L and some is balance sheet inventory value. Belt-tightening SG&A resulted in a good quarter, but clearly, we have lost a lot of scale with this level of top line drop. Things like interest income year-to-date have been outpacing interest expense associated with tapping our credit line, which we did some of this quarter. Adjusted diluted EPS for the quarter was $1.80, down from $4.79 this time last year. On a year-to-date basis, we're at $1.79 compared to $4.50 for the first 9 months of last year. We finished the quarter with $27.8 million in cash, up from $22.3 million last year. Understandably, our AR is down substantially. We are nonetheless comfortable with our flight path here on the cash front. One final piece of housekeeping. This month, our S-3, also known as a shelf registration, was expiring as it is now 3 years old despite never having a reason to use it, in order to maintain as much flexibility as we can over the next 3 years, we renewed that registration, although we have no immediate plans for its use. I'm also happy to share that the Board has approved the Q4 cash dividend of $0.25 per share, payable on December 29 to shareholders of record as of November 28. And now I'll pass things back to Stephen. Stephen Berman: Thank you, John. Since tomorrow is Halloween, we want to give you a more detailed update there. As a reminder, the Costume business essentially stopped when tariffs surged to over 100% in Q2. The team did an excellent job weeks later trying to patch up volume back once the 100% tariff period had passed. And some of that business was recovered with a bit of it shipping this quarter. But ultimately, this is not the Costume year we envisioned when we started the year, although we were pleased with our progress outside the U.S. At retail, we've seen larger accounts increasing retail prices significantly. Some opening price points are being held to pre-tariff levels, but we've seen a large portion of our line with retails increasing 15%, 20%, up to 40% in some accounts. Unfortunately, this has negatively impacted unit sell-throughs. Syndicated market data seems to confirm that this is widespread with all the leading manufacturers showing double-digit declines in dollars during the first 5 weeks of the season compared to last year with worse numbers in terms of units. Although we are happy to maintain our market leadership position according to the same data, this is obviously troubling trend. We know this is a business that traditionally happens very late, so we hope that the accounts have a great week this week and of course, wish everyone a safe and fun Halloween weekend. Looking forward, it's predictable and uninteresting for toy companies in October to reference that all-important holiday season. Nonetheless, we think it's appropriate to point out there is a much wider range of possible outcomes for the next 2 months than recent years. We could not know with any certainty what retailers would do from a pricing and promotional perspective or how consumers will respond. Retailers may be motivated to adjust their plans based off consumer behavior, and that loop will essentially continue every week through the end of the year. Longer term, I would like to highlight two separate areas that teams have been swarming over this year and particularly over the past 10 months. The first area is partnership work we do with our global licensors to grow our mutual businesses, which often involves myself and leadership of all of our different areas to make these things happen and make them happen quickly. Market by market, property by property, customer by customer, we are steadily asking ourselves and our retail partners what we are missing. Where is the next opportunity for us to pursue. The Disney Darling baby doll line we mentioned last quarter is an example of this type of work. There's no new entertainment driving that product line, but the collaboration by our two teams have brought a great product line to market to address an opportunity that we see. And so far, the initial sell-throughs and reaction has been terrific. We recently shared 2026 plans with retailers for how we see the product line expanding in the new year, and the feedback has been extremely positive. It's difficult to get into the details of some of these projects for confidentiality and competitive reasons. But to paint a bit of a picture, there are markets in Europe where we're challenging the local teams to stretch to more outlandish goals for key items and recharacterizing what role JAKKS can play for some of the largest European toy retailers, 12 months per year, not just the peak holiday season, again, market by market, account by account. In the U.S., we are redoubling our efforts in private label space, pitching for significant programs that could be meaningful value creators for us and the relevant retailers. Our Target role-play business, in particular, has continued to be an exceptional performer for us and Target this year and we look forward to that business continuing in the years ahead. As a broader theme, we have been finalizing several extensions to our most substantial licensing agreements for the next several years. Inclusive of the new entertainment releases that licensors have slated during that time. We are often constrained about what we can say on that front and when we can say it. As an example, we are happy to begin our FOB shipping for some new movie tie-in product this quarter with on-shelf date in the middle of Q1, and we'll be excited to tell you more details about it ideally on our year-end conference call. On a different note, we began making a concentrated effort to build out our new business pillar for us from a licensor and intellectual property perspective. Outside of what you've seen us do historically, but certainly informed by it, we aren't ready to get into the details, but we see this initiative as a meaningful market opportunity for us. We have been talking to a very wide range of companies to secure the necessary rights to get us started. This has been in the works for a very long time. We are not ready to get into the details yet, but we see this initiative as a meaningful market opportunity for us. We've been talking to a very wide range of companies worldwide to secure the necessary rights. We see it leveraging most of our existing strengths but also extending our product line into other hardline and softline areas which aren't necessarily toys in the classic sense. But nonetheless, we feel the appeal is extremely passionate to a major fan base of consumers alike. We think this effort can extend our presence into other aisles at retail, in addition to opening different doors from a customer perspective. So we're extremely excited and plan to share more in the coming months ahead. We would envision a small amount of this product to ship in the second half of 2026 with a much broader line launching for spring 2027. And again, we hope we can start talking about that more in bits and pieces in the weeks ahead and months ahead as soon as agreements and plans are finalized. And with that, we'll take a couple of questions. Operator? Operator: [Operator Instructions] Our first question comes from Eric Beder from Small Cap. Eric Beder: I want to kind of -- so there's so many things going on here. I just want to step it back a little bit. When we step back and look at what, in theory, the new normal is, and I know we're trying to figure that out right now in the midst of what is the biggest season for toys. What do you look at as the drivers, the key drivers for your business model that lets you move around this and lets you succeed to levels you've done in prior pieces? I know the FOB piece is going to probably be, to some extent, problematic here given what some of the other retailers are doing, but I fully respect what you're doing with it. But how should we be thinking about longer term, pick whatever period you want and where you can kind of take it from where it... Stephen Berman: Eric, Stephen Berman. Just so you know, I apologize in advance. I've had a brief cold, and my voice is a little bit here and there. But to answer the question, first and foremost, [indiscernible] and certainly is what's required at retail. That's what they're looking for, and that's kind of where we stand today. Up until today, when we just heard the recent fentanyl tariff being dropped by 10%, which -- waiting for a Custom documentation, which would bring new tariffs in our world to approximately 20% from the China market. This is the new norm. So retailers are kind of just adjusting to it and adapting to it. To jump into what you just said about the FOB topic, now going back to the FOB business, when this just occurred, retailers will be scrambling to jump back in on an FOB basis because they know what the tariff is now currently and where we stand today. So we're happy with that news. The business itself, and again, I'm sorry, for my voice, now has more certainty because throughout this year, you've had retailers cancel orders because of the tariffs, retailers push their August set dates to October, and that's done now. So going into next year, the new norm -- it's the new norm, and I think it will be back to what it is the following years past. So for JAKKS, we are so conservative in our approach and want to be reality to our shareholders, our retailers and licensors. That's why from what we've gone out to retail in North America and Asia, we see sales higher because of the higher sales price, but lower in unit dollars -- in unit volume, excuse me. And we don't see that really changing through the year, and we hear other commentary. So we're taking a very solid approach about building cash, keeping overhead low and building '26 and '27 aggressively. There's no reason for us to try to be heroes this year and push out inventory to try to make numbers. We want to make sure that the retailers have low inventory of our product, and we want to be low in inventory for JAKKS going into 2026, so we can have a strong year across the board. As I said, we have a lot of things that we haven't announced that we will be forward-looking to announcement. For competitive reasons, we need to hold off and [ wait until ] these agreements and plans are put in place. But that being said, this is a year that has had such uncertainty. And as JAKKS, we played it very much close to the vest and make sure that we ran our business like we should for our shareholders to make sure that we have the years to come with solid growth. Eric Beder: Okay. Switching gears, I guess, to the near term, you have the Super Mario Bros. movie coming out, how should we be thinking about that as an opportunity here, it's coming out -- I know it's coming out end of Q1 or early Q2. How should we be thinking about that as a potential kind of first time that shows a little bit of normalization going on here. Stephen Berman: We're excited for it, the retailers are excited for it worldwide. Our factories across Southeast Asia have been prepared for it. There's been -- Nintendo itself has a great track record as a classic evergreen product line. And with the enhancement of the Super Mario movie that you mentioned, it will just bring much more excitement to an area that has not had much real excitement, a toyrific platform this year. There hasn't been really any major toyrific excitement that's happened this year. So going into '26, it's one of the first major exciting initiatives that's going to be in theaters and for consumers and retailers. So we, our retailers, Nintendo and Universal are very excited about it. Eric Beder: Okay. And I want to conserve your voice, so I'll just throw one more in here. This DC collaboration, it's unique. I'm sure it's bringing toy excitement to people here even with all the things going on here. How -- this kind of, I guess, mash-up, how should we be thinking about this as opportunities going forward to do more of these kind of pieces that work great as toys, but they're also work great for the adult collector who does this kind of stuff. Stephen Berman: Well, the Sonic team that sells Sonic itself has continued to outperform, I think, everyone's expectations worldwide. And when they worked with DC due to the cross collaboration, it just enhanced the awareness of Sonic and as well as DC. So what it did is brought the older age group from the DC era into the younger age group of Sonic, which actually has a young fan, a kidult fan and a collector fan. So it's bringing a much larger collaboration and just bringing new eyeballs and new excitement without having any theatrical release behind it, it just brought two great iconic IPs together. And what we see with how Saga worked with DC and vice versa, the collaboration has been extremely strong and looking very much forward to more collaborations like that. Operator: Our next question comes from Thomas Forte of Maxim Group. Thomas Forte: So Stephen, I have a novel approach. I have three questions. And then I'll ask the question, answer the question, and then you can use as little voice as possible to see how I did with the answer. So first on -- so the first one is, how should we think about normalization? Stated differently, can you briefly recap to help us compare and contrast your first quarter, second quarter and third quarter tariff-related impact? Now my answer would be, if I oversimplify, it seems to me that the first quarter was a little-to-no impact, then the second quarter was a meaningful impact, but the third quarter is where it had the most impact. Stephen Berman: Okay. Great. Tom, thank you. First off, you're correct. First quarter had nominal impact. It had a scare effect, but had no impact to what was shipped at retail at sell-throughs. Second quarter in Halloween was a debacle because we had material cancellations because of the impact going from Liberation Day to the 145% approximate tariff. We had more cancellations than I think in the history of our company in Halloween during that period. Then -- so that had the cancellations, not major impact of tariffs at retail yet with price points. Going to third quarter, for Halloween, we retracted and scrambled and got more business. But at the same time, the tariff impact had a material impact on the sell-through and unit sales. So as I mentioned in the pre-recorded script, the product prices have gone from 15% up to 40% at retail, which truly affected the sell-throughs, and you're seeing it through the circular data that's out in the market. That being said, we are still #1 leaders in that space, but all the people in our industry have been affected double digits. So we're not the only ones out there, but we are still in the best position. Going to -- now to where we stand today, the impact of tariffs have gone across the board to all retailers in U.S. to where you've seen some retailers have kept prices to try to bring customers in and have them as loss leaders. But if you go out and you do store checks, and we've had all of our salespeople go out, the price points have risen quite substantially across the board. So we -- what our approach is, is we don't want to take risks having inventory at the year-end and hurting our 2026 year. And we don't want to hurt ourselves having inventory in our warehouse waiting for orders to come. So we, collectively, as a management took an approach, let's build international, where things are going well, let's be conservative in America. We still have everything doing strong for us, but it's just not exciting. So Sonic, Nintendo, Disney Princess, ily, private label all these areas of businesses, these all are doing very nice, but it's just not an exciting year because of all the uncertainty. That being said, uncertainly going into 2026 will be a lot less. And I think based off what we gather in road shows with retailers, we, JAKKS, because of the diversification and all the newness that we have coming out, are excited for next year and beyond excited for '27 as well. We have a tremendous amount of new IP for Halloween on top of our current great IP. We have a lot of theatrical releases happening. We have a lot of new announcements and extensions that we're working on. A lot of new private label initiatives. So we've gotten through the worst this year and are just looking forward to '26 and are gearing up. I've been in Asia, I think, four times this year with our partners, working with them across Southeast Asia, primarily China as well as Indonesia, Vietnam and Cambodia. But that being said, China is still the main part of where we are going to manufacture for safety reasons, quality, quickness and partnerships. But the factories that we work with in China are also in these [ epic ] territories to where -- if and when we need to move, we move with them because they are our partners. So we are just really getting through this year, keeping cash is king, inventory low, G&A low and getting prepared for just a great 2026 compared to what 2025 has been. Thomas Forte: Excellent. And I failed in getting you to conserve your voice, right? So the second one is, when thinking about your sales in '25 versus '24, how should we think about the impact of tariffs versus the impact of tough licensing comparisons? Is it 50-50, 75-25, meaning 75% tariffs, 25% tough comparisons. Stephen Berman: I don't know if we can answer that right now. It's a very good question. I'd like to spend time digesting it. I think the tariff result, let's call it, 20%, 30%, it is what it is, and that's the new norm. And everyone will take a hit from the factories to ourselves, to the retailers and the consumers. I just can't compare '24, I have not thought about what it was. We had Moana and some other theatrical initiatives. But we have so many new initiatives happening at '26, that it's too hard for me to compare them right now. And if you just give us time, we can go off-line, in a day or so and get back to you. Thomas Forte: Okay. So last one, current thoughts on strategic M&A, including your opportunities for accretive acquisitions, seems like you would have a lot of great opportunities given company's potential desire to exit now that they've gone through both COVID and tariffs. Stephen Berman: Great question. We're seeing quite a few various opportunities that are coming to us. I'm sure there's many other companies as well. But at this time, we just want to get through this year and see where these companies lie after the year-end because I think many of these companies that we've been reviewing, looking and discussing are having such a difficult time. I think things will be cheaper going into '26 because of cash needs, licenses. The licensors are very uncomfortable with companies that are not healthy. So there's a lot of opportunities, not just acquiring companies, but they're acquiring areas of businesses, of licenses that the licensors don't want to work with because of uncertainty. So there's a lot of really good opportunities. But even with all that, we look at '26 as a strong year for JAKKS and '27. As where we stand today, we've gotten through the worst, and we're looking for the best now. Operator: This concludes the question-and-answer session. I would now like to turn it back to Stephen Berman, CEO, for closing remarks. Stephen Berman: Ladies and gentlemen, thank you for your time today. Looking forward to the year-end fourth quarter call to go through our 2026 year excitement and hope we'll have much more good and positive moves to come. Thank you very much. Operator: Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.
Operator: Greetings. Welcome to Cullen/Frost Bankers, Inc. Third Quarter 2025 Earnings Conference Call. [Operator Instructions] Please note this conference is being recorded. I will now turn the conference over to A.B. Mendez, Senior Vice President and Director of Investor Relations. Thank you. You may begin. A. Mendez: Thanks, Jerry. This afternoon's conference call will be led by Phil Green, Chairman and CEO; and Dan Geddes, Group Executive Vice President and CFO. Before I turn the call over to Phil and Dan, I need to take a moment to address the safe harbor provisions. Some of the remarks made today will constitute forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995 as amended. We intend such statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995 as amended. Please see the last page of text in this morning's earnings release for additional information about the risk factors associated with these forward-looking statements. If needed, a copy of the release is available on our website or by calling the Investor Relations department at (210) 220-5234. At this time, I'll turn the call over to Phil. Phillip Green: Thanks, A.B. Good afternoon, everyone. Thanks for joining us. Today, we'll review third quarter 2025 results for Cullen/Frost. Our Chief Financial Officer, Dan Geddes will provide additional commentary and guidance before we take your questions. In the third quarter of 2025, Cullen/Frost earned $172.7 million or $2.67 per share, up 19.2% from a year ago. In the third quarter last year, our earnings were $144.8 million or $2.24 per share. Our return on average assets and average common equity in the third quarter were 1.32% and 16.72%, respectively. That compares with 1.16% and 15.48% in the third quarter last year. Average deposits in the third quarter were $42.1 billion, an increase of 3.3% over the $40.7 billion in the third quarter of last year and average loans grew to $21.5 billion in the third quarter, an increase of 6.8% compared with the $20.1 billion in the second quarter of last year. Our organic expansion strategy continues to generate positive results. As of quarter end, expansion deposits and loans stood at $2.9 billion and $2.1 billion, respectively, while generating almost 74,000 new households. That represents 10% of company loans and almost 7% of company deposits. Also, we were pleased to see the overall expansion reach a solid level of accretion in the third quarter, which will continue to grow as newer locations mature. Dan will share more detail in his comments but we are grateful to our owners for their support as we've reached this important milestone. Looking at our consumer business, we continue to see strong results, driven by consistent focus on customer experience across digital, phone and branch channels. And this commitment paired with strategic expansion is fueling what we believe to be industry-leading organic growth. In Q3, we recorded our strongest quarter in new checking household growth since the post-Silicon Valley flight to safety. Year-over-year, consumer checking households grew by 5.4%, a figure we believe positions us at the forefront of the industry in terms of organic growth. Mortgage lending also reached new heights this quarter with record performance across key metrics such as dollars funded, number of loans closed and solution referrals. Based on current momentum, we expect Q4 to surpass these records and we are confident of reaching our year-end goal of $0.5 billion in mortgages outstanding. Our overall consumer real estate loan portfolio, which stands at $3.5 billion in period-end outstandings has grown by $547 million year-over-year or 18.7%. Our commercial business continues to show good activity. Period-end commercial loans grew by 5.1% year-over-year, led by increases in energy, up 17% and C&I, up 6.8%. CRE balances increased 2.7% and were impacted by payoffs as some borrowers, particularly multifamily, opted for more flexible capital structures. Looking forward, I'm encouraged for a number of reasons. Calls made for the third quarter represented the second highest on record, putting us on track for the strongest year for calls made ever. Year-to-date, there have been 3,082 new commercial relationships, setting the pace for the largest number of new relationships in a year. This activity led to $5.6 billion in new opportunities created in the quarter, a 4% increase from Q2 and the highest quarter for third quarter on record. Strong new opportunity growth led to a weighted pipeline at quarter end of $1.9 billion, an increase of 20% from the second quarter and the second highest weighted pipeline ever. The weighted pipeline for CRE and C&I increased 29% and 11%, respectively and increases were seen in customer and prospects as well as core and large opportunities. Also, in addition to our consumer and commercial success, we're seeing some encouraging results for our wealth management and insurance businesses. Our overall credit quality remains good by historical standards with net charge-offs and nonperforming assets both at healthy levels. Nonperforming assets declined to $47 million at the end of the third quarter compared with $64 million last quarter and $106 million a year ago. Most of the decrease in the quarter was related to 2 credits. One was a borrower that returned to accrual status and the second was a successful resolution of a problem credit that had been on nonaccrual status since mid-2023. The quarter end nonperforming asset figure represents 22 basis points of period-end loans and 9 basis points of total assets. Net charge-offs for the third quarter were $6.6 million compared to $11.2 million last quarter and $9.6 million a year ago. Annualized net charge-offs for the third quarter represent 12 basis points of average loans. Total problem loans, which we define as risk grade 10, some people call that OAEM, or higher, totaled $828 million at the end of the third quarter, down from $989 million last quarter. This $169 million improvement was largely driven by the successful resolution of several risk grade 10 multifamily loans as anticipated and communicated during last quarter's earnings call. Also, as we noted on last quarter's call, while we continue to work with a few more multifamily borrowers in the risk grade 10 category and expect resolutions on each of these to occur, our overall commercial real estate lending portfolio remains stable with steady operating performance across all asset types and acceptable loan-to-value levels and debt service coverage ratios. I'm proud of these results and all of us at Frost continue to be optimistic about our strategy. That strategy, combined with our locations in the best banking markets anywhere and the dedication of our Frost bankers puts us in a great position to succeed. With that, I'll turn it over to Dan. Dan Geddes: Thank you, Phil. Let me start by giving some additional color on our expansion results. During the third quarter, expansion locations delivered $0.09 of EPS accretion driven by Houston 1.0 generating $0.14 per share with Houston 2.0 and Dallas nearing breakeven and Austin, the newest expansion region, costing $0.04 per share. The expansion efforts, which began in December 2018, now solidly reap benefits to our shareholders as the branches sown in Houston 1.0 have matured and we expect the other expansion regions to follow a similar trend. For context, Houston 1.0 average branch age is 5.5 years, while Dallas' average branch is 2.5 years, Houston 2.0 average branch is 2 years and Austin, where we are roughly halfway through the build-out is just over 1 year on average. We continue to be pleased with the volumes we've been able to achieve. On a year-over-year basis, the expansion represented 38% of total loan growth and 39% of total deposit growth. Looking at calls for the quarter, the Frost commercial bankers in expansion branches represented 19% of total calls, 12% of customer calls and 31% of prospect calls. For new commercial relationships, 26% of all new commercial relationships were brought in from the expansion bankers. And when looking at just the expansion regions of Houston, Dallas and Austin, expansion Frost bankers accounted for 40% of new commercial relationships for those combined regions. Now moving to third quarter financial performance for the company. Regarding net interest margin, our net interest margin percentage was up 2 basis points to 3.69% from 3.67% reported last quarter. Our net interest margin percentage was positively impacted primarily by a mix shift from lower-yielding taxable securities into higher-yielding balances held at the Fed, loans and tax-exempt securities. Looking at our investment portfolio. The total investment portfolio averaged $20.2 billion during the third quarter, down $198 million from the previous quarter. Investment purchases during the quarter totaled $430 million of municipal securities with a taxable equivalent yield of 5.93%. We had $134 million of municipals roll off at an average tax equivalent yield of 4.88% and $317 million of agency paydowns. The net unrealized loss on available-for-sale portfolio at the end of the quarter was $1.14 billion compared to $1.42 billion reported at the end of the second quarter. The taxable equivalent yield on the total investment portfolio during the quarter was 3.85%, up 6 basis points from the previous quarter. The taxable portfolio averaged $13.3 billion, down approximately $458 million from the prior quarter and had a yield of 3.48%, flat with the prior quarter. Our tax-exempt municipal portfolio averaged $6.9 billion during the third quarter, up $269 million from the second quarter and had a taxable equivalent yield of 4.6%, up 12 basis points from the prior quarter. At the end of the third quarter, approximately 70% of the municipal portfolio was pre-refunded or PSF insured. The duration of the investment portfolio at the end of the third quarter was 5.4 years, down from 5.5 years at the end of the second quarter. Looking at funding sources. On a linked-quarter basis, average total deposits of $42.1 billion were up $311 million from the previous quarter. The linked quarter increase was driven primarily by interest-bearing accounts. The cost of interest-bearing accounts in the third quarter was 1.94%, up 1 basis point from 1.93% in the second quarter. Customer repos for the third quarter averaged $4.6 billion, up $342 million from the second quarter. The cost of customer repos for the quarter was 3.17%, down 6 basis points from the second quarter. Looking at noninterest income and expense, I'll point out a couple of items impacting the linked quarter results. Regarding noninterest income, we saw strong relative quarter performance in insurance commission and fees and public finance underwriting fees. Total noninterest expense was up 1.7% linked quarter and was impacted by higher incentive comp, medical expenses and technology expense. These were offset somewhat by lower planned advertising and marketing expense during the quarter, which were down $3.9 million from last quarter. As Phil mentioned, we are encouraged by our wealth management and insurance businesses. Trust and investment fees were up 9.3% in the third quarter compared to the same quarter last year and 8.2% on a year-to-date basis over 2024. Insurance commissions and fees were up 3.9% quarter-over-quarter and 6.9% year-to-date over 2024. Both of those lines of businesses are focused on a sales culture aligned with our organic growth strategy. Regarding our guidance for full year 2025, our current outlook includes one 25 basis point cut for the Fed funds rate in December. We expect net interest income growth for the full year to fall in the range of 7% to 8% compared to our prior guidance of 6% to 7%. For net interest margin, we still expect an improvement of about 12 to 15 basis points over our net interest margin of 3.53% for 2024. This is consistent with our prior guidance. Looking at loans and deposits, we expect full year average loan growth to be in the range of 6.5% to 7.5%, in line with our prior guidance of mid- to high single digits and we expect full year average deposits to be up between 2.5% and 3.5%, slightly higher than prior guidance. Regarding noninterest income, given our strong broad-based growth in the third quarter, our updated projection for full year growth is in the range of 6.5% to 7.5%, which is an increase from our prior guidance range of 3.5% to 4.5%. And we expect noninterest expense growth to be in the 8% to 9% range, in line with our prior guidance of high single digits. Regarding net charge-offs, we expect full year 2025 to be in the range of 15 to 20 basis points of average loans, a 5 basis point improvement from our prior guidance. Our effective tax rate expectation for full year 2025 remains unchanged from last quarter at 16% to 17%. Regarding our stock buyback, I wanted to mention that during the third quarter, we utilized $69.3 million of our $150 million approved share repurchase plan to buy back approximately 549,000 shares. With that, I'll turn the call back over to Phil for questions. Phillip Green: Thank you, Dan. Okay. We'll open up the call for questions now. Operator: [Operator Instructions] Our first question is from Casey Haire with Autonomous Research. Casey Haire: I wanted to touch on the NIM. The guide is the same but versus last quarter but obviously, we have a Fed cut coming. Just wondering what you're thinking about for the fourth quarter. Dan Geddes: So I would just say that with -- we have the cut in October and then obviously, we have the cut in early December as well. And so I would say that for the fourth quarter, we're generally looking for just in terms of our kind of back book repricing, that would be a benefit. We have some treasuries that are coming due here in November that will help. Obviously, with the 2 rate cuts, that will be a drag on NIM. But in terms of just overall kind of expectations for the fourth quarter, I would say that depending on the -- just in terms of just our volumes in terms of deposits that you could see the NIMs stay -- it has opportunity to stay relatively where it's at comparatively to the third quarter because of those cuts. But again, I think some of it is going to be driven by just volumes of deposits. Casey Haire: Okay. And then just switching to expenses. I think you guys have talked about like things can -- the expense growth can moderate from this high single-digit pace. I guess, kind of 2-parter. What do you see as sort of the core expense inflation for the bank? And how much longer until we can get to that point from this 9%? Dan Geddes: Yes. So I think we're really focused on 2026 expenses, the growth moderating from upper single digits. We're in the middle of kind of budget processing and -- process and not ready to give 2026 guidance. But I think in general, we're focused on getting that growth down from high single digits to, I would say, on a glide path that is heading towards mid-single digits. Whether that's in '26 or '27, we're not ready to kind of say what '26 will be but we see that growth path declining. Operator: Our next question is from Dave Rochester with Cantor Fitzgerald. David Rochester: We've heard from some other Texas players this earnings season talking about stronger competitive pressures in the market. And I was just wondering if you're seeing any evidence of that, any increase in pressures in the most recent quarter. And given, of course, the M&A deals that have been announced over the past few months, which is bringing additional larger competitors into your markets in a more meaningful way, how are you feeling about what that might mean for margin and growth going forward? Sometimes M&A can bring a lot of good opportunities from disruption and then it could also bring more competition. So how do you guys see that balance, that tug of war playing out? Phillip Green: Yes, thanks. I think you caught it right. There is in my view, some increasing competition. I think we called that last quarter. I think we see a little bit more of that this quarter. I don't think anything dramatic. But it's clear there's money out there to be lent. It's mainly on terms where you see the most relevant competition to us. And I think I'm seeing some more pricing competition, although just on the margins. I'm not worried about our ability to compete. Our pipeline is good. And -- with regard to the acquisitions, I think you're exactly right. We have a saying that change equals regression and there's disruption brought on by these acquisitions. It gives us, we believe, a great opportunity to get customers we wouldn't otherwise have gotten. And in some of the markets we're in, we're seeing some really good success with that. And I expect that we'll have more. And if we don't, it's not because we're not trying, we're laser-focused on it. So I think that there will be some opportunity there. That said, we are not always in the market with some of these targets. We don't have exactly the same business model. So there's not always an exact overlap that we can just take advantage of. As far as the other banks coming in, larger banks, I don't want to sound casual about it but that's been our life story for the last 40 years. And I'm not worried about that at all. We, I think, differentiate ourselves very well. And frankly, our largest competitors and most significant competitors that we choose to compete against are really too big to fail. Really, I'd say, just to be honest, Chase, Wells, BofA are our most significant competitors and, therefore, that's where our focus is. It's easiest to differentiate our value proposition against those banks. And they're good banks. I'm not saying there's anything wrong with them but they're very large and I think it's difficult in the segments that we are really good at and choose to compete in, difficult for them to do it at the same level of service and relationship that we have. So I'm not concerned with the other banks coming into the market. And I think we'll continue to do well competitively just like we have to date. It's my view. Dan Geddes: Just something to mention is that the 3 largest money center banks generally have about a 50% market share in the larger markets in Texas. And that happens to be where we get 50% of our new relationships from the larger banks. David Rochester: [indiscernible] how it works out that way. That's great. I guess maybe just switching to the margin. Appreciate the color on where that goes for 4Q. I was curious how you're thinking about that on a more normalized basis, just given the forward curve, the cuts that are expected next year. I know you're still working through the budget. But what do you see in terms of just overall NIM trend over time? Can we move higher over the next couple of years? Obviously, you've got loans and deposits growing in legacy parts of the business and your expansion as well. Just given that backdrop and the forward curve, how much more upside is there to margin? Dan Geddes: Yes. I'll kind of talk -- and I think I mentioned this on the calls the last few quarters, for the fourth quarter, we have around $800 million in either maturities calls or prepayments. And that is around a yield of [ 3.80% ]. And so that will give us an opportunity to invest at higher yields. In '26, that number is going to be a little bit north of $2.5 billion at around a [ 3.60% ] yield. So we will have some opportunity to pick up yield there, obviously, with -- on the short end of the curve, if we do get steeper rate cuts, that would be kind of a headwind to net interest margin. What -- all things being equal is one thing but if we do see a lot of rate cuts, you could see deposit growth accelerate in that environment as well. So just keep that in mind as you kind of look into '26 and beyond if we're in a lower interest rate environment. Operator: Our next question is from Steven Alexopoulos with TD Cowen. Steven Alexopoulos: I want to start -- maybe for you, Dan, going back to your response to Casey's question. So with expense growth expected to moderate, say, over the next 18 months, 2 years, back down to mid-single digit. Does that contemplate the same degree of new branch openings each year? Or does that throttle down or need to throttle down in order to get to mid-single digit? Dan Geddes: That's assuming what we've -- I think a typical year of expansion branch openings. We haven't plugged in less growth. It's working and we're going to continue to do it. Steven Alexopoulos: Got it. So it's just the cost of new as sort of in the run rate at that point. Dan Geddes: Yes. I mean if you think about -- we've opened roughly 70 new branches and so we're up to 200. Well, if we open 10 to 15 a year, it's a lot less of a percentage when it was 130 than when it is at 200. Steven Alexopoulos: Got it. Okay. And then for you, Phil, so you've been pretty clear on these calls. You always get asked about pursuing M&A and you've been pretty clear you're innerly focused. The organic growth playbook is working. I'm just curious, as you think long term, I know you guys always play the long game and you look at potentially over the long term, taking the model outside of Texas. Are you poking around at all to see if there's a small bank out there, which would give you a toehold outside of Texas, just given this window seems to be wide open now to announce and approve deals? Or are you not even exploring that? Phillip Green: Steve, I am not exploring it. And it would be my preference when we do ultimately move outside the state to some market, it would be my preference to do it organically. I think it's cleaner. I think that there could be an opportunity to -- and we would want to hire local talent but I don't think we have to bring along a financial institution to do it with all the accompanying headaches and risk and other things that come along with an acquisition like that. It's been my experience, is that acquisitions, even small ones, tend to take a lot of the air out of the organization as they try to fold that in, particularly when you're as heavily curated a brand and service proposition as we have. So I'd like to believe that we would be able to do that completely organically. And I'd like to believe that we would mix in Frost bankers from the legacy operations along with new talent that we would bring in, in markets that we think would resonate with our value proposition and we could do that. As you say, we play the long game. And I realize that could take a little bit longer but I also believe it has less risk and it has a higher certainty of success. So that's my perspective right now. Operator: Our next question is from Jared Shaw with Barclays. Jared David Shaw: How should we be thinking about the capital generation and return from here in light of the buyback? Is that really just driven by feeling like 14% CET1 is high enough and we're solving for that? Or is it more in reaction to the underlying demand and opportunity for loan growth? Phillip Green: I don't think it signals any kind of lack of optimism of success for growth. I can -- want to make sure that we're clear on that. We are having good growth, as Dan talked about. We've got a great pipeline. I think we're going to be successful with loan growth. But keep in mind, we're starting out from a 50% loan-to-deposit ratio. So we've got lots of dry powder, whether it's in liquidity or it's in capital. So there is no signal whatsoever through those stock buybacks that we're not successful and going to be successful in competing in the marketplace and being successful. I think what's true is that we are generating significant amounts of capital and profitability. And we're taking the opportunity occasionally to utilize that capital and buy some stock back when it's clear that we've got room to do so. And that's what we did. It was not a -- it wasn't a play on price per se. I mean it was pretty much in line with where we are today. I think it's -- we feel like it's good intrinsic value for our shareholders. We have a lot of capital that we can utilize in that way. And so that's why we did it. Jared David Shaw: Okay. And then maybe shifting a little bit. When you look at the expansion markets, is there -- it's actually the newer markets, is there an opportunity to see accelerated fee income coming out of that as well? Or is it really more direct balance sheet lending? What's sort of the -- as we look out over the next year or 2, what's sort of the opportunity from fee income from these new locations? Dan Geddes: Jared, I think that's a good point. We are -- as Phil mentioned, we're bringing in new customer acquisition at what we believe is an industry-leading rate and a lot of that is attributable in these expansion regions where we're able to bring on new customers. And so we are seeing probably better than our pro forma in terms of service charges and it's purely volume related. It's -- we're -- we've brought on more customers than our pro forma projected. And so we're seeing some opportunity there to grow fee income. Operator: Our next question is from Peter Winter with D.A. Davidson. Peter Winter: I wanted to just follow up on capital. The TCE ratio is on the low side versus peers. It certainly had a nice increase this quarter given the AOCI. Is there a level you'd like to see the TCE ratio get to? And maybe any thoughts on restructuring the securities portfolio? Phillip Green: Well, I wouldn't -- first of all, regarding the restructure of the portfolio, it's not something that we are focused on right now. We've got -- that's been discussed, I know in the industry for a while, you've had some people do it but we're going to see those ultimately mature at par and we've got great liquidity and the ability to hold it. So not looking to do that. With regard to capital, I think we're at some of the higher levels we've ever been at. So I think we've got some room as it relates to what we do with that and that was reflected in some of the buybacks that we did this quarter. And I really would expect to continue to be using that vehicle over time at various levels. Peter Winter: Okay. Just on the branch expansion, great to see it accretive to earnings. It's been a pretty long journey. Phillip Green: Yes, it is. Peter Winter: Last quarter, you mentioned it was going to be accretive to '26, so probably a little bit earlier than, I guess, we were assuming. Can you provide any additional color maybe on the level of accretion you're expecting next year? Phillip Green: Not next year. We're not going to give any guidance on anything next year as is our practice until January. But I think we can give some color on it, Dan? Dan Geddes: Yes. So -- and the reason we wanted to call out the accretion when it happened and it was more significant and it -- we've been around breakeven for several quarters but this quarter's accretion was more than twice what it was in the earlier quarters. So we just felt like it was time to bring it to life that it's not only accretive, it's growing. And I brought up the age of each of the expansions because I think that's very relevant that you had Houston generating $0.14 at 5.5 years and roughly Houston 2.0 and Dallas, which are 2 years and 2.5 years at breakeven, well, I think you can see the trajectory of where that earnings growth will come from, both in Houston 1.0 maturing. But really, it's in 2.0 and Dallas reaching that kind of 4- and 5-year status. So again, I think we're looking at probably for the fourth quarter, roughly around the same EPS accretion with the rate cuts, maybe that, that will impact the profitability for the fourth quarter for the expansion by $0.01 or $0.02. Phillip Green: I think Dan brings up a good point with the rate cuts and I think it's important to understand how we look at it. This is a long-term strategy for us. And our pro formas were done based upon what we can think of as a normalized interest rate environment, which to us is probably a 3% Fed funds, 6% prime environment. And we're a little bit above that now. And we don't know what the Fed is going to do. If the Fed brings rates down, just like he said, the value of really any intermediary that's asset sensitive will be somewhat less in terms of the current earnings but it doesn't reflect poorly on the success of what's happening. I mean, because rates are cyclical as far as that goes. When we started out early on the same rates went to 0, right? So we've been in low rate environments. We'll be in higher rate environments. But what you're seeing is, you're seeing the breakout of where that Houston 1.0 is now carrying the load plus adding accretion. And then when you get Houston 2.0 and Dallas and those kinds of things getting that same level, it's just -- the math of it is it just -- it's that tree that continues to grow. And I think that's an exciting part of it. Operator: Our next question is from Sean Sorahan with Evercore ISI. Sean Sorahan: So wanted to circle back on the fee commentary earlier. I heard in your prepared remarks that full year '25 fees are now expected up 6.5% to 7.5%. A quick back of the envelope math there says 4Q should be essentially flat or down a touch. And when you annualize that number, it looks in line with Street estimates for next year, which means any growth there should be interpreted pretty positively. Can you unpack drivers of that flat 4Q expectation? And to the extent that you can for next year, frame out any growth? Dan Geddes: Yes, I'd be happy to. So I think what we're looking at in the fourth quarter, we've had some good growth in trust and service charges, insurance, really kind of across the board. Fourth quarter, we -- it's a little bit lighter in terms of insurance business. So that's one call out. Another one is our public finance underwriting. We had some pull forward of some school bond underwriting that we don't think will happen to that same degree in the fourth quarter. So that's going to impact fee income. So those are just a couple of just, I would say, kind of that linked quarter for the fourth quarter. Sean Sorahan: Got it. And then maybe shifting to credit just because you haven't touched on that yet. Results look great in the quarter. NPAs were down and NCLs were just 12 basis points, both were encouraging. But I think there's a bit of incremental apprehension regarding credit in the market today, maybe relative to a couple of months ago. Can you talk through some of the underlying trends you're seeing and maybe highlight any of the areas you're monitoring more closely given some of the broader macro uncertainties remain, if you had to flag any? Phillip Green: Yes. Thank you. Well, as we pointed out, credit has been very solid. It's been improving. And I think the level of nonperformers, for example, that we've got -- excuse me, while I knock on wood is -- I think that's the lowest I may have ever seen. So credit continues to be good. The credit worry of the day used to be commercial real estate and multifamily. That's been taken care of and it's in the process of being taken care of as private equity takes more of those credits out and as these developments get more seasoned, et cetera. So while there's work yet to do in the multifamily side, things, I think, are solid there. I'm not worried about that. Really -- I really wasn't worried before. But I mean, the numbers are just getting less. And while there will be -- there may be some risk grade 10s that move in to multifamily as they reach stabilization if they haven't hit their debt service coverage ratios, there are other -- at the same time, there are others moving out. So I feel good about that. The acronym of the day is NDFI. I had to Google that to find out what it was but it's a thing now. And so obviously, we've looked at it. I can give you some visibility on that. It's probably implied with your question. The definition that's used in the call report, by that definition, we have about $860 million of NDFIs. That's about 4% of loans. I think it's important to understand what it is. Well over half of that, $532 million would be subscription lines to private equity. That would be about $225 million of that. And then loans to family offices, insurance companies, bank holding companies, portfolio investors would be about $308 million of that. If you look at loans to what I'll call private credit intermediaries, we've got $327 million of those. Probably the most interesting ones based on headlines would be what I call loans to consumer credit intermediaries, which would include Buy Here Pay Here companies. That number is only -- it's here, $74 million. It's performing well. I think if you go back and think about some of our previous conference calls, we saw weakness in the Buy Here Pay Here used car segment back in mid-2023. You might recall our talking about some of the stress in that industry because collateral values, you also had interest rates moving up, which were a problem and just affordability of vehicles, et cetera. And so we moved out about $50 million of that asset class and we're left with just this $74 million, of which we feel really good about. The largest of those is about a $60 million relationship but it's been in business for, I guess, since 1958. It's a 16-year relationship of our company. It's a very conservative operator. Feel really good about that. I could go through other things. There are factoring companies. There are asset-based lending companies. There are things like that. But one thing I think gives an idea to the kind of relationships we have, of that $860 million in total -- and remember, that includes family offices, bank holding companies, portfolio investors, all these subscription lines, all that, which is the majority of it. But we have $1.5 billion of deposits from that asset class versus the $860 million that we've got lent out. And our average relationship in years is 11 years. So we don't have any of the headline stuff that's come out. We're just doing banking business here. I think credit is solid in it. And you got a bank character first, right? I mean I've done some reading on what's out there and what's happened and it seems like character has been a problem. And if you get away from that, you can have trouble. And so I guess one other thing I'd say is you might remember a couple of years ago, we had a company that had a new system and some inventory problems and we worked through that. It was a serious problem for them but they were able to work out of it. It all paid off in time. But it did, I think, highlight to us the need to enhance and increase our field audits in certain situations. So we tightened up our policy there. And so I'm proud of our people for being really out ahead of this, in my view, a couple of years, as it relates to the Buy Here Pay Here and in some of these other areas, too. Look, it's banking and you're never going to be perfect. So I'm not going to say we're not going to have any problem ever in place. But as I look at this portfolio, I do not have any heartburn about it as I read what's going on in the paper and some other areas. Operator: Our next question is from Manan Gosalia with Morgan Stanley. Manan Gosalia: Could you talk a little bit -- can you talk a little bit about the loan growth trends and what you're seeing? Last quarter, you noted more competition on price and structure. I think you pointed to CRE paydowns this quarter as well. How long do you see that as a headwind? And do you think it's got better or worse over the past quarter? Phillip Green: That's a really interesting question. Thank you. I'll tell you that as I have been out in the field talking to our lenders and I think this is proven by the pipeline numbers that I discussed earlier, here's what I'm hearing from them that the summer was tough, particularly the end of the summer, activity was slowing. And I think we saw that a little bit at the end of that summer period. But what they have told me, I'd say 9 out of 10 of the relationship managers I've talked to have talked about how things are moving forward now. And that's -- I think that's new. And I think that's encouraging. And again, as you looked at our pipeline for this quarter, it was up 20% on a linked quarter basis. Now I'm not saying that was all related to that but it certainly would have been a factor. I remember one conversation I had with one lender in Dallas and he gave this example of what a customer said that, that my customer told me, you know what, I wish I had just done the deal 18 months ago. Because it seemed like every time you turn around, there's some problem where the world is going to fall off a cliff and you wait and you wait and if I had just done this, I'd be 1.5 years into the project. So I think there's some people that are getting more comfortable with uncertainty, frankly. I think there's not uncertainty there but there's enough certainty and the need for business to move forward, that they're starting to do it. And I'm hearing that more broadly in our business. And I think that's a trend that I hope continues. I think it may well be doing that through the end of the year. Manan Gosalia: Got it. And I guess, does that mean that there's enough opportunity to grow despite the higher level of competition and maybe despite the high level of CRE paydowns that you're seeing? Phillip Green: I don't think the competition is going to cause us not to be successful. I mean it's there. But I think that in periods of growth, we tend to get our share of the business. People want to bank with us and we are solid and we're always in the market. They don't have to wonder if we're going to be in and out. So I'm not so much worried about competition right now. Frankly, I consider myself and our company a low-cost producer on funding costs. So I can be as aggressive as I want and be as effective as I wanted on the price side. Now the structure side is a different thing and we always deal with that. But as to whether or not it can offset, say, paydown headwinds for things like multifamily, et cetera, I think just talking to our regional teams, they feel like they can. They know what paydowns are. They're talking to their customers. They know what paydowns are expected. They know when they're expected. And yet they're still expecting some growth. So -- and those are the numbers that Dan is really looking to when he gives you those estimates of what growth is. So I would have to say, yes, we think we can offset them. Dan Geddes: I think early in the year, we were losing, especially on the CRE, maybe the first quarter, if I recall, it was encouraging to see that our CRE weighted pipeline had grown 30% linked quarter. And our customer percentage of our weighted pipeline is around 60% and so it's balanced. And that's a really good balance to have 40% of your weighted pipeline on prospects or new relationships. But to see 60% be our customers, I mean that tells me a lot of these payoffs that we've experienced have also kind of cleared the deck for -- especially in CRE for us to go and do the next project for our developers. And just living that world for 20 years, yes, you get the pain of the payoff but you also get to participate in their next few projects. So I think we're looking forward to seeing some really strong commitment trends. And in spite of the headwinds of payoffs that have been elevated this year. And I think 2026, we have some multifamily projects that we expect will pay off through refinance if they're not quite there yet or for merchant builders that may be ready to sell in a different interest rate environment. And so just -- it could also create loan opportunities for us as well. Operator: Our next question is from Catherine Mealor with KBW. Catherine Mealor: You talked about how this quarter was some of the best you've seen in the consumer checking. And if I look at your loan growth versus deposit growth, you've been growing loan growth successfully in the high single-digit range. Deposit growth is typically kind of 2% to 3%. But it feels like we're seeing a shift in deposit growth this quarter and then with -- just with the profitability of your new branches, too. And so just kind of curious, is it fair to assume that, that deposit growth rate accelerates into '26 and so that average earning assets or our balance sheet growth tends to look a little bit better into next year relative to what we've seen over the past couple of years? Dan Geddes: So I would say that there's an opportunity for that as I think one of the opportunities is as interest rates if they -- if we do get several cuts, there's some funds that are sitting in, I'll call, off-balance sheet money market funds that all of a sudden, we start to compete really, really well with. And I could see that being an opportunity to grow deposits to move some of those money market funds on to a bank balance sheet. I'd also see just in terms of just opportunities with our growing of new relationships, we're getting a lot of deposit growth from that. Looking at just kind of where we're getting business from, we've seen roughly -- let me get the number right here because we did on our deposits, our year-to-date, our new relationships generated basically our deposit growth. So our ability to bring on new customers has been a real big driver of deposit growth. So I would expect that to continue into '26 and '27. So I think there's an opportunity. I do think that you're going to see continued competitive pressure on deposit rates and then just deposit growth. So I think there's an opportunity. I don't think we're going to -- I wouldn't necessarily think it's going to expand to levels that we've seen in years past where it was high single digits. But I do think there's a opportunity for us to nudge it a little higher in coming years. Catherine Mealor: And then separately from that, if you look at your slides from this past quarter that you put out, I think Slide 28 shows a really interesting progression in the EPS from the branch investments that you've made and it shows a big pop in EPS in '26 and '27 and you've already talked a lot about that on this call so far. And so it would tell you that we've got big EPS growth just coming from that expansion strategy in '26 and really even more so in '27. And then if you look at consensus estimates, there's very little single-digit kind of EPS growth in consensus estimates today. So do you think the Street is appropriately viewing the profitability improvement that you think can come from the branch expansion? Or are there just structurally other things that are in there that are offsetting it that we need to be aware of? Dan Geddes: Probably the biggest thing that we assume just a normalized Fed funds rate of 3%. And so as -- right now, we're in a higher interest rate environment. So if rates fall, that would be the only -- that would be kind of one of the factors that you would just need to work into your model, is just the interest rate environment and that's just the entire business is impacted by that, correct -- right? So I think that's -- other than that, that trajectory in a normalized environment is -- and we feel really good about because of the volumes that we've achieved with Houston, Dallas and now Austin. Operator: And our final question comes from David Chiaverini with Jefferies. David Chiaverini: How should we think about operating leverage? You mentioned the glide path of high single digit to mid-single digit on expenses looking out to 2027. Any comment on the operating leverage that could potentially come with that? Dan Geddes: We're focused on that expense number. I will tell you that. And with us able to acquire new customers and with our organic growth strategy, I mean, those do help when you think about noninterest income, kind of fee revenue with wealth management, insurance, those lines of business, we're optimistic about us growing in those 2 areas. As we continue to grow in Texas, they're very aligned with our organic growth strategy. So I think there's opportunities there. The headwind is going to be the interest rate environment that we're in and just on the net interest income. And just that growth, that would be my only comment there is, we're going to see opportunities to reprice back book on both loans and our investment portfolio but we're also interest rate sensitive as well. So I think those -- that -- those are the components that we look at. We do think there is this glide path on the expense side to where we're not running high single digits in the foreseeable future. David Chiaverini: Very helpful. And then a follow-up on credit quality. There's been some volatility in oil prices in recent months. Can you remind us at what price level your borrowers would potentially come under some stress? Phillip Green: Well, it depends on a lot of factors, right? It depends on the basins that they're in. It depends on their operating costs, et cetera. So I think you'd look at the industry numbers. And I think it's generally pretty -- it probably pretty -- it'd be pretty well agreed to that in the 40s, you're going to end up with some stress on the companies. But here's a really important factor is how much you are requiring hedging on the portfolio? And we require a significant amount of hedging on our portfolio. And we look deeply into our loan portfolio. They do it every quarter. But obviously, with prices being down, there is a even higher level of interest. But man, the leverage in our portfolio is so low right now and the level of hedging is high and cash flow, EBITDAX is high. I mean it is in really great shape. So -- that combined with the fact that we're in the mid-single digits in energy compared to where it was 10 years ago, 3x that. I feel very comfortable with the portfolio. And even if we did get into the 40s for a while, I'm not really concerned at this point in any existential way about that portfolio because there's a lot of hedging that goes on there that we have in place. And so there's time for people to work through issues and get to the other side. So -- but short answer to your question is probably somewhere in the 40s their stress. Dan Geddes: And just keep in mind, it's not -- the portfolio is about 25% gas, 75% oil, So it's not all crude. Phillip Green: That's true. Yes. That's very true. Hope that helps. Operator: This concludes our question-and-answer session. I would like to turn the conference back over to Phil Green for closing remarks. Phillip Green: Okay. Well, that's all we have for you today. We thank everyone for their interest and we appreciate you being on the call. Thank you. We're adjourned. Operator: Thank you. This will conclude today's conference. You may disconnect at this time and thank you for your participation.
Operator: Thank you for standing by, and welcome to the Merit Medical Systems Third Quarter 2025 Earnings Conference Call. [Operator Instructions] Please note that this conference call is being recorded and that the recording will be available on the company's website for replay shortly. I would now like to turn the call over to Martha Aronson, Merit Medical Systems' President and Chief Executive Officer. Please go ahead. Martha Aronson: Thank you, operator, and welcome, everyone. I am joined on the call today by Raul Parra, our Chief Financial Officer and Treasurer; and Brian Lloyd, our Chief Legal Officer and Corporate Secretary. Brian, can you please take us through the safe harbor statements? Brian Lloyd: Thank you, Martha. This presentation contains forward-looking statements that receive safe harbor protection under the federal securities laws. Although we believe these forward-looking statements are based upon reasonable assumptions, they are subject to risks and uncertainties. The realization of any of these risks or uncertainties as well as extraordinary events or transactions impacting our company could cause actual results to differ materially from the expectations and projections expressed or implied by our forward-looking statements. In addition, any forward-looking statements represent our views only as of today, October 30, 2025, and should not be relied upon as representing our views as of any other date. We specifically disclaim any obligation to update such statements, except as required by applicable law. Please refer to the sections entitled Cautionary Statement regarding forward-looking Statements in today's press release and presentation for important information regarding such statements. For a discussion of factors that could cause actual results to differ from these forward-looking statements, please also refer to our most recent filings with the SEC, which are available on our website. Our financial statements are prepared in accordance with accounting principles, which are generally accepted in the United States. However, we believe certain non-GAAP financial measures provide investors with useful information regarding the underlying business trends and performance of our ongoing operations and can be useful for period-over-period comparisons of such operations. This presentation also contains certain non-GAAP financial measures. A reconciliation of non-GAAP financial measures to the most directly comparable U.S. GAAP measures is included in today's press release and presentation furnished to the SEC under Form 8-K. Please refer to the sections of our press release and presentation entitled non-GAAP Financial Measures for important information regarding our non-GAAP financial measures discussed on this call. Readers should consider non-GAAP financial measures in addition to, not as a substitute for financial reporting measures prepared in accordance with GAAP. Please note that these calculations may not be comparable with similarly titled measures of other companies. Both today's press release and our presentation are available on the Investors page of our website. I'll now turn the call back to Martha. Martha Aronson: Thank you, Brian. Let me start with a brief agenda of what we will cover during our prepared remarks. As the recently appointed President and CEO of Merit, I'll begin my remarks with a brief introduction, thoughts on what attracted me to this opportunity and where I have been focused since joining the team. I will then provide a brief summary of the third quarter 2025 financial results, followed by a review of the team's progress in recent months in a few key operating areas. Then Raul will provide a more in-depth review of the quarterly financial results and the financial guidance for 2025, which we updated in today's press release. We will then open the call for your questions. Before delving into our third quarter results, I would like to take a moment to introduce myself and provide a few summary points on my background and where I have focused my time since joining the team. I joined Merit on October 3 with over 28 years of experience in the global health care industry. My experience includes multiple general management and functional leadership roles at several global companies following a short time in management consulting. I spent almost 2 decades at Medtronic, including several years living and working overseas. After Medtronic, I led global health care businesses with notable scale, including serving as Senior Vice President and President of North America for Hill-Rom Holdings and Executive Vice President and President of Global Healthcare for Ecolab. I've also served as a Board member at a number of companies, including CONMED, Methode Electronics, Clinical Innovations, Cardiovascular Systems, Beta Bionics, Hutchinson Technology, Bright Uro and Home Care. And in one instance, I served as Interim CEO. I believe my experience leading global businesses in the health care industry and advising companies across multiple sectors gives me the requisite background to lead Merit. I have admired the consistent track record of strong top line growth and profitability improvements that the employees and executive team here have achieved, particularly over the last 5 years. As I learned more about the company and in particular, the company's values, which we call the Merit way, these values resonated with me entirely. I've been heartened by the fact that these are not just words, rather the organization truly lives these guiding principles. We focus on the health of our employees so they can better serve our customers and in turn, our health care professionals are better positioned to care for their patients. We focus on excellence. We focus on agility or being responsive to customer needs. We take responsibility for our actions, and we work as a team. An organization that is committed to the Merit way and aligned on a mission to understand, innovate, deliver represents a powerful combination. I appreciate that the mission includes a significant focus on innovation given the importance of R&D and new technology in our industry. Suffice it to say, I'm excited to join Merit and truly honored to take on this role. While my official start date was just a few weeks ago, I have been actively engaging with external stakeholders, directors and members of Merit's executive and senior management teams since my appointment as the new President and CEO was announced on July 7. Since my official start, I've been spending time with our global leaders and their teams as I continue to learn the business. I'm inspired by their optimism about the future, and I'm impressed with the talent and passion of the employees that I've had the chance to meet. I see strong alignment in the shared purpose that this organization has in saving and improving lives each and every day. I've been fortunate to spend a lot of time with Fred Lampropoulos in recent months. We have visited a number of sites together, including Richmond, Dallas, Perland, Tijuana and Minneapolis, and I have spent time at our headquarters in South Jordan. I've also visited with each member of our Board of Directors individually to gather their thoughts and views on Merit, so I can better understand the things that we're doing well and what we can work to improve in the future. Fred and I have also spent time developing our transition plan with a keen focus on ensuring minimal disruption while establishing a process that enabled me to take over the day-to-day leadership of the company. I am confident we have a solid plan in place and importantly, alignment across the team as to key roles and responsibilities. To that end, it is important to understand that as part of this succession plan, Fred is now serving as the Executive Chairman of the Board through the remainder of this year. As we begin 2026, he will transition to non-Executive Chairman. Fred will continue to play a role in our evaluation of potential organic and inorganic opportunities. I appreciate Fred's willingness to continue to partner with me and the team on such an important part of the company's growth strategy. We need to continue to leverage his knowledge, experience and substantial relationships with physicians and customers around the world to ensure Merit remains focused on the right product opportunities and investment areas to support our long-term growth and profitability. With respect to where I'll be spending my time over the balance of my first 100 days, simply stated, I'll be continuing on my listening tour. I look forward to visiting our global sites, meeting the teams, seeing the operations at our manufacturing facilities and spending time with our global research and development team. I have a lot more to learn about our products, our people and our processes. But so far, all that I've learned gives me great optimism. I look forward to attending several key medical congresses, physician advisory boards and meeting as many of our key opinion leaders as possible. I also intend to dedicate a portion of my time in the coming months engaging with the investment community. All of these activities are centered around gathering as much feedback as possible and learning as much as I can, a tall task, but one that I'm extremely excited about. I feel very privileged to have this opportunity. I'm grateful to Fred and the entire Board of Directors for the trust, support and confidence in me as the right leader for the company's next stage of growth and development. Now turning to a review of our third quarter results. We reported total revenue of $384.2 million, up 13% year-over-year on a GAAP basis and up 12.5% year-over-year on a constant currency basis. The constant currency revenue growth delivered in the third quarter exceeded the high end of the range of the growth expectations that were outlined on the Q2 2025 earnings call. The better-than-expected constant currency revenue results were driven by 7.8% constant currency organic growth, which exceeded the 6% high end of the range, which was outlined on the second quarter call. With respect to the profitability performance in the third quarter, the company delivered financial results that significantly exceeded expectations. It was another quarter of notable year-over-year improvement in non-GAAP operating margin, which increased 51 basis points year-over-year to 19.7%. The team delivered nearly 7% growth in non-GAAP EPS, which exceeded the high end of expectations. And the company generated $53 million of free cash flow, an increase of 38% year-over-year. The third quarter results reflect continued strong momentum in the business this year. Despite the continued challenges related to the dynamic and uncertain global macro environment, the team is executing well. Over the first 9 months of 2025, the team has delivered total constant currency revenue growth of 12%, a non-GAAP operating margin of 20%, representing a 129 basis point increase year-over-year, and the team generated more than $140 million of free cash flow. These are impressive financial results to say the least. We have updated our financial guidance for 2025 in today's press release to reflect the strong financial results in the third quarter and our updated expectations for Q4. We remain focused on delivering continued strong execution, solid constant currency growth and strong free cash flow generation in 2025 as well as progress in our continued growth initiatives program and related financial targets for the 3-year period ending December 31, 2026. Turning now to a review of the company's progress in recent months in a few key operating areas. Let me begin with new product development, clearance and commercialization. In August, the company announced the U.S. commercial release of the Prelude Wave hydrophilic sheath introducer with SnapFix securement technology. The Prelude Wave is the latest innovation in Merit's comprehensive access portfolio, which includes a wide range of dilators, micro access systems, sheath introducers and guide sheath. Merit innovated the Prelude Wave, a next-generation sheath with a unique securement feature. Compared to the leading competitor, the Prelude Wave offers twice the lubricity, twice the resistance to buckling and kinking and requires 40% less insertion force. A first of-its-kind SnapFix technology provides twice the adhesive strength with a number of physicians rating its performance and ease of use superior to the leading competitor. This new product introduction represents another advancement in Merit's access portfolio, built to improve radio procedures and to aid in minimizing common vascular challenges. In September, the company announced that Embosphere Microspheres received CE Mark and are indicated in the European Union for use in genicular artery embolization or GAE, to treat patients with knee osteoarthritis. GAE is a nonsurgical option that provides fast and lasting pain relief in patients with mild to moderate knee OA. Data show that over 75% of patients treated with Embosphere for GAE achieved clinical success with significant reductions in knee pain sustained through 24 months. In addition to durable pain relief over time, Embosphere was associated with a decrease in pain medication use and improvements in quality of life measures. Compared to corticosteroid injections, GAE with Embosphere achieved consistently higher clinical success with greater improvements at 3 months in pain and quality of life. CE Mark of Embosphere for GAE presents an exciting opportunity to advance this treatment option and further interventionalists ability to offer the positive results they expect from the procedure. On October 1, the company announced that our Scout Radar localization technology has been used to treat 750,000 patients worldwide, a significant milestone for breast cancer treatment. As a market leader in wire-free non-radioactive localization technology, Merit's mission every month, but especially this month, is to reduce the burden that cancer places on patients and their loved ones. Radar localization helps physicians surgically remove abnormal breast tissue while reducing trauma to surrounding healthy tissue. A trusted solution for breast cancer care, Scout has been mentioned in more than 100 clinical publications with nearly 8,500 patients referenced throughout. As it is being used in 50 countries, more than 500 cases are performed each day, totaling 10,000 cases per month. Over 1,100 facilities worldwide choose Scout as their preferred method of wire-free localization. Every day, through products like Scout, we're able to help more patients become cancer-free, and we're proud to be a part of that. I would now like to provide an update on our recent progress towards our commercial and reimbursement strategies for the WRAPSODY CIE in the United States. Our Renal Therapies group has been impressively executing the U.S. commercial strategy for WRAPSODY CIE during the third quarter, and they continue to exceed our expectations with respect to leveraging the new access to customers from the early commercialization of WRAPSODY CIE to identify opportunities to drive adoption and utilization across the rest of our dialysis product portfolio. The team remains focused on engaging with new and existing customers to work through the VAC approval processes as well as working with the largest GPOs and some of the largest IDNs across the country. Physician training events are being held at centers of excellence with physician partners who are passionate about the product and educating their peers on the benefits of the WRAPSODY CIE. The team has also worked to ensure we were prepared to maximize the opportunity presented by WRAPSODY CIE's new technology add-on payment, or NTAP, effective October 1, 2025. By way of reminder, this add-on payment applies to WRAPSODY CIE procedures conducted in the hospital inpatient setting. We have conducted sales force trainings and prepared reference materials to support discussions with customers and prospects. Our RTG team is focused on ensuring hospitals have the requisite information and understand the process for submitting claims for hospital inpatient use when the WRAPSODY CIE procedure is provided to a patient. We have been pleased by the initial market response in terms of access, adoption and utilization for customers using WRAPSODY CIE in the hospital inpatient setting following the NTAP effective date. With respect to our progress towards securing incremental payment for procedures in the outpatient and ASC settings, as projected on the last earnings call, Merit completed the application for TPT incremental payment under Medicare's OPPS system and submitted the application by the September 1, 2025 deadline. We continue to anticipate preliminary approval with an earliest effective date of January 1, 2026, and finalization in next year's rule cycle. Finally, we have made notable progress in expanding the body of clinical evidence for our WRAPSODY CIE in recent months. In August, we announced the successful enrollment of the first patient in the RAP North America registry study. Dr. Omar Davis, President and Medical Director at Bluff City Vascular, an investigator in the RAP North America Registry enrolled the first patient. The RAP North America Registry is designed to enroll up to 250 U.S. and Canadian patients on hemodialysis who experience obstructions such as stenosis or occlusion in the veins required for dialysis access. The RAP North America registry is intended to add to Merit's growing portfolio of clinical evidence supporting the WRAPSODY CIE. If completed as designed, it would represent the largest cohort of patients treated with an implantable device to restore vascular access for hemodialysis. On October 15, we completed enrollment in our RAP global registry study. This study was designed to enroll up to 500 patients outside of North America to evaluate real-world outcomes associated with the use of the WRAPSODY CIE. The primary endpoint of the study is 6-month patency, and we anticipate having data available in mid-2026. We look forward to one of the lead investigators in the study sharing the results at a medical meeting next year. Two other notable items I wanted to preview in the area of WRAPSODY-CIE clinical evidence and awareness. Tomorrow, October 31, Merit will be hosting an industry-sponsored breakfast symposium at the Controversies in Dialysis Access, or CiDA, Annual Meeting in Boston. CiDA is a high-priority conference for our unique dialysis access portfolio. The meeting is solely focused on dialysis access across all specialties. We are expecting 75 to 100 attendees and are very excited about the faculty selected to lead the session. We are also excited to participate in this year's Vascular Interventional Advances or VIVA meeting in Las Vegas, November 2 through 5. VIVA is the premier multidisciplinary educational event for specialists treating patients with vascular disease. We plan to release 24-month data for both AVG and AVF from our WAVE study at the VIVA meetings. We completed the last patient visits in the third quarter, and we look forward to having this long-term data presented at VIVA next week. Before I turn the call over to Raul, I want to discuss a strategic announcement we made subsequent to quarter end. On October 15, 2025, we announced that we had entered into an agreement to acquire the C2 CryoBalloon and related technology from Pentax of America, a subsidiary of Pentax Medical Inc., for a total purchase consideration of $22 million, $19 million of which would be paid in cash at closing. The C2 CryoBalloon delivers controlled freezing treatments to drive targeted ablation and precise destruction of unwanted soft tissue. The C2 CryoBalloon treats Barrett's esophagus as well as a less common disorder, GAVE or Gastric Antral Vascular Ectasia. The device freezes and eliminates abnormal cells while still maintaining the integrity of surrounding tissue structures. This proposed acquisition is intended to strengthen our position in the multibillion-dollar gastroenterology market and to provide opportunities to treat more patients from the effects of chronic gastroesophageal reflux disease or GERD and other gastrointestinal tissue disorders. While the total transaction size is relatively small, we believe this will be an important strategic acquisition as it is expected to expand the portfolio of solutions our endoscopy sales team has to offer customers. We have invested in this part of our business, both organically and inorganically over the last few years and are nearing an inflection point in terms of completing our integration and sales force alignment activities. We believe we are well positioned to accelerate growth and market share gain in the coming years. With that, I'll turn the call over to Raul for an in-depth review of our quarterly financial results and our updated financial guidance for 2025. Raul? Raul Parra: Thank you, Martha. I will start with a detailed review of our revenue results in the third quarter, beginning with the sales performance in each of our primary reportable product categories. Note, unless otherwise stated, all growth rates are approximated and presented on both a year-over-year and constant currency basis. Third quarter total revenue growth was driven primarily by 13% growth in our Cardiovascular segment and to a lesser extent, 4% growth in our Endoscopy segment. Cardiovascular segment sales exceeded the high end of the expectations we outlined on our second quarter call and endoscopy sales came in at the low end of our expectations. Our total revenue results included approximately $16 million of revenue from our acquisition of products from Cook Medical and BioLife of approximately $10.7 million and $5.3 million, respectively. Excluding sales of acquired products, our total revenue growth on an organic constant currency basis was 7.8% in the third quarter. Turning to a review of our third quarter revenue results by product category. Peripheral Intervention product sales increased 8% and represented the largest driver of organic Cardiovascular segment growth in the period. PI sales modestly exceeded the high end of our growth expectations in Q3. Growth in our PI business was driven by strong sales in our [ Ebola ] therapy, access and delivery systems categories, which together represented more than 75% of our total PI growth year-over-year. Demand of our Embosphere and QuadraSphere Microsphere products was notable in Q3. Access category growth was driven by demand for our WRAPSODY CIE and delivery system category growth was driven by demand for our SwiftNinja steerable microcatheter. Cardiac Intervention product sales increased 29% and 10.9%, excluding the contribution from the sales of acquired products representing the second largest driver of Cardiovascular segment organic growth in the period. This performance was well above the high-end organic growth expectations we assumed for Q3. Organic growth in our CI business was driven by strong sales in our EP, CRM and intervention categories, which together represented more than 2/3 of our total CI growth year-over-year. Demand for our Prelude SNAP, HeartSpan steerable sheath and our Ventrax delivery system were the largest contributors to EP CRM organic growth in Q3. Demand for our mean arterial pressure products, our PHD hemostasis valves and our basic inflation devices were the largest contributors to organic growth in the intervention category in Q3. Rounding out the Q3 performance across the rest of our Cardio segment, sales of our custom procedure solutions products increased 6%, above the high end of our expectations and sales of our OEM products increased 3%, modestly lower than our expectations. The softer-than-expected OEM performance in Q3 was entirely related to sales to OEM customers outside the U.S., which continues to see demand trends impacted by the macro environment. Sales to OEM U.S. customers increased in the high single digits year-over-year in Q3. Turning to a brief summary of our sales performance on a geographic basis. Our third quarter sales in the U.S. increased 12% on a constant currency basis and 7.6% on an organic constant currency basis, exceeding the high end of our organic growth expectations by 310 basis points. We were pleased to see continued strong demand from our U.S. customers in the third quarter. International sales increased 13% year-over-year and increased 8% on an organic constant currency basis. Sales results in APAC, EMEA and the rest of the world regions each modestly exceeded the expectations supporting our Q3 guidance range. With respect to China specifically, sales decreased 1%, which was softer than expected. We attribute the softness to broader macro environment as the VBP impact was better than expected in Q3. Excluding the VBP impacts in both periods, China sales increased 2% year-over-year in Q3. Turning to a review of our P&L performance. For the avoidance of doubt, unless otherwise noted, my commentary will focus on the company's non-GAAP results during the third quarter of 2025, and all growth rates are approximated and presented on a year-over-year basis. We have included reconciliations from our GAAP reported results to the related non-GAAP items in our press release and presentation available on our website. Gross profit increased approximately 19% in the third quarter. Our gross margin was 53.6%, up 267 basis points year-over-year and representing the highest gross margin in the company's history. The year-over-year improvement in gross margin was driven primarily by mix by product and by geography as well as improvements in pricing and freight and distribution expenses compared to the prior year period. As expected, tariffs were a material headwind to the year-over-year improvement in gross margin in Q3, representing a nearly 90 basis point incremental impact year-over-year to third quarter gross margins. Operating expenses increased 21%. The increase in operating expenses was driven by a 21% increase in SG&A expense and a 20% increase in R&D expense compared to the prior year period. Total operating income in the third quarter increased $10.4 million or 16% to $75.6 million. Our operating margin was 19.7% compared to 19.2% in the prior year period, an increase of 51 basis points year-over-year. Third quarter other expense net was $2.4 million compared to income of $0.9 million last year. The change in other expense net was driven by lower interest income associated with lower cash balances, offset partially by lower interest expense compared to the prior year period. Third quarter net income was $54.9 million or $0.92 per share compared to $51.2 million or $0.86 per share in the prior year period. Third quarter net income and EPS exceeded the high end of our guidance range by $3.2 million and $0.07, respectively. Turning to a review of our balance sheet and financial condition. We generated $52.5 million of free cash flow in the third quarter of 2025, up 38% year-over-year. As of September 30, 2025, Merit had cash and cash equivalents of $392.5 million, total debt obligations of $747.5 million and outstanding letter of credit guarantees of $3 million, with additional available borrowing capacity of approximately $697 million compared to cash and cash equivalents of $376.7 million, total debt obligations of $747.5 million and outstanding letter of credit guarantees of $2.9 million, with additional available borrowing capacity of approximately $697 million as of December 31, 2024. Our net leverage ratio as of September 30 was 1.7x on an adjusted basis. Turning to a review of our fiscal year 2025 financial guidance, which we updated in today's press release. For reference, we have included a table in our earnings press release, which details each of our formal financial guide ranges and how those ranges compared to our updated guidance ranges issued as part of our second quarter earnings press release on July 30, 2025. Our updated 2025 guidance assumes the following: GAAP net revenue growth of 11% to 12% year-over-year, which we expect to result from net revenue growth of approximately 10% to 11% in our Cardiovascular segment and net revenue growth of approximately 32% to 34% in our Endoscopy segment and a tailwind from changes in foreign currency exchange rates of approximately $6 million or approximately 45 basis points to growth year-over-year. Excluding the impact of changes in foreign currency exchange rates, we expect total net revenue growth on a constant currency basis in the range of 10.3% to 11.2% compared to 9.7% to 10.6% previously. Among other factors to consider when evaluating our projected constant currency revenue growth range for 2025 are the following items: First, the midpoint of our total constant currency growth range now assumes 13% growth in the U.S. compared to 12% previously and 8% growth outside the U.S., unchanged versus prior guidance. The 8% constant currency growth we expect outside the U.S. continues to assume low double-digit growth in EMEA, mid-teen growth in the rest of the world region and approximately 2% growth in the APAC region. Second, our total net revenue guidance for fiscal year 2025 also assumes inorganic revenue contributions from the business and assets acquired from EndoGastric Solutions on July 1, 2024, Cook Medical on November 1, 2024, BioLife on May 20, 2025, and proposed to be acquired from Pentax on November 1, 2025. Together, we expect inorganic revenue in the range of $59.9 million to $60.5 million in 2025. Excluding this inorganic revenue, our updated 2025 guidance reflects total net revenue growth on a constant currency organic basis in the range of approximately 5.9% to 6.8% year-over-year compared to 5.6% to 6.4% previously. Third, for the full year 2025 period, we continue to forecast U.S. revenue from the sales of WRAPSODY CIE in the range of $2 million to $4 million. By way of reminder, this range is driven by the initial ramp in WRAPSODY CIE sales for procedures in the hospital setting following the NTAP add-on reimbursement, which went into effect on October 1, 2025. With respect to profitability guidance for 2025, we now expect non-GAAP diluted earnings per share in the range of $3.66 to $3.79 compared to our prior guidance range of $3.52 to $3.72. The change in our non-GAAP EPS expectations for the 2025 year reflects the flow-through of the better-than-expected financial performance in the third quarter at both the low and high end of the non-GAAP EPS range, specifically $0.16 and $0.07, respectively. The low and high end of the updated non-GAAP EPS range also reflect the impact of a higher non-GAAP tax rate assumption and the previously announced expected dilution from the proposed acquisition of the C2 CryoBalloon, offset partially by lower expected dilution from our convertible debt. The high end of the non-GAAP EPS range also includes our updated projected impact of tariffs, trade policies and related actions recently implemented by the U.S. and other countries. Specifically, the high end of our updated guidance range now assumes tariff-related manufacturing costs in our cost of goods line of approximately $7.6 million compared to $7 million previously. This updated assumption is driven by a higher tariff impact realized in Q3, while our assumption for tariff impact in Q4 remains unchanged versus our prior guidance assumption. Importantly, the $7.6 million figure is based on available information as of October 30, 2025, and does not include any impact from new and/or additional tariffs or retaliatory actions or changes to currently announced tariffs, which could change the anticipated impact to our non-GAAP EPS in 2025. The ultimate impact from new and/or additional tariffs or retaliatory actions or changes to currently announced tariffs on our business will depend on the timing, amount, scope and nature of such tariffs, among other factors, most of which are currently unknown. The tariff situation and potential retaliatory measures by other countries remains highly uncertain and dynamic. As such, the low end of our guidance range continues to reflect additional tariff-related impact in 2025. Specifically, the low end of our EPS range now reflects a tariff-related impact on our 2025 cost of goods of $16 million compared to $26.3 million previously. This updated assumption for the low end of our guidance range reflects the actual tariff impact realized in Q2 and Q3 compared to the assumptions originally outlined on our Q1 earnings call in April. Our Q4 tariff expectation remains unchanged. Returning to a discussion of our updated 2025 financial guidance assumptions for modeling purposes. Our fiscal year 2025 financial guidance now assumes non-GAAP operating margins in the range of approximately 19.7% to 25% compared to 19% to 20% previously. Note, the change in our 2025 non-GAAP operating margin expectations is primarily attributable to the flow-through of stronger-than-expected financial performance in the third quarter of 2025. Non-GAAP interest and other expense net of approximately $8.3 million compared to $8 million previously, non-GAAP tax rate of approximately 23% compared to 22.5% previously and diluted shares outstanding of approximately 60.5 million. Note, our weighted average share count now assumes incremental dilution of approximately 0.6 million shares related to our convertible debt facility compared to 0.9 million shares previously. We now estimate incremental share dilution related to our convertible debt facility represents an impact of approximately $0.04 to our non-GAAP EPS in 2025 compared to $0.05 previously. Finally, we now expect to generate free cash flow of at least $175 million in 2025, inclusive of the expectation that we will invest approximately $90 million to $100 million in capital expenditures this year. We would also like to provide additional transparency related to our growth and profitability expectations for the fourth quarter of 2025. Specifically, we expect our total revenue to increase in the range of approximately 7% to 10.6% on a GAAP basis and up approximately 5.5% to 9.1% on a constant currency basis. The midpoint of our fourth quarter constant currency sales growth expectation assumes approximately 9% growth in the U.S. and 4% growth in international markets. Note, our fourth quarter constant currency sales growth expectations include inorganic revenue in the range of $8.5 million to $9.1 million. Excluding inorganic contributions, our fourth quarter total revenue is expected to increase in the range of approximately 3% to 7% on an organic constant currency basis. With respect to our profitability expectations for the fourth quarter of 2025, we expect non-GAAP operating margins in the range of approximately 18.8% to 20.8% compared to 19.6% last year and non-GAAP EPS in the range of $0.87 to $1.01 compared to $0.93 last year. That wraps up our prepared remarks. Operator, we would now like to open up the line for questions. Operator: [Operator Instructions] Our first question comes from the line of Jason Bednar with Piper Sandler. Jason Bednar: Congrats, everyone, here on the strong results. And Martha, welcome and looking forward to working with you. I feel like got to start talking here about WRAPSODY to kick it off. You said you're pleased with the response so far on the inpatient side. You called it out as a notable contributor to PI growth. Can you give a bit more color here? It sounds like you're already tracking pretty well in that inpatient setting in the early days. And then maybe I'll just ask an open-ended question, if you could respond to questions that exist out there with respect to clearing the necessary criteria into secure TPT, particularly the cost criteria that requires a different price point than that [ 5,800 ] ASP that you've publicly discussed in past calls and which was used in the submission to secure NTAP. Martha Aronson: Jason, thanks very much. Appreciate the question and look forward to working with you as well. Yes, let me make a few comments on this. First of all, let me just say, I think we're all really pleased with the initial market response as it pertains to WRAPSODY CIE, right? If we look at access, adoption and utilization in the in-hospital setting, right? And so in that setting, in the hospital setting, effective October 1 was the new add-on payment. So we're certainly excited about that and a big shout out, frankly, to our team who's done a great job training physicians. I think you may have heard on a previous call, the goal was to train and have about 250 physician advocates. At the end of the quarter, we're at 200, and that has actually led to a total of over 500 physicians who have been trained in WRAPSODY. So we're very excited about that, and there continues to be even more work being done around building awareness for WRAPSODY-CIE. And you heard a little bit, there's going to be a symposium in Boston at the CETA meeting this week as well as next week at the VIVA meeting in Las Vegas, which I'm personally excited to attend. There will also be 24-month data shared. So I would just say stay tuned on that because you may see a press release or 2 coming out on some of that data next week. So I think it's also fair to say that I'm well aware there's been a considerable amount of discussion, if you will, out in the community about whether or not -- now I'm shifting gears, okay, from that -- we were just talking about the hospital setting, just so I'm really clear, right? We're talking about the hospital setting and the NTAP add-on payment that went into effect October 1. So now I'm going to switch gears to your second question, which I believe was about TPT, which pertains to the nonhospital outpatient and ASC settings, right? So as I said, I understand there's been a great deal of discussion on this. Let me try to be very clear and state quite simply, we believe we meet the required cost criteria. So our application for TPT included WRAPSODY’s list price of $8,000. Jason Bednar: Okay. All right. That's helpful. And I'll let others follow up on that. But I wanted to switch over to -- we had a lot of impressive pieces in the quarter here. Hard to pick what was most impressive, but I'll settle on gross margin to ask here. I think you beat the Street by almost 300 basis points. You referenced it's a record for the company. Maybe, Raul, if you can unpack a bit more the source of that upside, whether there's durability there. And then bigger picture, and sorry, I'm packing a couple in here, but we're officially in mid-50s gross margins. I'm doing some generous rounding, but you're drifting into the margin range where some peers currently operate. Do you still see gross margin headroom beyond the mid-50s? Or when we think about the margin opportunity for Merit going forward, it's going to require more SG&A leverage? Raul Parra: Yes. Great question, Jason. And thank you for highlighting the gross margin, right, and asking the question. I mean I think we're really proud of that. As you know, since Foundations for Growth and now CGI, we've really focused on expanding that gross margin and our approach of kind of throwing the kitchen sink at it has really worked. And so when we look at the compounding efforts from our sales force and our operations team to get to where we're at, we're really proud of those guys for all the hard work that they're doing. It's a tough job, but they've been able to really move the needle there. And so kudos to them. As far as the gross margin for Q3, it was really driven kind of, again, by the kitchen sink approach, right? So our sales force did a really good job on focusing on mix. not only by product but also by geography. And also the focus on improvements in pricing has really helped us out. Our operations group has been doing everything they can to hold the line on what's a really tough environment. Freight and distribution expense compared to the prior year also helped us out. And I also kind of want to highlight that they overcame kind of a 90 basis point incremental impact year-over-year on the gross margin, which could have been better, right, had it not been for those tariffs. As far as kind of the long-term vision, I'm not going to get ahead of myself on CGI. When we launched CGI, we were pretty clear that most of the improvement in operating margin would come from gross margin. And on the higher end, it would be more gross margin with some OpEx leverage. So I think that's the goal is to continue to drive gross margin to hit our CGI goals. And we're just -- we're focused on that. And we're not going to get beyond that. You've heard me say this before, we don't want to drop the football on the one yard line. So we're laser-focused on making sure that we stay within the CGI goals and focused on those. Operator: Our next question comes from the line of Robbie Marcus with JP. Lilia-Celine Lozada: This is Lilly on for Robbie. Martha, congrats on the new role. I know it's still early, but I'm going to try my hand at a question on 2026. There's clearly a lot of momentum in the business, new product rollouts, a lot of nice tuck-ins recently. Could you share some high-level thoughts on how you're thinking about next year? And if not quantitative, then any qualitative color on headwinds and tailwinds we should be keeping in mind would be helpful. Martha Aronson: Yes. Lilly, thanks for the question. And I think you're right. We're not going to really go into 2026 at this point, right? I mean, suffice to say, as you know, we've got CGI goals that are in place that go through the end of 2026. So my message here in month #1 has been really clear to the team that we want to just stay really focused on that. We want to stay focused on closing out a strong 2025. We've got CGI goals for 2026. And then frankly, as I'm just kind of getting in the seat here, I will then spend a lot of time with our newly structured executive leadership team and a newly structured operating committee, global operating committee to really do the work to start to think about our strategic goals beyond CGI. So that's really where our focus is at this time. Lilia-Celine Lozada: Got it. And then just as a follow-up, you've done a number of small tuck-ins over the last few quarters. So could you share your updated thoughts on M&A and cap allocation? Is this the cadence of deals that we should be expecting moving forward? And are there any areas that stand out to you as particularly interesting that you'll be focusing on? Martha Aronson: Yes. Look, I mean, here's what I would say, right? I mean Merit has really focused historically on both organic and inorganic growth, right? They really have used both very effectively, I think, to grow the business. So again, really early for me to say a whole lot on this topic other than I think we'll continue to look at the opportunities that come our way. We'll continue to think more about each kind of platform that we're in and where the strategic opportunities might be, again, to focus our R&D efforts, again, both internally and externally. So I don't see a major shift in terms of capital allocation strategy. I think this has been a company that's invested in R&D to grow the business. And again, I anticipate continuing to do that. Raul Parra: Yes. One thing I'll add is, obviously, free cash flow continues to be very strong. which helps us as part of these acquisitions and investments internally, like the distribution center and our R&D projects, as Martha was talking about. So we've generated almost $142 million in free cash flow this year with $57 million coming in Q3. So we're definitely driving free cash flow. That will help with the investments, capital allocation that we want to do, and we just got to stay focused on it. And we're -- we've got a minimum of $400 million of free cash flow to hit for CGI. We're well on our way to do that and excited about how strong our free cash flow continues to be. Operator: Our next question comes from the line of Jayson Bedford with Raymond James & Associates. Jayson Bedford: Welcome, Martha congrats to both of you on the progress here. Maybe a product line question. Cardiac Intervention has seen a real acceleration here in the last couple of quarters. I think you've called out EP and CRM as a driver. Are you just riding what is a faster growing end market? Or is there a unique kind of share capture dynamic going on? Raul Parra: Well, there's a couple of things going on. I think one of the things that's really helped is the focused sales groups. So having a more focused approach to our bags has really driven a lot of growth. You look at the Cook acquisition, part of the reason we did that was to allow more focus on our EP and CRM products. And we're clearly seeing those guys do a really good job of driving growth. So when you look at the performance in Q3, our Cardiac Therapies group did -- is just doing really good from an integration standpoint, not only selling the Cook products that we acquired, but also the products that Merit had, which is what we were hoping for. And then you look at our Vascular Therapies group, now that they don't have those products in their bag, they're allowed to focus more on the PI side of things, specifically kind of the biopsy drainage and embolic portfolio, which are -- some of those high-margin products that we really want our groups kind of pushing. And then lastly, you look at our Renal Therapies group, again, I know they're kind of tasked with selling reps through CIE, but they're also really focused on the rest of the portfolio that we have for them. And again, I think it's a team effort, and they've all been executing at a really good high level to deliver the growth rate that we've seen. I mean to look at our U.S. organic growth at 7.6% in Q3, and that's outstanding. Jayson Bedford: Okay. Fair enough. Maybe just a different type of margin question. SG&A was a bit higher than it's been in the past or at least higher than our model. Anything notable there in terms of either new reps? Is it integration or just simply a function of the gross margin is stronger, which allows you to invest a bit more in the business? Raul Parra: Yes, there's definitely some of that going on, Jason, right? I think we've talked about that. But there was a couple of kind of what I'll call kind of one-timers that we were obviously looking at. Obviously, with the higher sales than expected, we [ had ] commissions. So also, if you look at the performance of the company, a majority of -- a big chunk of the increase, I'll say, was the variable bonus accrual, truing that up to kind of the year-to-date performance of where the team is at. And then we also had a distributor buyout in Europe that came in earlier than anticipated. So rest assured, we're keeping an eye on the operating expenses and the amount we're investing. But we have been kind of candid and clear, I would say, and transparent about making sure that you guys understand that as the gross margin come in, there is a level of investment that we're making, but we're also very conscious about making sure that we're keeping an eye on it. Operator: Our next question is going to come from the line of Mike Matson with Needham & Company. Michael Matson: So I know it's still kind of early days with WRAPSODY, but I was wondering if you were seeing any of the expected benefit to the other dialysis products, kind of that portfolio strategy that you have there in that business? Martha Aronson: Yes. I mean I'd say we are, yes. I mean I think as Raul was just sharing, I mean, having these slightly more focused sales organizations, right, does enable the group to not only be focusing on WRAPSODY, but all the wraparound -- no pun intended, right, but all the wraparound products, all the additional products that we have in that bag. So I think we're really encouraged by that in the early days here. Michael Matson: Okay. And then just on the CryoBalloon, the C2 product, I'm familiar with Barrett's esophagus and the ablation procedure. But wondering if you could tell us how big that market is or the TAM there? Yes. I don't have that handy here, but I can get it for you. Obviously excited what the product can do. Yes. But just at a higher level, obviously excited that we continue to find products that we can drop in our endoscopy bag. This is the second acquisition here within the year. We've been looking for things to add to the endoscopy bag, quite frankly, for a long time and just finding assets that we can drop into that sales force is really exciting. I know they're excited about it. This product was really driven by our sales force. They really wanted this. They're really excited about what it can do for the rest of the portfolio. So we'll get to that TAM, but continue to be excited about the opportunity there. Operator: Our next question will come from the line of John Young with Canaccord. John Young: Martha, [indiscernible] sentiment and look forward to working with you. And maybe just starting on that, too, just what have you identified so far in terms of company excellence versus possible areas of improvement? Martha Aronson: Yes. Thanks, John, and I look forward to working with you as well. The first thing I have to say is having spent some time both leading up to my official start date and since then, I just have to say the passion that I've seen out of the employees here, everybody I've had the chance to visit with amongst the various sites and here in Salt Lake City, there's just so much dedication to taking care of our customers who we know are then helping patients. And I mean, we all -- when you're in this industry, right, everybody kind of says, "Oh, this is a great industry. We're helping people. But I have to say, you really feel it here. It's very genuine. I think the Merit way, which is the values of this company, it comes through loud and clear. And as I think I said in my prepared remarks, these aren't just words on a page. This is really how people feel. It is. It's health, it's excellence, it's agility, it's responsibility, it's teamwork. So I think I'm super excited about that. As I said, I'm also excited to really kind of dig in and get going with, as I said, a newly structured executive leadership team and kind of a newly formed global operations committee, right, which is sort of our top leaders all around the globe. And I do think we do have an opportunity as we continue to grow and scale globally, right, to really think about how are we ensuring really tight cross-functional collaboration and I would say, cross geographic collaboration. So those are kind of the things I'm looking at so far. And as I said, really excited to kind of dig in and we'll have 2026 while we're staying focused on CGI to really think about kind of what's next beyond '26. John Young: Great. And then just as a follow-up to Endoscopy, the softness in Q3 that you called out, I didn't hear any reasoning behind that, Raul. Was that seasonality? Or is there another factor going on there? Raul Parra: Yes. I mean there's always a level of seasonality. But honestly, the way we forecasted for our Endotek division, they're integrating an acquisition. We expected kind of -- it always -- when you're trying to combine 2 portfolios, there's always a level of distraction as you're learning to sell the new products. And so we really anticipated that to happen. And essentially, the Q3 sales trend was improved as expected. It was better than the first half of the year. And I think it will continue to accelerate from here as the sales force kind of starts to understand how to combine and sell these products. But they're hanging in there. Every month seems to get a little bit better, and that's kind of what our expectation was. Operator: Our next question is going to come from the line of David Rescott with Baird. David Rescott: Congrats on a good quarter here. A few questions from us, and I'll ask them both upfront. First, on China. I heard the call out around softer growth than expected, only down 1%, though not too terrible. But I'm just curious on what some of the dynamics are in that market that have played out so far in the second half of the year relative to what your expectations were heading into the second half, how you're feeling about the dynamics in that market over the next 12 to 18 months? That's the first question. And then second one on WRAPSODY. I know we'll probably find out around the TPT update in the coming days or weeks. So just curious if you could walk us through what the next day steps are, meaning that once you find out what the update is on reimbursement, where you go from there as you start to progress through or into, I guess, 2026? Raul Parra: I'll take China and then Martha, I think, is going to take the WRAPSODY question. So look, I think, first of all, I'll start with the highlight, right? I mean I think China has been a market that hasn't grown like we wanted to kind of from a reported or organic basis. I think the encouraging thing is that volume continues to be strong. I'll highlight that I'll point out, VBP was better than expected in Q3. I think we've seen that happen routinely in China. I think that's a positive sign for us. But really, it's -- the softness is coming just from the broader macro environment. And when we say that, we're really kind of talking about kind of OEM in China specifically being softer than anticipated. So I think as we look at the core business, which is China, excluding OEM, I think they're doing really well given the environment. And it's really just kind of the OEM component that kind of continues to drag it down a little bit. But overall, I think we -- just the China market overall, I think we're excited about what we can do there in the future. Other than that, I think it's no other things to kind of point out. Martha Aronson: Yes. And let me comment then on -- again, on WRAPSODY. So I think as I mentioned earlier, we are very confident we meet the required cost criteria. As I said, our application for TPT included our list price at $8,000. So as you said, we do expect to hear sometime in December with the earliest than possible effective date of January 1, 2026, and then a finalization during next year's [indiscernible]. Now I mean we know the U.S. government is in shutdown. So far, we haven't heard anything there that changes our expectations. Obviously, if we hear something, we'll let you know. But otherwise, we'll proceed from there. Operator: Our next question will come from the line of Michael Petusky with Barrington Research. Michael Petusky: I just wanted to real quickly drill down both on endoscopy and China, which have been sort of called out as maybe areas of relative weakness. Raul, have there been any key customer losses in either business, say, over the last 6 to 12 months? Raul Parra: Like I said, endoscopy, it's really just driven of the integration of the sales forces, Mike. So again, I wouldn't -- I've got nothing else to say other than the performance of endoscopy kind of continues to improve as they learn how to sell these products. So I think on a go-forward basis, we're excited about what they can do. And like I highlighted earlier, they're really excited about C2 and what it can do for not only our newly acquired products, but also kind of our legacy portfolio. So I think that will be a something that can hopefully generate additional growth to the core business and obviously deliver some additional growth on the noncore stuff. As far as China, I mean, it really -- there isn't anything that -- any red flags that I would call out. Again, I think when you kind of strip out the OEM piece, which, as you guys all know, I have been pretty adamant about OEM, just being a business that's very variable, right? I know when we were growing at 20%, 15%, I kind of told everybody, hey, don't get excited, right? I think a high single-digit business is kind of what we expect from OEM. You will have some quarter-to-quarter variability, some year-to-year variability. That's just the nature of OEM. So we don't have any concerns. I think when you look at the OEM business, year-to-date, they've grown at 9%, which is right in that high single digit. And when you look at China business, kind of the core business itself, again, I'll highlight that VBP was better than expected. Volume continues to be strong. So yes, I wouldn't call anything else out. I mean I think we're doing just fine. Michael Petusky: Okay. Great. And then a quick one for Martha. In terms of this next, I guess, at this point, roughly 60 days where Fred is the Executive Chair versus next year when he'll be nonexecutive Chair. I mean, what are the primary ways you're sort of utilizing them? Is it mostly just introductions to team and customers? Or are there other areas where you hope to utilize Fred over the next 60 days? Martha Aronson: Yes. So yes, Fred and I are, of course, in pretty regular communication. And I think one of the primary areas, as you all know, because you know him well, Fred is very, very knowledgeable in what technologies are around, right? And so he's really helpful as we think about, again, whether it's organic or inorganic technology opportunities. So that's really one of the primary areas where we are leveraging his expertise and experience. Operator: Our next question comes from the line of Jim Sidoti with Sidoti & Company. James Sidoti: Another question on the Pentax acquisition. How does that product differ from the product you acquired last year from EndoGastric Solutions? Is it the same treatment? Is it complementary? And is it approved in Europe as well as in the U.S.? Raul Parra: Well, I mean, it is a different -- it's in the same call point, Jim, which is why the sales force is excited about it. I think it allows the sales force to highlight the C2 Balloon while also talking about EGS, right? And so as you -- as they think about the full portfolio of products, now it allows them to be talking about multiple devices within the same call point that they're in. And so it really is a different product, but it's within the same call points. Martha Aronson: So Jim, it really -- yes, it really is different, right, in terms of, it's cryo, right? So it's using very, very cold. If you will, think of it, it's almost making ice, right? So you're delivering a frozen treatment, if you will, to drive a targeted ablation. So it is different. It destructs unwanted soft tissue. So I think the other thing that's exciting that could be some possibilities for us in the future is to see whether or not there are other applications of soft tissue beyond the current one that it's got approval for, right, which is in the gastroenterology space. James Sidoti: And in terms of approvals, is it just a U.S. product? Or do you expect it to be sold overseas as well? Raul Parra: It's sold overseas, too. Not materially, but it is. James Sidoti: Okay. Is that something that you think you could expand? Or do you think you'll focus on the U.S. market? Raul Parra: Jim, I think our approach is that we think we can take products just given our global footprint, our sales force, obviously, that's an opportunity that we think we can exploit. Obviously, it takes time now with MDR and all the regulatory kind of hurdles. We'll make the assessment as to what markets make sense. But we're always looking to take things internationally when we can. James Sidoti: And speaking of MDR, that expense has come down the past few quarters. Is there a light at the end of the tunnel for that? Or do you think it kind of levels out where it is spending right now? Raul Parra: I hope there is. I mean I think it's a long process. As you guys know, you guys have heard us complain about it, right? I mean I think to reregister products that have been in those countries for 10-plus years with no serious impact. As a matter of fact, helping patients has been really frustrating. But I think there is a light at the end of the tunnel. I think there's rumors of positive changes to MDR, how those play out is yet to be decided. But I think that the regulatory burden for Medtech devices is really hard. And I think Europe has seen the impact of those changes. And so hopefully, they come to some common sense there and they make some changes. But for now, the Merit way is just to be prepared and play by the rules. And so that's what we'll do. James Sidoti: All right. And then the last one for me, $140 million of free cash flow in the year-to-date, I assume you'll generate another chunk in the fourth quarter. Is that all going to go to debt pay down? Or do you have any other plans right now? Raul Parra: Yes. Well, we've got to convert, right? So there's really no debt to pay down, right? I mean I think for now, we'll continue to hang the cash on the balance sheet and look for acquisitions or investments here within Merit to deploy that capital. But we are calling for a minimum of $175 million of free cash flow for the year. So there is additional free cash flow that we think we can get. But yes, super excited about how strong it's been, given that we're also building the distribution center across the street, so. Operator: Thank you. And I would now like to hand the conference back over to Martha Aronson for closing remarks. Martha Aronson: Thanks very much. And just a huge thank you to all of our employees for all their hard work, and thank you all for joining us today on the call and for your interest in Merit Medical. Operator: This concludes today's conference call. Thank you for your participation. You may now disconnect. Everyone, have a great day.
Operator: " Caitlin Lowie: " Michael Raab: " Eric Foster: " Justin Renz: " Christopher Raymond: " Raymond James Joohwan Kim: " Citi Roanna Ruiz: " Leerink Partners Dennis Ding: " Jefferiesruiz Thomas: " Wedbush Securities Matthew Caufield: " H.C. Wainwright Joseph Thome: " TD Cowen Julian Harrison: " BTIG Aydin Huseynov: " Ladenburg Thalmann Daz Patel: " Cantor Fitzgerald Operator: Good day, everyone, and welcome to the Ardelyx Third Quarter 2025 Earnings Conference Call. Now I'd like to turn the call over to Caitlin Lowie, Vice President of Corporate Communications and Investor Relations. Caitlin, please go ahead. Caitlin Lowie: Thank you. Good afternoon, and welcome to our third quarter 2025 financial results call. During this call, we will refer to the press release issued earlier today, which is available on the Investors section of the company's website at ardelyx.com. During this call, we will be making forward-looking statements that are subject to risks and uncertainties. Our actual results may differ significantly from those described. We encourage you to review the risk factors in our most recent quarterly report on Form 10-Q that will be filed today and can be found on our website at ardelyx.com. While we may elect to update these forward-looking statements in the future, we specifically disclaim any obligation to do so even if our views change. Our President and CEO, Mike Rabb, will begin today's call with opening remarks and an overview of the company's progress during the third quarter of 2025. Next, Chief Commercial Officer, Eric Foster, will provide an update on the performance of IBSRELA and XPHOZAH. Justin Renz, Chief Financial and Operations Officer, will conclude today's prepared remarks with a review of the company's financial performance during the third quarter ended September 30, 2025, before we open the call to questions. With that, let me pass the call over to Mike. Michael Raab: Thanks, Caitlin. It's great to be here with all of you today to share our third quarter 2025 results. Another standout quarter for both IBSRELA and XPHOZAH. This performance demonstrates the power of our commercial model, the momentum behind our products, the exceptional execution by our team and the real-world impact that our differentiated therapies are having for both patients with IBS-C and for those with CKD on dialysis. We generated $105.5 million in product revenue during the third quarter, representing 15% year-over-year growth, a signal of strong demand across our portfolio. In January, I outlined 4 key priorities for Ardelyx this year: one, to accelerate IBSRELA's momentum; two, to execute on our XPHOZAH strategy; three, to build the pipeline; and four, to continue delivering strong financial performance. 10 months later, it is clear that the team at Ardelyx is delivering on these key priorities, and as a result, we're building real sustainable momentum. I'd like to provide a bit more detail on each of these areas. IBSRELA continues to outperform and is the foundation of our portfolio and the main engine for Ardelyx' future growth. IBSRELA set yet another record, generating $78.2 million during the third quarter, a 92% increase over last year. Demand growth is broad-based and demonstrates how vital this therapy is for patients. The IBSRELA team is doing an exceptional job expanding reach and deepening prescriber engagement and conviction. Every driver that has fueled our success remains strong, a passionate patient community, an engaged prescriber base and a novel commercial strategy. We expect this momentum to continue through Q4 and beyond. As a result, we are raising our guidance, and we expect to generate between $270 million and $275 million in IBSRELA revenue this year. XPHOZAH also had an incredibly strong quarter, generating $27.4 million in revenue, a 9% increase compared to Q2. The XPHOZAH team is navigating this dynamic market with determination and agility as we execute on our strategy, ensuring patient access, strengthening clinical conviction among nephrologists and driving prescription pull-through. XPHOZAH is a valuable component of our growth, and we expect its contribution to our business will only grow over time. Today's announcement of ARDX-10531, which we will refer to as 531 is the next-generation NHE3 inhibitor and marks an important milestone for Ardelyx as we reinvigorate our pipeline. We at Ardelyx pioneered NHE3 inhibition and with tenapanor, we have the only approved modulator of this pathway on the market. With 531, we may be able to unlock even greater benefit for patients. Early preclinical data demonstrates that 531 is a highly potent, highly soluble molecule that could open development opportunities across a broad range of therapeutic areas. Preclinical and manufacturing activities are underway in advance of a Phase 1 study. This investment in 531 reflects thoughtful stewardship of an important internal asset and is our first new development program in more than 3 years. We are committed to building a broad, sustainable pipeline, capitalizing first on an internal asset, while in parallel, we explore external opportunities. As we build this pipeline, we are taking a disciplined and forward-thinking approach, identifying opportunities where Ardelyx can win. We are going to leverage our expertise, assets and scientific clinical and commercial leadership to unlock value. 531 is a reflection of that approach, and I look forward to sharing more information on our plans for this molecule as we advance through the development program. Finally, I want to highlight our financial strength. With the meaningful revenues we expect to generate in 2026 and beyond, we're extremely well positioned to thoughtfully invest our capital in current commercial endeavors and to grow our pipeline. We are delivering on our 4 key priorities. We are driving meaningful impact for patients, and we are creating lasting value for shareholders. Before I hand the call over to Eric, I'd like to formally welcome Sue Hohenleitner to Ardelyx as our Chief Financial Officer. She's a remarkable leader who brings deep financial and strategic expertise to Ardelyx, and she's already making her mark. Challenging our thinking, strengthening our plans and energizing our path forward. She's joining a highly experienced leadership team with the technical expertise, vision and enthusiasm to lead and write the next chapter for Ardelyx. With that, I'm pleased to turn the call over to Eric, who will share his perspectives on our commercial performance. Eric? Eric Foster: Thanks, Mike, and it's great to be with you all once again. The commercial organization continues to operate at an exceptionally high level. Our commercial strategy is strong and continues to be the foundation of our success. We are focused on addressing areas of high unmet need, delivering first-in-class medicines, leveraging a targeted sales and marketing approach to both patients and prescribers and investing in high-impact patient services programs to improve access. I'm excited to share with you today how this focus drove our performance during the third quarter, starting with IBSRELA. The strong demand for IBSRELA continued during Q3, leading to our highest demand quarter since launch. Additionally, we delivered record highs in the following areas. Revenue was $78.2 million, posting 92% growth year-over-year. We continue to see the strength of our field sales force and the impact of our marketing initiatives, which drove us to new highs in new writers and total writers, reflecting growth in both depth and breadth of writing. This increase in writers also led to growth in new refill and total prescriptions. Once again, the increased and focused activity from our field access manager team resulted in improved pull-through rates. These results clearly indicate that our strategies are working and our strong momentum continues. We remain focused on the patient, the prescriber and improving prescription pull-through so more patients can benefit from IBSRELA. First, the patient. IBS-C patients are incredibly engaged and consistently seek information and new options to address their unmet IBS-C symptoms. In fact, more than 75% of surveyed patients report that they continue to experience the symptoms of IBS-C despite treatment on a secretagogue. In contrast, patients report highly satisfied with IBSRELA. In a poster, we presented earlier this week at the American College of Gastroenterology's Annual Scientific Meeting, 88% of surveyed IBSRELA patients reported treatment satisfaction. Further internal market research also suggests that when patients learn about IBSRELA, they are motivated to ask for the therapy by name, and when they do, physicians are highly likely to prescribe it. Our focus on the patient will continue. In some areas, we will increase our investment in targeted patient marketing efforts to support our future growth expectations. Next is the prescribing health care provider. The investments we have made in our field-based team and physician marketing efforts continue to demonstrate that HCPs are highly responsive to IBSRELA's safety, efficacy and tolerability profile and its differentiated mechanism of action. Once again, we saw increased targeted activity from our sales team who drove expanded adoption and utilization. We maintain our focus on driving depth and breadth of prescribing among high-writing HCPs who are frequently seeing patients with IBS-C. Our messages are resonating, and the team will continue to drive clinical conviction and ultimately to identify and prescribe IBSRELA for those in need. Finally, prescription pull-through. The investments we are making in this area are delivering improvements across the patient journey. Our field access manager team increased their call activity during Q3, translating into increased rates of prior authorization approvals and resubmission approvals. We continue to look for ways to improve the patient experience, lessen the burden on HCPs and help ensure that every patient who has prescribed IBSRELA gets on treatment. We are focused on addressing critical aspects of the patient and physician journey and maintaining and building momentum as we enter the fourth quarter. As I mentioned earlier, my team and I just attended the ACG Annual Conference, and we heard directly from many HCPs about the impact of IBS-C and the important role that IBSRELA is playing for their patients. We are committed to the patient community, and we continue to bring important science to HCPs with 3 posters presented at the conference. I'm incredibly proud of all this team has accomplished, and I look forward to a strong close to 2025 on our path to more than $1 billion peak revenue. Now turning to XPHOZAH. The team continues to execute and drive demand. In Q3, the team delivered $27.4 million in revenue, a solid 9% revenue growth compared to Q2. This demand-driven growth demonstrates a clear need among patients for XPHOZAH. Our strategy is anchored in access to XPHOZAH for all patients who receive a prescription regardless of payer. We are pleased that this strategy is working, and we remain confident in our long-term growth expectations. The team remains focused on driving clinical conviction among nephrologists to prescribe XPHOZAH for appropriate patients, encouraging prescriptions to be sent to ArdelyxAssist to ensure patients get on treatment and providing important resources to support prescription pull-through. Our steady and consistent progress is evident in the growth we see across a number of key demand indicators. Total writers grew quarter-over-quarter. We grew new and rebill prescriptions, which resulted in growth in total dispenses compared to Q2, including increased volume for both paid and patient assistance prescriptions. In short, more patients have access to XPHOZAH today than ever before. We also saw continued improvement in prescription pull-through following our investment in the field access manager team. Importantly, we saw a second consecutive quarter of growth in the non-Medicare payer segments. These are all very encouraging indicators, demonstrating that the momentum we experienced in the second quarter continues through the third quarter as a result of our strong commercial execution. We focus on expanding breadth and depth of XPHOZAH writing among healthcare providers and continue to place the nephrologists at the center of decision-making. We also connect with other stakeholders in the community, including the dialysis providers, renal dietitians and advocacy organizations that are important to patient care. We have a broad-based team focused across the patient journey and continue to engage with all stakeholders about the importance of XPHOZAH. I will be joining the team on Tuesday at the American Society of Nephrology's Kidney Week to engage directly with HCPs and learn from them about the value that XPHOZAH provides. We also have 3 posters being presented that will further support our efforts and will highlight the importance of XPHOZAH for patients with elevated phosphorus. Consistent progress will fuel a strong finish to 2025 for XPHOZAH and create a solid foundation for further growth next year and beyond. I am proud of this team and their efforts in this dynamic market. We remain confident in our long-term peak guidance of $750 million. Looking at the fourth quarter and into next year across our portfolio of products, we will continue to execute our strategies at a high level and create new opportunities for growth. We have the right team and the right focus. We're making a difference for patients and driving impact across the business, and we remain steadfast in our commitment to bring these important medicines to the many patients in need. I will now turn it over to Justin. Justin? Justin Renz: Thanks, Eric. Ardelyx delivered an impressive quarter with continued meaningful growth for both products and another record-setting quarter for IBSRELA. We thoughtfully invested to improve our commercial opportunities, restart our pipeline and strengthened our balance sheet through significant top line growth. Starting with revenue. For the period ended September 30, 2025, we reported total revenue of $110.3 million, an increase of 12% compared to the $98.2 million we reported in Q3 of last year. The growth was primarily driven by an incredibly strong performance by IBSRELA, recording revenue of $78.2 million, an increase of 92% over the same period last year. The team's focus on driving increased demand for IBSRELA and improving prescription pull-through continues to drive this momentum. The performance was also a result of expected improvement in our gross to net deduction, finishing the third quarter at approximately 31%, a slight improvement over Q2. We expect IBSRELA growth to continue, and as such, we are raising our guidance and currently expect to finish the year between $270 million and $275 million in revenue. XPHOZAH delivered another solid quarter of growth, generating $27.4 million in revenue during the third quarter of 2025, an increase of 9% compared to the second quarter of this year. Our gross to net deduction of approximately 29% was consistent with the second quarter. Finally, you will note that we recorded $4.8 million in non-cash royalty and commercial milestone revenue during the quarter, a significant increase compared to previous quarters and last year. We are pleased to share that our partner in Japan, Kyowa Kirin Co., achieved year-to-date sales levels that triggered a $3.4 million payment, which will be passed along to Healthcare Royalty Partners later this quarter. Now turning to expenses. Third quarter expenditures were up compared to the same period of 2024, reflecting our investment in growth and spending levels were consistent with Q2 of this year. R&D expenses were $18.1 million for the third quarter of 2025 compared to $15.3 million for the same quarter of the prior year. SG&A expenses were in line with our expectation at $83.6 million compared to $65 million we reported in the third quarter of last year and reflects our continued investments in commercial activities to drive growth. Our net loss was approximately $1 million or less than $0.01 per share in the third quarter compared to a net loss of approximately $800,000 in the same period of last year. In addition, our third quarter 2025 results included $4.8 million in non-cash revenue, $12.7 million in non-cash stock compensation expense and $2.2 million in non-cash interest expense. We are pleased to report positive quarter-over-quarter cash flow as a result of significant growth on the top line. We finished the quarter with a very strong balance sheet, including $242.7 million of cash, cash equivalents and short-term investments. As I prepare to step away from the CFO role at Ardelyx, I would like to thank all the investors and analysts who I've had the pleasure to interact with over these past 5-plus years. I would also like to thank all of the Ardelyx team members who had the privilege to work with, and to all, I'm delighted to welcome Sue to the team. We've had the opportunity to work together in transitioning the various tasks over these past couple of weeks, and you will find her to be a strong and capable financial leader. I look forward to following Ardelyx in the future as I begin my next journey. With that, I'll hand it back to Mike. Michael Raab: Thank you, Justin, not just for the thoughtful commentary that you provided as you finish up your final quarter with us, but for your leadership, your partnership and support of everyone at Ardelyx. Ardelyx' third quarter performance was a continuation of consistently delivering on our priorities. IBSRELA's strength is the foundation of our growth and the opportunities ahead for this business are significant. XPHOZAH remains an important contributor to our business. 531 is our reentry to product development and our strong cash position demonstrates our focus on being prudent stewards of our resources while investing in growth. I look forward to sharing more updates on our progress in the quarters ahead. Elvis, you can now open the call to questions. Operator: [Operator Instructions]. Our first question comes from Chris Raymond of Raymond James. Christopher Raymond: Best of luck to you, Justin. It's great working with you and hope to in the future. Just some questions. Maybe first of all, on IBSRELA. Just looking at the -- I guess, it's the SparxIT data that kind of sticks out to me the most. You guys have now sort of mid-teens share, I think, overall in the IBS-C market, but first-line share looks like it's also in the single digits. Mike, maybe -- obviously, you got a long way to go to compete with Linzess for frontline share, but maybe just talk about how frontline use maybe is factoring into your long-range plans and what you guys are doing to try to make that more of a lever that you can pull? Then maybe the next question on the 10531, I guess you guys didn't talk about indications maybe for a reason, but just looking at the literature and potential targets for a potent soluble molecule here, some pretty big indications, hypertension, heart failure, maybe some diabetes indications. Are you looking at something as more broad or more of a targeted indication? Michael Raab: Well, I think let me answer the second part first. We've got to take some baby steps before we go to the sprint in marathon, right? I mean we understand how to develop NHE3 inhibitors exceedingly well. The characteristics of the molecules are extremely unique and the fact that we've got one that's as soluble and potent as this does open up the opportunity to consider things like what you just described. It is premature for us to consider what indications until we go through these initial steps. As I said in my comments, the ability that we now have to invest in what we have created in NHE3 inhibition is an incredible strength. I'll head it off questions that I'm sure are going to come is that this is well within our ability to spend and get it to the phases of development as we take advantage of the engine that IBSRELA is. To your questions about IBSRELA, I'll ask Eric to comment as well. I think as we've spoken in the past, Chris, the indication in our clinical work was first line, right? There is nothing in our label, nothing in our clinical work that says it cannot be first line. The growth that you see in that is completely organic. When we started this effort to commercialize IBSRELA, we made the intentional decision to position it in a way that is second and third line because no matter what we did with PBMs and formularies, we would never be first line because we wouldn't generate the kind of revenue to supplant what they're getting from current first-line therapies. We are seeing that organic growth because it is a good drug and experience with physicians who are writing the scripts are being successful in driving those through. There are millions of patients on GCC agonist right now, 80% or more of which are dissatisfied with their therapy. The market could grow no more, and we would still be able to meet our objectives and the projections that we've had. I think it's a really important way to think about the business is we -- because of the way that we've approached this, our target and our commitment to $1 billion or more is based upon second-line therapy with the established patients that are there and the call points that Eric and the team are pursuing. Anything to add to that, Eric? Eric Foster: Thanks, Chris, for the question. Yes, the only thing that I would add to that, Mike, is we're coming off a third quarter where we've got all-time highs in new writers and total writers. Clearly, we are doing a great job of expanding breadth and depth and utilization of IBSRELA. With that comes confidence in the product when they see the results and the impact that it can have with patients. As you mentioned, we know that more than 75% of the physicians or patients that are out there are continuing to experience symptoms, so they need something different. We remain committed to our strategy. We're pleased to see that it does get some utilization first line, as you noted, that we're indicated from a first-line basis, but we remain committed and very confident with what we saw in Q3 and the momentum that we're generating coming into Q4. Operator: Next, we have Yigal from Citi. Joohwan Kim: This is Joohwan Kim on for Yigal. Congrats on the quarter. Maybe just 2 quick ones for us. I know you had commented on solubility and potency, but just wondering if you could provide a little bit more color on what 531 is hoping to solve that was suboptimal versus tenapanor? Michael Raab: Versus tenapanor is one way to look at it. When you have highly soluble gut-restricted drugs, you may have better penetration into the target of NHE3. Solubility matters to have a molecule do what it needs to do where you're trying to target it. Potency will bring you lower doses or better efficacy. That's exactly the preclinical work that we're embarking upon is to understand how best to leverage those qualities of this molecule. As I said in the previous question, it's premature for us to speak as to whether or not it is to answer questions that tenapanor can't or if there are other indications that make more sense to pursue. Joohwan Kim: Maybe just one more, if I may. It seems like Israel is really continuing to take off due in part to the investment into the sales force. Just wondering, as you're seeing that there's still a big opportunity there, is there any consideration for perhaps increasing the sales force even further beyond what you had already done to reach that peak 750 as early as possible? Michael Raab: I mean the one -- just a general comment, I'll ask Eric to comment on the specifics. Every day, we think about where else we can invest in this growth and this opportunity because what we see here in terms of the benefits providing patients, the organic growth that the previous question had in terms of moving into first line, this is a very good drug that's helping a lot of people. There are a lot of people that aren't being helped by it yet because of the breadth, depth and reach. There are many ways to communicate with those HCPs and those patients, and that broad-based approach is what we will always consider. We will always look at new and better ways to penetrate, but certainly investing those considerations and investing in whether it's the fans of the sales force is something that Eric always considers. Eric Foster: Yes. Thanks for that question. As Mike said, we're constantly looking at the data to see where we can continue to drive growth and value. As we're looking at the sales force, just recall, we're now about 3 to 4 full quarters in with the expanded sales force. What they've done is really raised the bar. Right now, I've got great confidence in this team. We are well on our path to achieve $1 billion peak year sales. As we go into Q4, I feel really confident about where the team is. We'll continue to look at the size of the field team, but we remain confident there. Also just want to take the opportunity to remind you, it's not just the field team. We've got great marketing initiatives out there. We've got a wonderful field access manager team that's focused on pull-through. It's really a team effort out there that's driving the growth of IBSRELA. Operator: Next, we have Roanna Ruiz from Leerink Partners. Roanna Ruiz: A couple for me. One for thinking about IBSRELA. What pushes and pulls could impact your ability to reach the high versus low end of your new guidance? It did sound like you're making great strides with new and repeat prescribers as well. Could you give us a little bit more color like what's resonating there? Michael Raab: Yes. I mean I think the guidance reflects our confidence in what we are doing with all the questions you've heard previously. I think that increased guidance in the range that we've provided is to show you our confidence in what we're going to deliver this year. I think Eric can go into some more of the specifics around it, but that should speak for itself. I think, Roanna, you've noticed over the years that we've taken a pretty conservative approach in the way that we provide these numbers. What we do is give you numbers that we are confident that we're going to meet. That's been consistently the way we've approached it over the years. Eric Foster: Yes. Like I said earlier, I mean, we're very confident in the strategy we have. If you think a little bit about what I mentioned earlier, we know that there are millions of patients out there that are -- have been on or are on secretagogue. Again, more than 75% of those patients continue to experience symptoms of IBS-C. What they need is something different. We know that this is a multifactorial disease. They need something that potentially offers a different mechanism with a proven safety and efficacy profile. I mentioned the poster at the American College of Gastroenterology that was just presented showing that more than 85% of the patients out there were satisfied with IBSRELA. We have a great opportunity out there to address a high unmet need in this patient population, and we continue to be confident with the strategy. Roanna Ruiz: One question on 531. It did sound like it's just the beginning of building the pipeline. I was curious if there are any other targets or molecules that you're interested in or would consider? Is external BD also an option? Michael Raab: Well, yes, I mean, to the second part first is, as you know, just under 2 years ago, we brought in Mike Kelleher to lead our corporate development efforts. He and his team are always looking and speaking to opportunities that are out there. We will pull the trigger on things when the right thing is there for us. As I said in my opening comments, we're now at a place where we could look at these assets that we had sitting on the shelf because they're really good. Are there other ones? There may be, but our focus at this point for our internal pipeline generated pipeline is 531. Operator: Our next question comes from Dennis Ding of Jefferies. Dennis Ding: Congrats on the quarter. Two questions for me. One on IBSRELA. You guys are running trials in peds less than 18 years old. Can you help frame the size of that market versus the adults and if that is already accounted for in your $1 billion peak sales guidance? Also maybe comment on the timing of clinical trials to go into CIC? Then number two, on XPHOZAH, congrats on the progress there, but there's still quite a large gap between where XPHOZAH is now and the $750 million you guys are guiding. What are things that are within your control to really accelerate that? Michael Raab: Sure. Thanks for the question, Dennis. From the top, if you look at where we are with IBSRELA and where -- sorry, the pediatric trials were a commitment that you have to make to the agency. I think if you look at the total prescriptions that are out there for IBS-C, it includes those. The market that we're all penetrating is relatively small, but any IBS-C drug, those are included in the prescriptions there. We've not specified whether or not we are counting on that to get to the $1 billion because we're just looking at the total market as the market that we're penetrating. For CIC, we've not spoken of doing anything there. It's obviously, as I spoke in your last meeting in London, that is obviously one that we would consider as we have the ability to pay for it. Those are the sorts of things we will look at. As it relates to XPHOZAH, I think as we've talked about this, it's important to note that when we ended last year, we lost 60% of the revenue that was being generated by XPHOZAH in an incredibly tumultuous market for these patients that are depending upon effective phosphorus management to survive in many cases. That turmoil is real. It's significant. We just put numbers on the board that are as good, if not better, even having lost that 60% of the revenue for the entire portfolio. The strength of this team and what we've done, I think, is what you see in the results that we're speaking of today. We have great confidence in our ability to get to $750 million. I will leave it at that because we've spoken about the specifics numerous times of it's 1/3 of the TAM that we now have of 220,000 patients is what is required to $750 million. If the need is as extensive and significant as we believe it is and demonstrated both by the paying and the patient assistance program patients, the turmoil of the TDAPA period is turmoil. Once you get past that, likely that's going to change. Operator: Laura Chico from Wedbush Securities has our next question. Thomas: This is Thomas on for Laura Chico. Just one from us. You discussed gross to net for 3Q earlier for XPHOZAH. Any thoughts on gross to net dynamics heading into 2026? How might this compare to 2025 levels? Justin Renz: Thank you, Thomas. Our gross to net was approximately 29% for Q3, and we do think that will be somewhat consistent going to Q4. We're not in a position yet to discuss specifics around 2026. Look for us to update that in early 2026. Operator: Next, we have Matthew Caufield from H.C. Wainwright. Matthew Caufield: When we think about XPHOZAH and getting those prescriptions filled, should these essentially be primarily filled through ArdelyxAssist and the patient's pharmacy at this stage? Or are there scenarios where the drug could come through the dialysis center experience despite being external to the bundle, for example? Just trying to kind of best understand the patient journey there to access and growth. Eric Foster: Yes, sure. That's an important question, I think, to really understand how we can make sure that these patients have access. As we said earlier, we remain committed to access for these patients regardless of who the payer is. On the non-Medicare side, it's covered through their prescription benefit. ArdelyxAssist can adjudicate it and they can also work with specialty pharmacies to deliver to the patient. On the Medicare side, ArdelyxAssist can fulfill that through our patient assistance program. Because we did not file for TDAPA, the dialysis organizations are not buying and billing it. Important to note though, what we've seen is actually increased access when we think about patients, whether they're Medicare or non-Medicare, so more patients today have access to XPHOZAH than they ever have before. I think it's important to note that we've got a path to access for these patients, and we're continuing to be able to address the unmet need for them. Operator: Our next question comes from Joseph Thome of TD Cowen. Joseph Thome: Congrats on the progress, and let me add my best of luck to Justin. Maybe the first one on the new program. I guess anything that you can share on the profile of this drug, whether it's extended release? Or is there a way to, I guess, improve tolerability? Obviously, the NHE3 mechanism does result in some diarrhea. I guess, is that able to be modulated given that it's kind of... Michael Raab: Joe, great question. I mean those are obviously the things that you begin to explore in the preclinical work that you're doing. I mean we have obviously years and years of experience and knowledge around the translation of what you see in animal models all the way through to human experience. Obviously, that's one thing that we would look at. The benefit that we together have learned about what NHE3 inhibition does, right, it's blocking sodium. Fundamentally, that's what it does. Then it's tightening the junctions, gosh, and that's where it works in phosphorus. That was not predictable. Geez, it also has a benefit in pain, which one would never assume that, that was the case until you start the IBS-C work. Those 3 different things that this molecule, NHE3 inhibition does, does open a vista for lots of things to consider, contemplate exactly around the lines of what you questioned, but time will tell. It is early, early in the process, but we were excited to announce its development. Joseph Thome: Yes, and a little bit related to that. I guess, maybe can you talk a little bit about why now is the right time? I guess, did you see anything preclinically that you can share that kind of triggered the announcement or anything in the field, I guess? Or is it just kind of continued progress and now I guess anything? Michael Raab: Well, I kind of talked about it in a couple of previous questions is you look at the balance sheet that we have, we've not raised any money for years, and it's on the basis of what we're driving with IBSRELA and XPHOZAH that the balance sheet is as strong as it is. We had a very short dip after the end of -- or the start of the TDAPA period, and we're back with a balance that is what was prior to the start of the TDAPA period. That's an incredible accomplishment. That then said to me and the team, we can begin to afford to explore other things that we might be able to do to build this company. 531 was an obvious choice because it was something we knew pretty well, and we began to pursue that. I think as you heard in my comments, I think this demonstrates that we've been extremely good and thoughtful stewards of the capital that we have. I think this is an example of how we plan on deploying. Operator: Our next question comes from Julian Harrison of BTIG. Julian Harrison: It's great to see another beat and raise for IBSRELA. You're at more than 70% year-over-year growth at the lower end of the new range for 2025. I guess looking to next year and beyond, I'm curious to what extent you think this cadence of growth can persist? Then looking towards the intellectual property estate, are you at a point now where you can talk more about how you're exploring extending exclusivity potentially beyond composition of matter? Are there any pending patent applications that you would highlight as potentially being Orange Book eligible? Michael Raab: Yes, great questions. It is exactly what we are doing and should be doing to protect the franchise that we're building. Yes, of course, those things are all the things that we will contemplate and talk about when we can. I think what's important about your question is the growth that you see as you described for IBSRELA, the potential is spectacular, right? If you look at the number of scripts that we have compared to the market that's out there and the growth that is being driven by the need that's out there for the patients by Linzess and others, that is to our benefit over time. Our belief is that reaching that $1 billion is something that's well within our control or we wouldn't have said that we expect it to be there. I think as we gain and continue to gain more perspectives and guidance, we can provide more guidance on when and how that is achieved. We're excited about the future for IBSRELA and what we're doing now, certainly with IBS-C and hyperphosphatemia with XPHOZAH. This mechanism, these drugs are making a huge difference. It's the work that Eric and his team are doing to show that conviction in physicians and getting those prescriptions pulled through. Operator: Next, we have Aydin Huseynov of Ladenburg Thalmann. Aydin Huseynov: Congrats with a great commercial quarter. Regarding business development activities, just curious on the kind of assets you're looking for? Is it more like a GI space? Or is it more like an early-stage Phase I preclinical? Or would you prefer something like Phase III plug and play or complementary to your commercial portfolio? Michael Raab: The answer is yes to all of that at the right time, right? We're going to take some baby steps as we can begin to afford to do more. The natural thing is to look at therapeutic areas and the close adjacencies of the therapeutic areas that we're currently in. Like any biotech company, we're going to be opportunistic as something demonstrates itself. Me too is not very interesting. Even me better, not very interesting. I think this very special and unique way that we approach commercialization is a really important driver of the considerations that we have for things to bring in. That's the lens from which we look at things. I think in the coming year, for sure, you're going to be hearing much more of that as we get our legs under us and look at opportunities that we are confident that we will bring in. Aydin Huseynov: One more question, general question for me. You're making almost $400 million in annualized sales. You've got the -- you give about $75 billion long-term guidance and yet you're trading on $1.2 billion market cap. What do you think the market is underestimating, the long-term guidance itself or the future after 2033? Just curious on your thoughts on this. Michael Raab: I'll be completely transparent, and we've talked about this before. I think there's an over-index on XPHOZAH, not giving this engine that we have at IBSRELA that do that it's -- the attention that it's due. What you see in terms of the growth and the benefit that it provides us in profit and operating cash for us to reinvest in the business, whether it is to expand our capacity capabilities on the commercial side, we will be thoughtful and measured in that. Also, as we look at other things to bring in, it is something that we are looking forward to as we are on the cusp of generating that kind of free cash to build this company even further. I think we don't get that credit. I think if you look at many of the buy and the sell side, they are expecting at LOE, we may or may not make $1 billion. There's no consistency even in the way that people look at this product or products and whether or not they're giving them their due in the modeling that they do. That's our job, right, to also work with each of you to work on that. I think it's a bunch of those things tell you the truth that I hope by now, we're beginning to get out of the penalty box of we're show me story. I think we've shown everyone again and again and again a meet and beat and that this is a substantive, big and important market, certainly for IBSRELA. As I said in my opening remarks, XPHOZAH is a contributor to that portfolio and will only continue to provide better contribution over time. Operator: Next, we have Prakhar Agrawal of Cantor Fitzgerald. Daz Patel: This is Daz on for Prakhar. Could you comment on any potential tailwinds or headwinds in 2026 that we should be aware of for IBSRELA and XPHOZ? Michael Raab: I can't think of any. I think we're looking forward to getting out of the apices of what the bundle is doing for these patients and being able to help them to the degree that we believe we can and should. The turmoil is significant. I don't think -- I think that's not a headwind. I think that's a tailwind that ultimately is going to help us as we emerge from '26 with this remarkable product. I think there are only tailwinds for both of them, not only because I'm an optimist, but I think everything that we're sharing with you today says that we've got the wind in our sails that are going to help us propel us to, at a minimum, the guidance that we've given for peak for both. Operator: That concludes our question-and-answer session. With that, I'll turn the program back over to our host for any closing comments. Michael Raab: Thank you, everyone, for joining the call today. We entered the fourth quarter with confidence in our strategy and enthusiasm for the future. We have the medicines, the focus on execution and the team in place to deliver on our vision of a healthier tomorrow for patients. I'd like to recognize our employees, the people behind every number that we share today. Their hard work, ingenuity and resilience continue to drive our success. Together, Team Ardelyx is determined to make a difference. I'd like to end by thanking our shareholders for your continued trust and support. We remain focused on driving sustainable growth and creating long-term value for you. With that, we can close the call. Thank you.
Operator: " Phillip Yeager: " Kevin Beth: " Scott Group: " Wolfe Research Bascome Majors: " Susquehanna Financial Group Unknown Analyst: " J. Bruce Chan: " Stifel, Nicolaus & Company Jonathan Chappell: " Evercore ISI Institutional Equities Brian Ossenbeck: " JPMorgan Chase & Co Brady Lierz: " Stephens Inc. Daniel Moore: " Robert W. Baird & Co. Elliot Alper: " TD Cowen Michael Triano: " UBS Investment Bank Brandon Oglenski: " Barclays Bank PLC Operator: Hello, and welcome to the Hub Group Third Quarter 2025 Earnings Conference Call. Phil Yeager, Hub's President, Chief Executive Officer and Vice Chairman; and Kevin Beth, Chief Financial Officer and Treasurer, are joining the call. [Operator Instructions] Statements made on this call and in other reference documents on our website that are not historical facts are forward-looking statements. These forward-looking statements are not guarantees of future performance and involve risks, uncertainties and other factors that might cause the actual performance of Hub Group to differ materially from those expressed or implied by this discussion and therefore, should be viewed with caution. Further information on the risks that may affect Hub Group's business is included in the filings with the SEC, which are on our website. In addition, on today's call, non-GAAP financial measures will be used. Reconciliations between GAAP and non-GAAP financial measures are included in our earnings release and quarterly earnings presentation. As a reminder, this conference is being recorded. It is now my pleasure to turn the call over to your host, Phil Yeager. You may now begin. Phillip Yeager: Good afternoon, and thank you for joining Hub Group's third quarter earnings call. Joining me today is Kevin Beth, our Chief Financial Officer, and Garrett Holland, our Senior Vice President of Investor Relations. Before we begin our review of the current market and Hub Group's performance, I wanted to thank all of our team members across North America for their constant effort and focus on delivering for our customers and organizations in this evolving environment. I'd like to begin by discussing near-term market conditions and our current viewpoint on supply and demand dynamics. International shipping volume was pulled forward in the third quarter, but we did not see that inventory materially begin to impact domestic shipping until following the Labor Day holiday. This has led to a delayed West Coast peak season from what we originally anticipated. Strong West Coast shipping demand in September continued through October, and our customers are indicating that will be maintained into November, which is much closer to typical seasonality. We believe that the recently established regulatory requirements in our industry will be a positive catalyst to balance the supply of capacity and with active enforcement and demand strength should lead to improving market conditions over time. These factors, along with our investments in our intermodal business and the prospects of a Transcontinental Rail merger are creating a more positive framework for 2026 bid season and beyond. As we referenced in our call last quarter, we are excited about the opportunities that a potential merger between our primary rail partners presents to drive increased intermodal conversion in shorter-haul lanes while growing share gain opportunities due to reduced transit times and improved service performance. These improvements would enhance asset utilization and in aggregate, reduce overall costs, leading to significant opportunities for growth. In the current market, rail services remain strong, and we are excited about the new lanes we are offering our customers in conjunction with our rail partners. In particular, the launch of a new integrated service in Louisville has led to conversion of existing volumes running less efficiently over Chicago and new customer wins in a short time frame. We believe we are well-positioned to drive growth in the months ahead as bid season kicks off and over time, as the merger process progresses. We have remained focused on our strategic priorities and executed well in the third quarter. We closed on the acquisition of Marten Transport's Intermodal division, adding scale to a fast-growing and higher-margin segment of our Intermodal business. We also closed on the acquisition of SITH LLC, adding additional full-service locations and scale in Final Mile. We completed these while returning capital to shareholders, executing on our cost reduction program and maintaining excellent service for our customers. In ITS, we delivered strong results with revenue that was slightly up and operating margins that improved 20 basis points year-over-year due to strength in Intermodal, which was offset by declines in Dedicated. We performed well in Intermodal with slightly improving volumes following double-digit growth in the third quarter last year as we are providing an excellent value proposition with our rail partners. As mentioned, peak volumes were not recognized in the quarter until September and have continued into the fourth quarter despite a pull forward of inventory. Transcon volumes declined 1%, Local West declined 2%, Local East declined 12%, while we grew Mexico nearly 300% and our refrigerated business 55% in the quarter. Revenue per load increased 2% due to improved mix, peak season surcharges and more balanced pricing. We have also reduced costs in our network through lower linehaul costs, improving our in-sourced trade percentage by nearly 700 basis points and decreasing our maintenance and repair costs through higher in-sourcing levels. These improvements were offset by headwinds and repositioning costs to support peak demand at the end of the quarter and higher insurance costs. Overall, we are pleased with the momentum in our Intermodal business and the investments we are making to deliver growth. In Dedicated, higher volumes and revenue per tractor per day with core customers was not able to offset lost sites, impacting both revenue and profitability. We reduced equipment, maintenance, insurance and third-party carrier costs while onboarding new business in the quarter, which helped to balance revenue headwinds. We are actively reallocating assets in preparation for growth with new and existing customers and believe that our high-end service capabilities, geographic density and dynamic model position us well for growth in the current market and the shifts in capacity occur. In the logistics segment, revenue declined 13% year-over-year, but we were able to improve operating margins by 10 basis points as our cost containment initiatives and performance in Final Mile and managed transportation helped to offset headwinds in brokerage. Last quarter, we announced significant onboardings in our Final Mile business totaling $150 million in annual revenue. Those onboardings are taking place now, and we are ramping volumes consistent with our expectations. The timing of the start-ups was delayed, but we are excited with the growth we are having with our customers as well as the integration of our most recent acquisition. These onboardings are helping to offset softness in our legacy Final Mile customers and position us well for strong growth in 2026. In CFS, we are executing on in-sourcing space in our remaining third-party locations with a focus on maximizing our space utilization, which improved by 1,400 basis points year-over-year while delivering improved site productivity. The integration will be completed by the end of the first quarter of 2026 and along with new onboardings we brought on in September and have scheduled in the fourth quarter, will help drive further improvements in our margins. In brokerage, we continue to face headwinds with soft demand and limited spot market activity. We executed on a restructuring of the business during the quarter, which reduced costs and enhanced productivity by 7% year-over-year, while focusing our team on higher profitability areas to serve our clients. Volumes declined 13% and revenue per load was down 5% in the quarter. However, we believe the actions we are taking to right-size our business and focus on revenue quality will position us for success in the future. Managed Transportation has performed exceedingly well, and we have new onboardings we recently signed, which will help deliver further growth. Our productivity has improved over 50% year-over-year, enhancing our margins due to our investments in automation and technology. We are excited about the momentum we have in this business due to the savings and visibility enhancements we are delivering to our customers. We are focused on controlling what we can control in this dynamic environment. We are reducing costs while investing in our business to deliver results in the near and long-term through our scale and integrated product offering. We are excited about the performance that our team is delivering and believe we are well positioned as an organization to support our customers and deliver for our shareholders. With that, I will hand it over to Kevin to discuss our financial performance. Kevin Beth: Thank you, Phil. I will walk through our financial results before commenting on our outlook. Our reported revenue for the third quarter was $934 million. Revenue decreased by 5% compared to last year but increased 3% sequentially. ITS revenue was $561 million, which is slightly greater than prior year's revenue of $560 million as steady Intermodal volume and 2% growth in revenue per load was partially offset by lower Dedicated revenue in the quarter. Additionally, lower fuel revenue of approximately $8 million negatively impacted the top line. The logistics segment revenue was $402 million compared to $461 million in the prior year due to lower volume and revenue per load in our brokerage business, exiting of unprofitable business and select customer attrition in CSS and sub-seasonal demand in Managed Transportation and Final Mile businesses. Lower fuel revenue of $6 million in the quarter also contributed to the decrease. Moving down the P&L. For the quarter, purchase transportation and warehousing costs were $684 million, a decrease of $56 million from prior year due to strong cost controls as well as lower rail and warehouse expenses. This resulted in a 180-basis point improvement on a percent of revenue basis when compared to Q3 of 2024. Salaries and benefit expenses of $143 million were stable compared to the prior year as the impact from the EASO transaction offset expense initiatives. Total legacy headcount, which excludes acquisition employees, drivers and warehouse employees declined 5% from the prior year as we continue to manage headcount across the organization. Depreciation and amortization decreased $1 million over Q3 2024 due to our updated useful life assumptions. Insurance and claims expense were largely unchanged from prior year as we continue to realize benefits from our safety focus and training programs. Our general and administration expenses declined by $3 million or 9% year-over-year. Altogether, our adjusted operating income decreased 4% year-over-year, but our adjusted operating income margin was 4.4% for the quarter and increased 10 basis points over the prior year. The IPS quarterly adjusted operating margin was 2.9%, a 20-basis point improvement over prior year. The third quarter logistics adjusted operating margin increased 10 basis points year-over-year at 6.1% despite the challenging brokerage environment and demand headwinds. Adjusted EBITDA was $88 million in the third quarter. Overall, Hub earned adjusted EPS of $0.49 in the third quarter, down from adjusted EPS of $0.52 in Q3 2024. Now turning to our cash flow. Cash flow from operations for the first 9 months of 2025 was $160 million. Third quarter capital expenditures totaled $9 million, with spending weighted towards technology and warehouse equipment investments. Our balance sheet and financial position remains strong. Through the third quarter, we returned $36 million to shareholders through dividends and stock repurchases. We also closed on the acquisitions of Marten Intermodal assets and West Coast Final Mile provider, SIS LLC during the quarter. Net debt was $136 million, which is 0.4x adjusted EBITDA, below our stated net debt-to-EBITDA range of 0.75x to 1.25x and includes the Marten transaction. Adjusted EBITDA less CapEx was $79 million in the third quarter. We are pleased with our adjusted cash EPS of $0.60. The spread between adjusted EPS and adjusted cash EPS was $0.11 for the quarter, and we ended the quarter with $147 million of cash and restricted cash. Turning to our 2025 guidance. We expect full year EPS in the range of $1.80 to $1.90 and revenue of $3.6 billion to $3.7 billion for the full year. We project an effective tax rate for the year of approximately 24.5%. We also expect capital expenditures to be less than $50 million for the year. Recall, the upper end of our prior revenue and EPS guidance ranges reflected benefits from a healthy peak season and related surcharges, along with the onboarding of sizable Final Mile business awards. Outside of quarter end activity, peak season has been muted to date rather than a stronger return to seasonality. Execution for the Final Mile awards has also been solid but start dates for some markets have shifted into the fourth and first quarters. The team continues to realize targeted cost savings, but benefits have been offset to a degree by revenue pressure. Given muted demand and continued low visibility, we tempered expectations for the fourth quarter and narrowed our outlook accordingly. This outlook implies sequentially lower adjusted EPS during the fourth quarter at the midpoint. Realizing the upper end of our revenue and EPS guidance range would reflect a strong finish to peak season. The path to the lower end of the current guidance range would reflect further weakness in freight market activity. For the ICS segment, the Intermodal business continues to cycle challenging volume growth comparisons from a year ago, but revenue per load trends should continue to slowly improve in the stabilizing pricing environment. Lost sites and customer activity in the competitive one-way market are expected to continue to weigh on Dedicated's performance. For logistics, excluding our brokerage business, during the fourth quarter, we expect further progress onboarding new Final Mile awards, sustained stronger profitability in Managed Transportation and stable CSS results sequentially. For brokerage, we expect volume pressure continues in the near term and weighs on logistics segment profitability. Market optimism to start the third quarter around the stabilizing tariff backdrop and potentially stronger peak season gave way to sustained softer demand across end markets. Nevertheless, the team was able to deliver improving margin performance year-over-year and sequentially for both the ITS and logistics segments. Hub Group is not assuming market conditions quickly change and remains focused on execution. We remain confident in achieving the targeted $50 million of cost savings on a run rate basis by the end of the year and work to continuously improve profitability across business lines. Margin improvement and solid free cash flow through this challenging freight recession underscores the resilience of our operating model. The acquisition of Marten Intermodal also reflects our disciplined approach to capital deployment. Focused growth, cost controls and capital deployment should continue to support performance until the freight market conditions improve. We continue to manage the business for long-term growth, higher returns on capital and resilient free cash flow generation. With that, I'll turn it over to the operator to open the line to any questions. Operator: I would also like to remind participants that this call is being recorded, and a replay will be available on the Hub Group website for 30 days. [Operator Instructions] Our first question is from Scott Group of Wolfe Research. Scott Group: So I think your call last quarter was like right after the UP-Norfolk announcement. And so, 3 months later, I'm guessing you've had some time to talk with customers. We're seeing some share shifts; IMC is moving some stuff around from one rail to another. I'm curious what you're hearing from customers. Do you think as you approach 2026 bid season, is there an opportunity for you guys to take share ahead of the merger closing, just sort of getting on to this combined UP-Norfolk early? Just overall, what you're hearing from customers, how you think you're positioned? Phillip Yeager: Yes. Great. Thanks, Scott. This is Phil. Yes, I think you're exactly right. We do look at some of the shifts that are occurring as an opportunity. We already have a great service product that we're delivering with Norfolk in particular, as well as GP. But with that capacity shift, there's now capacity available for us to sell into. As we enter bid season first and second quarter, we're going to have in bid over 80% of our intermodal network, and we think we have a great value proposition to go out and compete and win. I've been out visiting with a lot of customers. There is an extremely high level of engagement around this merger process. I think our customers see it as an opportunity not only to engage on new service, but a more resilient service as well as the market is likely going to be tightening given hopefully a positive demand backdrop. So, I think the announcement of partnerships and the new lanes from Louisville are a great positive for us as well and things that we can engage with our customers on. But I would tell you, the feedback is overwhelmingly positive. We're excited about it and think it positions us well for this upcoming bid season. Scott Group: Can you give an update on sort of volume trends throughout Q3, what you're seeing so far in Q4? Phillip Yeager: Yes, sure. Yes. So, we did see a little bit of a later peak than we had originally anticipated just given that air pocket and then the surge of incoming international demand. We expected that to flow through to the domestic side a little bit sooner than it did. So, July was flat. August was down 5%. September was up 6% and then October month-to-date is up 3%. And I would tell you the last couple of weeks here in October have been really strong. We're excited to see that momentum in discussions with customers. We're anticipating some of that demand will likely continue through November, leading up to the Thanksgiving holiday. I think it gets a little unclear after that. Typical seasonality would tell you things start to slow down at that point. But given the diversification we've done in our business model as a whole, that's really when we start to see our Final Mile business and e-commerce businesses start to ramp up, which can offset some of those headwinds. Kevin Beth: And Scott, this is Kevin. I just like to point out, there is a business day difference where August had 1 less business day and September had one more. So those sort of canceled each other out. But we are excited and wanted to point out, we have had 6 consecutive quarters now of intermodal growth. Scott Group: And then just lastly before I pass it on. You guys talk a lot about the free cash flow the business is generating. We've got you doing over $150 million of free cash flow this year. You're well below your leverage target and you bought back like, I don't know, $30 million or so of stock this year. Like why aren't you doing more with the cash you're generating in the balance sheet? Kevin Beth: Yes. So good question, Scott. This is Kevin again. It's our capital allocation plan that we invest in our core business, we look at acquisitions and then we look at our capital allocation and how we get back to our shareholders. We feel that we've done all of those this year. We've had -- our CapEx has been a little muted compared to some prior years as we don't need to add additional containers. But we're still seeing our same $20 million to $25 million of IT enhancements, and our tractor replacement cycle has continued on as well. We spent over $50 million in acquisitions this past quarter with the Marten acquisition and the SITH LLC. And then we're still returning to our shareholders with our dividends, which we had another $7.5 million during this quarter. So, between all of those and the exciting pipeline that we feel we have on an M&A side, we think that we are allocating our cash effectively and think that we're doing the right things for the long-term of the business. Operator: Our next question comes from Bascome Majors of Susquehanna Financial Group. Bascome Majors: Maybe to follow up on Scott's opening question here. If you're successful in using your rail alignment to really grow share next year, what's the time line of when that could really show up in volumes, gross profit, bottom line? Just trying to understand when the opportunity and conversations happen and when the financial benefit, if you're successful, will really show up for us. Phillip Yeager: Sure. Yes. This is Phil. I think if you look at our bid schedule, it's actually gotten pulled forward the last several years. And our anticipation is that this year will be similar, just given some of the unknowns, our customers are trying to make sure they lock in capacity early. We are having really good dialogue with many of our customers as they're kicking off their RFP events. We do think about, call it, 48% or so, which is similar to this year will be bid and effective in the first quarter. And then we see bid and effective, call it, another 38% in the second quarter. So, you're talking about the vast majority of that business being in RFP and being effective in the first half of the year. And so that would be likely the timeline where you'd really start to see that take hold, I would say, call it, the second half of the year. Bascome Majors: And just when you say bid and effective in the quarter, you mean by the end of the quarter? Phillip Yeager: Yes, sir. Bascome Majors: It's actually moving. Phillip Yeager: Yes. The effect of the implementations typically will kind of move throughout a quarter, but the vast majority go in at the end of the quarter and then are effective starting that following quarter. Bascome Majors: And in shorter-term, I mean, the midpoint of your guidance, which you called out, looks for earnings decline in the fourth quarter. Can you walk us through how you feel about seasonality in the first half of next year before this business potentially starts to ramp? Just to kind of level set the starting point for next year or before second half that looks like it could be very strong. Kevin Beth: Sure, Bascome. This is Kevin. We think that we're going back to more of a normalized seasonality, which has been very hard the last couple of years between COVID and tariffs and the pull forward last year on -- related to the East Coast, West Coast port authorities and strikes. So, what we're anticipating is unlike what we saw in '25 with the pull forward in the first quarter is that we would see first quarter be sequentially down from fourth quarter and potentially the weakest quarter of the year. And then you'll see the ramp-up as we hit sort of that peak season in spring for the home improvement companies. And then you have a little lull there at around the holidays, Memorial and 4th of July and then a stronger third quarter leading into the peak season that we're in now. So, a little more normalized. But again, that is something that has been a couple of years since we've seen. Operator: Our next question comes from Richard Harnan with Deutsche Bank. Unknown Analyst: So, gentlemen, we recently heard from one of your key railroad partners discussing some more aggressive competitive dynamics in association with its pending Transcontinental Rail merger. So maybe you can talk specifically about that. Are you noticing more aggressive competition? Is that allowing you to take more opportunity as maybe your rail partners lean into trying to capture more growth? Or is it making it more challenging? That's my first question. Phillip Yeager: Sure. Yes. This is Phil. Yes, I'd say it's definitely an opportunity, right? And you see volume moving off of one of our rail partners. There's certainly a desire and alignment to make sure that we can get that business back moving on their network. And we think we have a very strong value proposition to go deliver on that, both on service and costs. And so, I would tell you there's a great deal of alignment as we enter bid season and feel we're in a good position to go out and compete. Unknown Analyst: And then just could you tell us where we are with respect to like the Marten acquisition? So I think you said Kevin, down earnings in Q4. But I would think that with the Marten acquisition, you're talking about bringing that on and being accretive. So curious how that factors in and if like the volume figures you shared were inclusive of Marten, just like level set where we are in that acquisition. Kevin Beth: Yes. Thanks for the question. Yes. So, Marten, we do expect to be slightly accretive this quarter. They just came on. We closed the deal the last day of the quarter. So, we're seeing that volume today. But right now, as we look ahead, we're still not sure exactly how long peak season is going to last. We do have some late year degradation of margins in both Dedicated and in Intermodal as you're using a lot of fixed cost and not the right amount of volume to utilize all that around the holidays. So that is sort of what standard happens in the ICS segment. And then on the logistics side, we do have -- while we have new business coming on in Final Mile, we do have some start-up costs that is going to pressure that -- those margins as well. So, between those things, right now, that's our best estimate of what we're going to see here in fourth quarter. Operator: Our next question comes from Bruce Chan of Stifel. J. Bruce Chan: Maybe just to start, I want to make sure that I understand the peak comments correctly because you said that it's been stronger in September and you expect some of the strength you've been seeing through October to continue into November, but you're also tempering the midpoint of your guidance on lower peak volumes. So maybe just help me to synthesize that, if you could. Phillip Yeager: Sure. Yes. I think the main thing is follow typical seasonality would tell you around or after the Thanksgiving holiday, intermodal volumes just start to slow down. And I would anticipate a sequential slowdown from October into November leading up to that point. So, it's really just the conclusion of peak that impacts the ITS margins on a sequential basis. From a logistics perspective, the new volume and business wins that we're bringing on both in CFS as well as in the Final Mile business are helping to keep us in a more stable footprint Q3 to Q4, where we are anticipating a similar sort of impact for brokerage, which would soften in the December time frame. Now if we see things continue and November is more robust, that's certainly upside. If it continues like it did last year into December, that's certainly upside, but we were trying to build in what typical seasonality would tell you and obviously, dialogue with our customers around their expectations. But demand has been great in September. I think we did a really nice job. October was also very strong. And so, it's good to see a peak. And I would just also highlight that sets up a more positive framework for discussions as we enter this season as well. Kevin Beth: I would like to just point out, though, last year, fourth quarter, we had $4.5 million of peak season surcharges, and we're not expecting to be anywhere close to that this year. On to the point, that it went all the way through the end of the year and well into January. And really, I think that was the pull forward of the port strike. So, I don't -- we don't see that phenomenon this year. J. Bruce Chan: That's helpful. Maybe just a follow-up on that point. I guess, how are you feeling about your ability to cover any peak repositioning costs here with your surcharges just given that the volume expectations are maybe a little bit in sharper focus. And then if we do see that stronger peak materialize, are you going to have an offsetting impact on the margins? Phillip Yeager: No, no. I think we've done a really good job on our empty repositioning plan. We had some elevated costs in the third quarter, which were more than offset by surcharges, and it would be the same outcome here. And we're pretty diligent on setting those plans, making sure we have clarity with our customers on their expectations and then being in a position to support. So, I wouldn't anticipate repositioning costs have a material impact in a negative way at all. Operator: Our next question comes from Jonathan Chappell of Evercore ISI. Jonathan Chappell: Still, I want to tie a couple of things together here because it may be the most important thing, I think, as we try to transition to '26. You said 48% bid effective 1Q, 38% in 2Q. We have the potential positive tailwinds from the merger and maybe there's some clarity on it by that point, but still probably doesn't close until '27. And then on the other hand, you're kind of talking about potential slowing around the holidays, typical seasonality would have 1Q down on 4Q. So, are you expecting kind of a favorable demand backdrop that could help you with that 48% in 1Q and really kind of set the pace for yields for the rest of the year? Or is there a chance that by the time we have line of sight on a merger, it's kind of the second half of '26, and you really don't see that benefit you until bid season '27? Kevin Beth: Yes. No, I think it's a good question. I think it's obviously a little early for us to be getting into 2026. But I would tell you the level of engagement I'm getting from customers and their desire to really start to take advantage of the service opportunities that could exist now is real. To your point, yes, I think as the integration process takes place is when you're really going to see that take hold. That's going to be when you start to be able to get some of the pricing that is probably more aggressive and takes advantage of those transits as well into place. So yes, do I think it will be much more material as the merger is closed and progresses? Absolutely. But I also think we're having those discussions now and customers are certainly highly engaged. And so, there is upside opportunity in '26. I think you frame that with as well the tightening capacity backdrop likely through the regulatory requirements as well as just lower capital expenditures being below replacement levels. I think consumers getting some help with rate cuts and tax benefits. And then as I look at us more broadly, we've got a great balance sheet, great free cash flow, a ton of new business we're bringing on in Final Mile and managed trans and then the great backdrop that we have of a fantastic intermodal service product and additional cost outs. I think it's a good framework for 2026. Jonathan Chappell: And a super quick follow-up, and I think this was kind of danced around a little bit, but maybe just to speak to it directly. East down 12% you would have thought the East maybe had a little bit of a better comp because of the threat of the East Coast port strikes last year at the end of the third quarter. Is that associated with what's been happening with Norfolk and CSX? Norfolk is your partner. They've directly called out the share shift there. Is that that? Or is it something completely outside of the potential rail merger? Phillip Yeager: No. Yes, I think it's a good question. We do not believe it's associated with anything going on there. I think if you look at our volumes last year, we were up 39%, I believe, in the third quarter in local East last year. We've seen opportunities to generate really strong returns off the West Coast and been allocating capacity there. I think that Eastern market did get more competitive. But if you look at it on a 2-year stack basis, we're still far exceeding market performance. And so, I think our view is we're still doing very well, but had such significant growth last year that we couldn't quite overlap it. Yes. If you look at the 2-year growth in the East, it's 23%. So still very healthy. Operator: Our next question comes from Brian Ossenbeck of JPMorgan. Brian Ossenbeck: Maybe just to be a little more specific on the opportunities. I don't know if you would call the Louisville Lane, an example of something that might be done with the potential merger, but it did sound like that was at least worthy enough to merit the comment here on the call. Is that truckload conversion? Is that related to some of the new services? Can you get a little more detail on that? Kevin Beth: Yes, yes. I mean on Louisville, in particular, there was a business -- we were actually able to dray over Chicago, which is highly inefficient and not that competitive. So, we're able to improve service, improve the cost structure to our customers, and it's led to us converting business that was ramping Chicago, but also get some new business with customers that we weren't accessing before. So that's exciting. As we think about this watershed opportunity where we've really been at a disadvantage historically, just given transit as well as long-haul dray that isn't matched. We think the opportunity in those lanes is somewhere around 2.5 million loads. So, we're pretty excited about that opportunity as we start to structure those services and think we'll have a differentiated service to go to market with. Brian Ossenbeck: So, you would this is like an example of some potential watershed opportunities in the future. I guess, what stops from doing more of these in the near-term before you even get to the potential transaction because it looks like that wasn't a critical factor here, still put this out there? Kevin Beth: Yes, absolutely. I think it's about setting up the single line service, right? And I know there's a focus on creating those partnerships now, but at the same time, being cognizant of the process. So, I think there's certainly opportunities. We're actually in advance of this building out our local drayage network around a lot of those watershed areas. And so that's -- we're trying to make sure we're in a position where as those services are established, we're able to take advantage of them right away. Brian Ossenbeck: Just one other quick one. Can you just talk about the brokerage restructuring? I think you mentioned earlier, Phil, like what was the cost for that? How long is that going to take? And what's the end result or the metrics you're targeting coming out of that? Phillip Yeager: Yes. So, we went through the restructuring in the quarter, really didn't take effect until probably near the end. We really didn't really see -- realize much of the benefits until the end of the quarter. And that's what drove the 7% productivity. It was improvement. So, it was really about focusing our team on higher-value services, making sure that we're productive and focused and putting ourselves in a structure where we can make sure we're going after the highest return revenue quality load. And now that we're in that structure, we're very focused on automating everything we can. We've done a really nice job there, but at the same time, going after these more high-value products to help us differentiate and win. So, I think the productivity enhancement that we highlighted is just the start, and the fourth quarter should be a nice improvement on top of that. Operator: Our next question comes from Brady Lierz of Stephens. Brady Lierz: I wanted to kind of follow up on a question from earlier about uses of cash from here. You have this potential merger between your 2-rail partners that could be approved sometime in the next 18 months or so. Is there any increased investment in containers or the network that you would need to do in '26 or '27 to kind of support that potential growth? Or will that not come until after the merger is approved, if it is? Just how should we think -- or we expect you to balance investing to support that potential for increased growth versus additional M&A or share repurchases over the next 18 months? Kevin Beth: Yes. Great. Thanks for the question, Brady. This is Kevin. So, a couple of things. I'll start with the network and a couple of things that we already have underway that was happening before this. We've been upgrading our actual transportation system on the intermodal side all year, and we expect to be on the new platform full bore all of our transactions by the end of the first quarter here in '26. So that investment has been going on regardless of this. The other thing you may recall, we do have staff containers today. So, with the stack containers, and we believe that we can improve our utilization of those stack containers even before the rail merger, we think that we have 30% to 35% additional capacity already in-house. So, there's no additional container requirements for that. And then in the longer-term, as we see some of this quicker service, that will even enhance our ability to use our current fleet to handle more loads. We are seeing, as Phil mentioned, and are thinking about setting our CapEx for next year regarding tractors and replacements and exactly what our drayage network would look like. So, there are some possibilities there. And then last, like we just did with the Marten transaction, we're certainly open to other potential M&As on any intermodal opportunities that are out there if it makes sense for us. Phillip Yeager: Yes. The only other thing I'd add, I think is the drayage investments are certainly something we're going to be cognizant of and potential buildout of the network, but I don't think that's going to be overly material. But I think our strategy of diversification has certainly benefited the organization and our margins over this prolonged cyclical downturn. And so, as we look at acquisition opportunities at the bottom of that cycle, we think there are good opportunities to keep investing and while making sure that we're positioned to put capital towards the intermodal business as well. Operator: Our next question comes from Daniel Moore of Baird. Daniel Moore: Real quick question. I'm curious, from a capacity standpoint, how much excess capacity in intermodal would you say you have today? It strikes me that UPNS, assuming the proposed transaction is approved and goes through, has a very, very healthy appetite for domestic intermodal growth based on the selling points to the STB. I'm just curious how you think about that opportunity set relative to the capacity you have today? And as you explore M&A opportunities, I'm also curious, as a follow-up, what sort of leverage would you feel comfortable taking on? Phillip Yeager: Thank you. Great questions. Yes. So, I think on the capacity side, if you look at just our stacked containers as they say, it's about 25% of the total fleet. If you then go to -- with just slight utilization improvements that are in line with where we should be operating, that's about another 10% incremental, so 35% capacity. And if we then get reduced transit times, in particular on some of these transcontinental lanes, we think that could be potentially an additional 10% capacity availability. So, you're looking at some significant capacity available for us to absorb growth without having to put additional capital into containers. And I think we're excited about what that could mean for us and the operational leverage that we would have through that. On the acquisition side, I think we've trying to be very targeted, and we try to be very thoughtful in our approach and make sure that it's a good cultural fit, that it aligns with our strategy and that the business is complementary to the organization and is going to be able to be integrated effectively. I think we're currently obviously below our leverage target and -- which is, call it, 1x our net debt-to-EBITDA range. And I think we'd be willing to go up to 2 if we found the right transaction and then be -- make sure that we're in a place where we could delever very quickly once we got to that point. Kevin Beth: Yes. I'd just like to add, so right now, we have net debt of $136 million. As Phil said, we are willing to leverage up. We did in the second quarter, renewed our revolver and increased that by $100 million as we want to be agile. And if a good opportunity comes that we could act fast. I think we're known in the market as a good M&A partner. And so, we want to be able to take advantage of deals that come up. Operator: Our next question comes from Jason Seidl of TD Cowen. Elliot Alper: This is Elliot Alper on for Jason Seidl. Maybe just one question on Final Mile. Can you talk about the new business wins ramping up, why some of those are shifted maybe into the fourth quarter or into next year as well as some more detail on sub seasonality you're seeing in your legacy business? And ultimately, is housing the real kicker for this segment to materially gain traction into 2026? Phillip Yeager: Well, yes, the housing segment coming back to life would be a huge benefit to this business. And we have gotten some really good builder wins with customers. So that's great, and it's good to see the positive signs there. On the ramp, we were displacing existing providers. And I think with customers, they want to be cautious in making sure there's no disruption to their business as those transitions take place. And so really no more complicated than we had aligned on a schedule and just in being cautious and making sure that the transitions go well. They were moved out slightly. As we have onboarded the business and the vast majority has been coming in, in October, we have seen it ramp to what we thought, which is great. Oftentimes, you think that spend -- the award might be much higher than reality. But in these instances, it's really met our expectations, and some exceeded them as we head into Black Friday. So yes, so we're pleased with how that business is performing. We need to go out and execute for our customers, and it will definitely offset some of that softness, as you mentioned, just with the broader housing market. Operator: Our next question comes from the line of Tom Wadewitz of UBS. Michael Triano: This is Mike Triano on for Tom. So, revenue per load in intermodal was up year-over-year in 3Q for, I think, the first time since 1Q of '23. It sounds like mix and surcharges played a factor. But do you have any early thoughts on '26 and where conversations could be starting the year from an intermodal pricing perspective? Kevin Beth: Yes. I think as we're starting bid season, I don't think a ton has changed, right? It's still a competitive environment. Head haul rates, you're able to take rates up. Backhaul rates are still quite competitive. We have a really good service product and value proposition. And I think we're being really targeted with our rail partners on what we want to go after and being explicit with our customers on that. Only other thing I'd just highlight again is that our customers are really engaged in this merger process. And as they're looking at the potential for capacity tightening, they want to think about how can they build resiliency into their supply chain. And we think that working with us and converting business to intermodal is a great way to do that. And at this point, there's still a very good value proposition that's on the table. So yes, so I would say, generally feeling pretty good about where this season is kicking off. Michael Triano: Are customers bringing up the non-domiciled CDL and ELP issue? Like do you think that there's interest to potentially convert more volume to intermodal next year in case truck capacity does tighten. Kevin Beth: Yes, absolutely. I mean I think if you look at it, it's not that it's going to happen overnight, but there is organic exits that are already taking place. You see the CapEx Numbers and Class 8 orders being under replacement levels is something to watch as well. And then you throw the language proficiency, the non-domiciled CDL regulations on top of that, it's incremental and continues to move things along. So once again, it's not overnight, but if demand holds up and the consumer stays resilient and you see this capacity continue to attrit at a faster pace, you could be into more of a tightening cycle, and I think it's certainly in the mind of our customers. Operator: Our next question comes from the line of Ravi Shanker of Morgan Stanley. Unknown Analyst: This is Madison on for Ravi. Just first off, I know there's been a lot of focus on tech and AI, particularly in the logistics business, but also kind of just across the industry. I was wondering if you can speak a little bit about the initiatives you have underway and how they differentiate you versus peers. Phillip Yeager: Yes, sure. So, this is Phil. We have a really good ROI focus and process when we look at investments in technology. Last several years, it's been a focus on establishing the right foundational technologies. And as we've gotten those in place with our businesses, we're then really able to layer in automation. I think this quarter, one that really stands out is our managed transportation business, where you see a 50% improvement in year-over-year productivity. And that's because we enable that team with technology, and they're able to automate tasks and be closer to our customers and take on more through that process. So that's one, I think, great example. Our Final Mile business where we have our call centers is highly automated within our brokerage, we're really focused on our pricing and capacity generation as well as track and trace functions, appointing functions. All those are highly automated processes. And then the last one that I think has really been beneficial to our team here at Hub and just our general productivity is in the communications with our drivers and going in identifying where a lot of those communications and touch points are happening and automating those to put the data and utilize all of our devices to make the right decisions and then having our teams then focus on the exceptions versus touching every single one of those points. So, we believe we have a great road map. It's about getting those foundations in place first and then really attacking those automation opportunities as we can identify them. Unknown Analyst: And then maybe this isn't as much of a dynamic for you guys, but just wondering if you're seeing at all any kind of impact from the government shutdown? Phillip Yeager: No, not at this time, no. I mean we have such a consumer-oriented business. We haven't seen an impact. Operator: Our last question comes from Brandon Oglenski of Barclays. Brandon Oglenski: And Phil, I know you said it's not going to happen overnight, but I think there's a certain Twitter Ranger out there that might disagree every other night. I'm not sure. But I guess maybe along those lines, it looks like -- I mean, your commentary sounded better on the bid season in the next year, and maybe you want to clarify that, but maybe we can finally get traction on pricing and get margins higher for the industry, too, not just your business. But if we roll into next year and it's like another year of very low-rate increases, do we have to start thinking, hey, this is the fourth year and GDP is up? Like what do we do differently as a business to try to secure better profitability, better returns? Phillip Yeager: Yes. No, I completely agree. And I think that's what our mantra here has been focused on controlling what we can control. Let's not worry about the cycle, and that's why we're utilizing our balance sheet to invest in growth. We're focusing on taking costs out and driving productivity. We're focused on growing with our rail partners, bringing on new wins across all of our offerings. I think we are really just going out and executing with the mindset that, yes, we aren't going to get cyclical help. And if we do, then that is upside, and we're ready to take advantage of that. But we're certainly not going to be sitting around hoping that, that is the thing, the catalyst that helps improve earnings. We're taking the actions right now, in my view, to position Hub to perform regardless of what the cycle does next year. Brandon Oglenski: And maybe I'll push this a little bit harder, though, but you did sound maybe a little bit more upbeat on the bid process into next year. Should we take that as maybe potentially better pricing? Phillip Yeager: Yes. Yes, absolutely. I think there's definitely that opportunity. I think we want to see that capacity tighten. We certainly want to get our foundational network established at the front end of bid season. That's important to make sure we keep winning in balanced lanes, and we do see great opportunities in the head haul right now. So yes, I mean, there's certainly that opportunity. We want to make sure we're driving growth but also making sure we're repairing our margins. So as the pricing opportunity is there, we will certainly be attacking it as well. Operator: I would now like to turn the conference back to Phil Yeager for closing remarks. Phillip Yeager: Great. Well, thank you so much for joining our call this evening. We appreciate your time. And as always, Kevin, Garrett and I are available for any questions. Thank you so much, and have a good evening. Operator: Ladies and gentlemen, this concludes today's conference call with Hub Group. Thank you for joining, and you may now disconnect.
Operator: Welcome to the Entegris Third Quarter 2025 Earnings Conference Call. [Operator Instructions] I would now like to turn the conference over to Bill Seymour. Please go ahead. Bill Seymour: Good morning, everyone. Earlier today, we announced the financial results for the third quarter of 2025. Before we begin, I would like to remind listeners that our comments today will include some forward-looking statements. These statements involve a number of risks and uncertainties, and actual results could differ materially from those projected in the forward-looking statements. Additional information regarding these risks and uncertainties is contained in our most recent annual report, subsequent quarterly reports that we file with the SEC. Please refer to the information on the disclaimer slide in the presentation. On this call, we will also refer to non-GAAP financial measures as defined by the SEC and Regulation G. You can find reconciliation tables in today's news release as well as on the IR page of our website at entegris.com. On the call today are Dave Reeder, our CEO; and Linda LaGorga, our CFO. With that, I'll hand the call over to Dave. David Reeder: Thank you, Bill, and good morning. As this is my first earnings call as the CEO of Entegris, I want to begin by expressing how honored and excited I am to lead this exceptional company. Throughout my long career in the semiconductor industry and during nearly 2 years on the Entegris Board, I've developed a deep appreciation for the company's culture, its commitment to innovation and its consistent track record of delivering value to both customers and shareholders. In the 2 months since I started as CEO, I've met with many of our customers around the world in their home country. And during that process, I also visited many of our local manufacturing sites and technology centers, engaging with hundreds of our team members. These interactions have only deepened my conviction in the strength of Entegris, our people and culture, our capabilities and the tremendous opportunities ahead. In my conversations with customers, one message came through loud and clear. Entegris is a trusted, highly engaged and indispensable partner. Our customers rely on us, not only to support their technology road maps and node transitions, but also to help solve complex challenges. To continue earning their trust, we must consistently engage, innovate and execute at the highest level. Starting with our Asia facilities and continuing throughout the U.S., I've had the opportunity to visit many of our manufacturing sites, seeing firsthand the capability and capacity that we've built. Our existing manufacturing base, including our new facilities in Taiwan and Colorado are valuable and strategic assets. Assets that when fully ramped, will enable us to capture more of the demand that we were unable to support during the last industry upturn and better serve our customers. Finally, over the past few months, I've also had the opportunity to meet with many of you, our investors. The feedback has been clear. There's strong appreciation for our business model, our historical outperformance and the compelling opportunities ahead. I've also heard and noted some of the candid feedback regarding growth, capital intensity and leverage, all of which we have plans to address over time and which are reflected in my top initial priorities. I have 3 initial priorities, all based upon my observations over the last 10 weeks. First and most fundamental to our success is customer intimacy. We will continue to support our customers' technology road maps with our deep application expertise, strong organic innovation and accelerated product development. Execution in these areas will continue to translate into winning critical positions of record PORs, which will increase our SAM and accelerate our revenue and content per wafer growth. We're already seeing encouraging momentum in liquid filters, liquid purification, deposition materials like moly and CMP consumables at the most advanced nodes and within the most complicated processes. In addition to these efforts, we are extending our customer engagement model to more customers and more ecosystem partners than ever before. While these efforts are nascent today, we believe they'll help us drive long-term incremental growth. Our second priority is accelerating the qualification and ramp of our new facilities in Taiwan and Colorado. Ramping these sites is critical to meeting future demand and offsetting the margin pressure driven by the cost of these investments, including incremental depreciation and foregone fixed cost leverage. Our Taiwan facility is expected to increase volume in 2026 and our Colorado facility, which has just been put into service, is expected to substantially complete customer product qualifications next year. Exiting this quarter, we will have largely worked through the majority of the significant manufacturing investment cycle that began in 2022. We subsequently expect CapEx to materially decrease on a year-over-year basis. At our current mix, we believe that our existing manufacturing footprint, when fully ramped, will enable us to support meaningfully more revenue with limited incremental investment. Third, we're committed to improving free cash flow. Thanks to our team's efforts, we've already seen excellent progress, delivering record operating cash flow in the third quarter, which Linda will discuss more in her section. Looking forward, operating cash flow improvements in combination with reduced CapEx are expected to enhance free cash flow, enabling us to accelerate debt reduction and reduce leverage. Turning to the third quarter. Third quarter revenue, EBITDA and non-GAAP EPS were all approximately at the midpoint of our guidance ranges, while gross margin percent was roughly 100 bps below guidance, directly driven by the underutilization of our manufacturing assets. Though these assets are underutilized in the current semiconductor environment, I am confident that longer term, our expanded global footprint will enable us to capture share during the next market up cycle, enable peak-to-peak gross margin expansion and enable us to better manage a dynamic international trade environment. With respect to the semi market, Advanced logic continues to show strong growth, largely driven by AI-enabled applications. In mainstream logic, while inventories have normalized, end demand is still mixed and well below prior peak levels. In memory, pricing trends in recent months have firmed with HBM benefiting from the same AI trends as logic, a continuation of strong growth. And more recently, we've seen a notable shift in sentiment regarding 3D NAND. After a prolonged period of weakness, our NAND customers are now expressing renewed optimism. This renewed optimism is fueled by the potential of accelerating AI-driven demand for 3D NAND as the industry shifts from training large language models to inference workloads. From an industry wafer starts and CapEx perspective, trends remain consistent with what they've been all year. Wafer starts are modestly higher this year, led by advanced logic, but other markets, as referenced, have remained muted. From an industry CapEx perspective, WFE continues to grow solidly, but industry facilities-related spending, where Entegris has the most exposure, remains muted, down approximately 10% this year due to slower year-over-year fab construction. These industry trends correlated well with our third quarter performance. Overall, our year-on-year unit-driven revenue grew, led by CMP slurries, pads, cleans and liquid filtration. Notably, liquid filtration achieved record quarterly sales in Q3. Conversely, our CapEx-driven revenue declined high single digits year-on-year in the third quarter, reflecting the slowdown in industry fab construction. This year-over-year slowdown has continued to impact FOUP and fluid handling revenue in our APS division. Looking into next year, AI-driven growth, both advanced logic and memory is expected to remain strong. And despite pockets of optimism for the rest of the semi market, like others, we are prudently taking a wait-and-see approach, diligently managing our costs while operationally and commercially preparing ourselves for the optimism to translate into orders. In closing, I'm truly excited to lead Entegris into its next chapter. Over the past several weeks, I've gained an even deeper appreciation for the unique and indispensable role we play with our customers and across the semiconductor industry. As devices become more complex, our expertise in material science and materials purity becomes increasingly critical, helping customers enhance performance and achieve optimal yields. Because of the uniqueness of our value proposition and the quality of our execution, we expect to significantly grow our content per wafer and outperform the market in the coming years. I look forward to connecting with many of you in the coming weeks and months as we close out 2025. Let me now turn the call over to Linda. Linda? Linda LaGorga: Good morning, and thank you, Dave. Our sales in the third quarter of $807 million were flat year-over-year and up 2% sequentially, in line with guidance. Gross margin on a GAAP basis was 43.5% and 43.6% on a non-GAAP basis in the third quarter, below guidance. The sequential decline in gross margin was primarily driven by the underutilization in our manufacturing facilities, including our new facilities. I want to provide a little more color and clarity on our gross margin. Today, our facilities are underutilized, including our new Taiwan and Colorado facilities, reflecting the current muted industry growth environment and our decision to add new capacity to support our local-for-local strategy. In addition, we have made short-term decisions to lower production volumes at some of our manufacturing sites to reduce inventory to maximize free cash flow. Based on our current visibility and inventory plan, we believe that gross margin has stabilized in the current range and expect it to increase as we continue to normalize production levels. Back to the Q3 P&L. Operating expenses on a GAAP basis were $229 million in Q3. Operating expenses on a non-GAAP basis in Q3 were $181 million. The reduction in our operating expenses in the second half of 2025 reflects our continued focus on cost management. Adjusted EBITDA in Q3 was 27.3% of revenue, in line with our guidance. The GAAP tax rate in Q3 was 2%, and the non-GAAP tax rate was 9%, in line with our guidance. As a reminder, our tax rate was lower in Q3 due to the expiration of a tax reserve. GAAP diluted EPS was $0.46 per share in the third quarter. Non-GAAP EPS was $0.72 per share, in line with guidance. Sales for our Materials Solutions in Q3 were $349 million. Sales were up 1% year-on-year and down 2% sequentially. The modest growth year-on-year was driven primarily by CMP consumables and cleaning chemistries. The sequential sales decline was driven primarily by demand shifts between quarters driven by the evolving trade environment. Adjusted operating margin for MS was 18.9% for the quarter, down both year-over-year and sequentially, driven by lower production volumes and product mix. Sales for Advanced Purity Solutions in Q3 were $461 million, essentially flat year-on-year and up 5% sequentially. The sales increase sequentially was driven by the strength of our liquid filtration business, which had a record quarter in Q3. Adjusted operating margin for APS was 25.9% for the quarter. The year-on-year decline in margin was driven by underutilization of our manufacturing facilities and incremental fixed costs as we ramp Taiwan and Colorado. The sequential increase in margin was driven by sales leverage. Moving on to cash flow. Our free cash flow of $191 million was our highest in 6 years. The significant improvement in cash flow was driven by our team's focus on working capital, most notably reductions of approximately $50 million in our inventory levels in the third quarter. Free cash flow margin was 11% year-to-date. And as expected, this is a significant improvement from our first half of 2025 free cash flow margin. We continue to expect our free cash flow margin to be in the low double digits for the full year of 2025. A quick overview of our capital structure. During the third quarter, we paid down $150 million of the term loan from cash on hand. At quarter end, our gross debt was approximately $3.9 billion, and our net debt was $3.5 billion. Gross leverage was 4.3x and net leverage was 3.9x. From a capital allocation standpoint, our single priority remains paying down our debt and reducing our gross leverage to below 4x. Moving on to our Q4 outlook. We expect our Q4 sales to range from $790 million to $830 million. Gross margin of 43% to 44%, both on a GAAP and non-GAAP basis. GAAP operating expenses of $232 million to $236 million and non-GAAP operating expenses of $184 million to $188 million. We expect EBITDA margin to range from 26.5% to 27.5%. Net interest expense of approximately $47 million. We expect our non-GAAP tax rate to return to a more normalized tax rate of approximately 15% in the fourth quarter. As I mentioned earlier, the increase in Q4 from our lower Q3 tax rate was driven by the expiration of a tax reserve that benefited Q3. GAAP EPS between $0.35 to $0.42 per share and non-GAAP EPS between $0.62 and $0.69 per share. And we expect depreciation of approximately $53 million in Q4. The incremental depreciation is primarily driven by our Colorado facility being placed into service in October. Before I hand the call over to the operator for Q&A, 2026 is our 60th anniversary as a company, and we plan to host an Investor Day on May 11 next year in New York. We will share more details on this in the coming weeks. With that, operator, let's open the line for questions. Operator: [Operator Instructions] Our first question comes from Jim Schneider with Goldman Sachs. James Schneider: Dave, realized you've been part of the Entegris management structure for a little while now as a member of the Board, but I appreciate also the strategic priorities laid out. But maybe you could focus on a couple of differences in terms of maybe one strategic or commercial difference you hope to implement and maybe something operationally that you hope to improve. David Reeder: Jim, it was good to reconnect, and it was good seeing you at SEMICON West. Starting with the first one, from a commercial perspective, we're going to continue to do the good things that Entegris has always done, which is engage directly with the fabs, the foundries, the IDMs as well as the broader ecosystem and help work with them on their technology road maps and bring our innovation in both purity and materials to their technology road maps and capture those plan of records that we've always spoken about. So we will continue those activities. New activities, we're looking to bring the model that we have worked with our largest customers and the most advanced manufacturing technology, that customer engagement model, we're looking to expand that out. We're looking to expand that upstream into the ecosystem partners as well as bring some of those advanced capabilities into the mainstream logic as well. So those are the 2 big differences that we're looking to bring. They're nascent today. We're working on them. We have been working on them for the last 10 weeks. But in terms of what would be different, it would be to focus on the ecosystem partners, both upstream as well as the OEMs and then additionally expand that out into the mainstream logic partners. Operationally, we need to -- we've invested a lot of capital into Rockrimmon more recently, which we plan to open this quarter as well as Southern Taiwan in Kaohsiung, KSP South. And so we need to qualify those facilities, get them fully ramped. We have migrated through a large portion of the qualification process with KSP South. So we're looking to ramp that more meaningfully in volume in 2026 versus '25. And then for Rockrimmon, we're looking to put that facility into production this quarter, complete qualifications largely in '26 and then start to ramp volume towards the end of '26 into '27. Did you have a follow-up, Jim? James Schneider: Yes, please. That was helpful. And then in terms of broadening the customer base in terms of more mainstream, to what -- how far do you intend to take that? And specifically, can you address whether you'd be willing to use price as a lever there, even if it means growing the top line faster at the expense of gross margin percentage? David Reeder: So let me start with the broader ecosystem for just a moment. As you think about the most advanced nodes, one thing that we've learned working with the most advanced manufacturers for semiconductors on the planet is that as you start getting into the sub 5-nanometer technologies, the materials that go into the manufacturing process not only have to be more pure at origination, but they also have to be delivered at point of use in a much more pure way. And so those are 2 areas where we've actually started migrating upstream from the fabs and from the IDMs into the broader ecosystem so that the actual input materials into those process start more pure and then ultimately are pure at point of use with our filtration technology. So that would be an example of moving into the ecosystem. With respect to moving into the mainstream logic, mainstream logic cares deeply about performance and yield, just like the most advanced nodes care about performance and yield. And we've actually learned a lot at the most advanced nodes with respect to how we can continue to deliver yield and performance at the mainstream nodes. So I won't necessarily get into pricing discussions on this call. But what I can tell you is that we have a lot of value to bring not only upstream into the broader ecosystem, but also across the mainstream logic portfolio. Operator: Our next question will come from Tim Arcuri with UBS. Timothy Arcuri: Dave, can you speak to whether the BIS bands, the affiliate band, did that cost you any revenue in September? And how much are you accounting for that in your December guidance? And can you just speak generally, will it -- if it didn't hit you in December, is it going to hit you next year? David Reeder: No, it didn't contribute this quarter. It didn't hit us this quarter, and we're not expecting it to really impact us in 2026. Did you have a follow-up, Tim? Timothy Arcuri: Yes. Yes, I do. So I guess I'm still trying to understand where utilization is across all the sites. I know that you're ramping up the new sites, but I guess I'm sort of a little wondering why you wouldn't just fill those sites up as quickly as you could. And it sounds like you made the short-term decision to lower production. And I don't know if that was in those locations or in other locations. So can you speak to that and just speak to where utilization is across your whole network? David Reeder: Sure. In my prepared commentary, one of the things I included in the script was that we had the capability to significantly increase revenue from current levels with the capacity that we have. I didn't necessarily quantify what significant means, but it certainly means more than $1 billion from these levels. So we have a lot of capacity that we've invested in. Starting in 2022, we've been in a pretty intensive capital investment cycle for manufacturing capacity given that we were unable to really satisfy the demand during the last upturn. We've also added to that with some of our local-for-local manufacturing given some of the decoupling that's occurred geopolitically with trade. And so those 2 things have combined to really create an incredibly strategic manufacturing footprint, but yet one that's underutilized today. So when we think about utilization from here, when we looked at the third quarter specifically, we had the opportunity in the third quarter to really focus on cash from operations, free cash flow. Those are 2 areas that have been highlighted from the investment community, particularly with respect to reducing our leverage. And so we took the opportunity in the third quarter to reduce the inventory, deliver that to the bottom line or the cash line, I should say, with record cash from operations and the highest free cash flow for the last 6 years. We'll continue to kind of balance inventory build with utilization and free cash flow. We'll continue to balance that going forward. And then as we look into 2026, we expect to expand profitability levels from here, increase utilization levels from here. And as we do that, we'll be able to do it with very limited incremental capacity investments. So CapEx will be down in '26 versus '25, and we'll still be able to deliver incremental revenue growth, utilization and profitability. Linda, anything you'd add to that? Linda LaGorga: No. I would just say, Tim, to your point or your question, the decisions on reducing inventory were very selective. And the one thing I would add is we will continue to do that a bit more in Q4, but I don't expect the inventory impact to be as much in Q4 as it was in Q3. Operator: Our next question will come from Melissa Weathers with Deutsche Bank. Melissa Weathers: I wanted to touch on, Dave, some of your commentary on wafer starts and your wait-and-see approach as we go into 2026. It seems like we're pretty -- I mean, hopefully, we're pretty close to the bottom of the cycle, especially in the NAND business. And you guys obviously benefit as soon as utilization start to expand at those fabs. So any incremental color on why you're taking this wait-and-see approach? What are you seeing on wafer starts? And maybe any color on the linearity of orders in the quarter given that it seems like recent weeks have been a lot stronger than the beginning of the quarter. David Reeder: Thanks, Melissa. First, 10 weeks in still. So forgive me if I'm not quite ready to make a definitive call on 2026 yet. And the commentary with respect to wait-and-see approach, obviously, we're preparing internally for multiple scenarios. We're obviously preparing qualifications and capacity for orders so that we can ramp. We're also continuing to work on the innovation that I spoke about earlier. And that stated and referencing some of the commentary really from the script, all of which have been informed over the last 10 weeks. Advanced logic, it will continue to be strong. We expect it to remain strong, really driven by the AI trends that we've seen all year this year as well as last year. Mainstream logic, we believe those inventories have largely normalized. In demand still seems a bit mixed. The recovery, we think, continues, but the pace seems pretty slow at this point. I think you've heard very similar stories from most of the early reporting over the last couple of weeks. HBM, obviously, that remains strong. That's continuing to be driven by AI. Memory in general, I would say, we started seeing some renewed optimism around the time of SEMICON West, you started to see pricing really kind of firm up across all memory DDR as well as NAND. 3D NAND, in particular, there's renewed optimism for really accelerating AI demand, largely on the basis of migrating AI workloads from large language model development to really inference workloads, which, as you know, requires a different type of memory. And so given all of that, what we've positioned the company to do is we've positioned the company to be ready, both with raw materials inventory, work in process, finished goods inventory, though obviously, we're managing that a bit more aggressively for free cash flow. And we've continued to work with our customers on their plans for ramp. I think there was some good news out from the major memory providers or manufacturers, I should say, this week, in fact, over the last couple of days. That news does seem to be a bit more optimistic than things that we've heard 2 months ago when I first joined. But we'll be ready irrespective of the environment. Did you have a follow-up, Melissa? Melissa Weathers: Maybe as my follow-up, just on the December quarter guidance, you're guiding about flattish sequentially on revenues. I was a bit surprised to see that, especially because we have certain gate-all-around and 2-nanometer nodes ramping in high volume in the December quarter. I thought that, that would maybe be an uplift to your MS business, maybe a little bit of the microcontamination control as well. So when it comes to gate-all-around and 2-nanometer, can you help us size how much of a growth driver that could be in December and then maybe into 2026 as well? What is that content uplift when you go to gate-all-around? David Reeder: Great. Let me start maybe at a higher level. The way we thought about fourth quarter let me put it in the context of the way we thought about third. In third quarter, we guided $780 million to $820 million, midpoint of $800 million of revenue, we delivered $807 million. In fourth quarter, we're guiding $790 million of revenue to $830 million of revenue, so midpoint of $810 million. So obviously, we're feeling a bit better going into fourth quarter, given where we are with backlog, where we are in the quarter, where we are with our engagement with customers. We're feeling better in the fourth quarter versus third quarter. But I'd like to remind you that 75% of our business is driven by wafer starts and about 25% of our business is driven by CapEx. And so wafer starts, we have seen kind of continuing to improve, albeit slowly. Yes, AI is doing well, but that's only about 5% of the volume. And so the other kind of 95% of the volume has been very modest in terms of growth. So that's the 75% portion of our business. The 25% portion of our business, which is CapEx, is pretty heavily levered towards fab and facilities construction and build-outs. And that has been down, call it, low teens, very high single digits on a year-over-year basis. That continues to create a little bit of a drag in terms of our top line revenue growth. And so really for the fourth quarter, you saw us kind of give guidance related, one, to the broader market and two, specific to our mix of business. Operator: Our next question comes from John Roberts with Mizuho. John Ezekiel Roberts: In the Material Solutions segment, you talked about the demand shift between quarters. Did the September quarter benefit more from customer inventory build? Or is it the December quarter is going to have more destock that you're anticipating? Or maybe just talk about maybe the month-to-month volatility that you're seeing around this demand shift. Linda LaGorga: Yes, John, I'll go ahead and take that question. When we were referring to the demand shift around Material Solutions, it was more in relation to the Q2, Q3. It's starting to seem like it was a while ago, but as we remember, Q2 there was a lot going on in the trade environment, and it was difficult at that point to know exactly how demand was shifting between that Q2 and Q3. So as you just look at that growth on MS across those quarters, that's what we were referring to. John Ezekiel Roberts: Okay. And then, Dave, I think you expect some product rationalization as part of the requalification of your U.S. produced products into China. Is that -- will that be a material sales drag in 2026? David Reeder: Really, with our sales into China, let me -- maybe it would be helpful if I just kind of outline that broader strategy a bit more fully. We'll be about -- so we'll be greater than 80% local-for-local manufacturing for our Chinese customers by the end of this year. And when I say local for local, I mean that we're satisfying from the region into China without some of the restrictions that you get when it originates from the United States. We expect that number to be greater than 90% in 2026. We don't believe that number will get to 100% just simply because there are small volume, small running products that from a capital perspective, it would not make sense to kind of move some of that production overseas, local-for-local manufacturing. So that -- those types of products will either satisfy through paying a tariff on those products or obviously, we work with our customers to find a different source, neither of which we believe will materially impact our revenue in '26. We believe the vast majority of our products will be local-for-local manufacturing in 2026. And our China market, we've actually been quite pleased with. If you were to look at our China markets, we're up about 8% sequentially. We're up 3.5% year-over-year for the quarter. In fact, Asia in general, if you exclude China, is up 7.5% year-over-year in the third quarter, up 8.5% year-to-date. So we're quite pleased with all of our Asia sales, with all of our Asia teams. And then specific to China, we think we have a very capable team in China that has enabled us to manage a pretty complex environment quite well. And the internal teams continue to execute well with respect to local-for-local manufacturing. Operator: Our next question will come from Elizabeth Sun with Citi. Yiling Sun: I guess first question for Dave. As a follow-up to an earlier question. As we think about the ramp of 2 nanometers going into next year, maybe you could help a little bit or quantify a little bit about your content growth opportunities going into next year from 3 nanometers to 2 nanometers. David Reeder: Sure. Look, I'll start again with -- this is my 10th week in. And so I probably won't give too much commentary on 2026 at this stage. Obviously, we're entering the fourth quarter, I would say, with a bit more optimism from both advanced logic as well as from memory. So I think those are 2 things that we're entering the fourth quarter, and we'll most likely be entering 2026 with. Mainstream will continue to most likely have a muted recovery as it kind of continues to work through its demand cycle. With respect to node transitions, we actually feel quite good about the node transitions. As the manufacturing becomes more complex, you need more products from Entegris, both products with higher purity as well as products that at point of use and at source have to have the same purity as origination. So for liquid filtration, we feel good about our plan of records for advanced logic, photo bulk as well as point of use. We've talked about some of the advanced nodes with respect to memory, particularly 3D NAND with moly and some of the PORs in that space. CMP slurries, we have 2x more plan of record wins at N2 versus N5. So we feel quite good about our wins there at Advanced Logic. We also have some significant growth plan of records in HBM as well for CMP solutions. And then, of course, we just talked about setting a record quarter for liquid filtration. So I think as you think about these node transitions, node transitions will drag higher content per wafer from Entegris. It hits a lot of the core assets of the company. So as that becomes a larger portion of total volume, then you would expect that portion of our business to grow accordingly. I think the only caveat I would add to this perhaps would be just keep in mind that the advanced nodes still represent a very small amount of total wafers. You're talking about AI-driven wafers of something like 5% of the total wafers that will be started in 2025. And so while we're excited about the node transitions and we're excited about the content that it pulls from Entegris as we transition through these nodes, they still today represent a small portion of total wafer starts. Did you have a follow-up? Yiling Sun: Yes, please. So as a follow-up for Linda, for the KSP and Colorado fabs, is there any incremental headwind on gross margin? Are you expecting with the two are still ramping? Linda LaGorga: Yes. So overall, with Taiwan and Rockrimmon, again, just stepping back to -- these are amazing facilities for us, very strategic assets, really critical to our local for local. To your question, Elizabeth, we did put Rockrimmon into service in October. And in our Q4 guide, you do see that incremental depreciation. The way I think about it going forward, you will see depreciation in 2026 for the full year. But I'd frame it like this, the Colorado facility is smaller than the Taiwan facility and that incremental depreciation, I view as very manageable. Really right now, going back, as we said, all of our facilities are underutilized. As the volumes ramp across our facilities, we're going to see that benefit to gross margin for the company. Operator: Our next question will come from Bhavesh Lodaya with BMO Capital Markets. Bhavesh Lodaya: Maybe following up on the capacity utilization question, just one more angle to it. I appreciate that CapEx is moving lower from here, and you have also moved some capacity or some production across regions. As you look at your global footprint today, do you see opportunities to perhaps reduce some capacity, increase utilization at the newer plants? Or do you see yourselves as a rightsized and just waiting for volumes to grow from here? David Reeder: Bhavesh, it's David. I think it really depends on rate and pace of ramp from here. We have a lot of strategic assets now from a manufacturing perspective. We believe that we're well positioned with some additional qualifications to satisfy kind of local for local in region based upon where the demand is located, we can source from local production. We also believe that we have ample capacity to capture demand in an up cycle, which would generate significantly more revenue from here with very limited incremental additional manufacturing CapEx. So we feel good about all of those things. Would we rationalize our manufacturing footprint at this stage? I think I would just take a step back, I would say, well, what's the rate and pace of industry growth from here? And I think we'll look at that rate and pace and then make real-time decisions based upon what's happening in the broader semiconductor market. Did you have a follow-up, Bhavesh? Bhavesh Lodaya: Yes. And maybe a question around your priorities as you look forward to capital allocation. Clearly, leverage reduction is top of mind here. Lower CapEx should help with that. But after that is achieved, how do you see capital allocation for Entegris going ahead? David Reeder: Sure. It's probably worth just commenting again on the big priorities. So the big priorities, again, kind of 10 weeks in and informed by being on the Board for a couple of years as well as 10 weeks at the company. I would start with the customer. It all starts with the customer and technology in semiconductors, as you know. So it starts with the customer and capturing those node transitions and those technology road maps and having the innovation to be relevant in the industry, all areas where the company has excelled. And what we want to do is we want to take that now and we want to expand it out to more of the semiconductor market than perhaps we focused on in the past. So I would start with customers. From an operations perspective, obviously, we've got a very large and strategic manufacturing footprint. And so now it's the blocking and tackling that you expect from operations, which is the qualification and the efficient production site by site such that we can squeeze the most out of our manufacturing assets. And we believe that we can significantly increase revenue with limited incremental CapEx. So that's why you'll see that CapEx come down on a year-over-year basis. And then finally, it's using that good customer intimacy with excellent operational focus that will result in more of cash from operations and free cash flow that then is necessary and required for us to reduce our leverage. So that's kind of the high-level framework from a priority perspective. Now to get to the basis of your question is our near-term priority for capital allocation is to continue to pay down debt. You saw us in the third quarter, we were able to generate meaningful free cash flow. We paid down the debt an incremental $150 million in the third quarter. We expect to generate more free cash flow in the fourth quarter, use that free cash flow subsequently to then reduce the debt load further. That will be the near-term focus will be to reduce our leverage. Obviously, once we get to our leverage to a place that's less than 3x, and I would prefer closer to 2 than 3, then we'll be able to start looking at other perhaps more interesting and strategic capital allocation strategies. And I'll just save that kind of commentary perhaps for Capital Markets Day in the second quarter that Linda mentioned as well as for conversations in the future. Operator: Our next question will come from Chris Parkinson with Wolfe Research. Christopher Parkinson: Could we just dig in a little bit more into what you're seeing in APS and just how we should -- I understand you don't want to talk too much about 2026. But just in terms of the trends in the second half, have they been surprising to you, better or worse? And how do you see things through at least the balance of the year? David Reeder: Specific to APS Obviously, we're seeing good trends in liquid filtration. We commented that we had a record quarter in the third quarter for liquid filtration. That's driven from some of the ecosystem that I spoke about earlier, needing higher purity as well as from direct engagement with some of the most advanced manufacturers. And we're looking to kind of extend some of those learnings to the broader market. So all of those comments kind of fit and tie together with what we saw in the third quarter. Fluid management in FOUPs, those are a bit more CapEx driven, as you know. So they've been challenged with respect to when you see facilities and fab build-outs on a year-over-year basis, a number of something like high single digit, low teens depending on which service you're looking at. Obviously, that CapEx-related portion of our business, fluid management and FOUPs has been impacted by that. It's been impacted by that all year. It was impacted by it in the third quarter. We expect it to be impacted and our guidance includes the fact that it would be impacted continuing into the fourth quarter. We'll see what happens with that trend in 2026. The good news is that the base has come down in '25, and then we'll see how it develops further into 2026. I think that's probably the best high-level color I can give you for APS. Did you have a follow-up, Chris? Christopher Parkinson: Yes. Just in your initial conversations with shareholders, and obviously, I'm sure you already had some familiarity. But just what was the most surprising thing that you heard in terms of broad-based feedback from the position you were in to the one you're in now in terms of was there anything surprising? Is there anything you thought that perhaps the organization needs to do a little bit better in terms of communication? Just -- what was that -- you mentioned some blunt feedback. I'd love it if you could expand on that. David Reeder: Yes. I think when I spoke to shareholders, and I had the opportunity to meet with shareholders on 4 different occasions in the last 10 weeks as a member of the company, the feedback from shareholders were really related to the growth, the profitability and the leverage. I think those were the -- and I know I'm kind of grouping those into high-level categories. But those were the 3 categories that almost all of the commentary fit in. There was a lot of feedback with respect to how long will it take you to generate more free cash flow to get through the investment cycle to help reduce this leverage. I think that was probably the category that had the most commentary given the understanding of the current state of the semiconductor market. But I wouldn't discount the commentary on growth. So as you think about those as direct feedback from investors delivered in multiple forums, and then you look at from a company perspective, what can we do to kind of address all 3 of those. The growth perspective or the growth category, I should say, that really starts with the customer. It starts with the customers that we tend to spend the most time with historically, which are the most advanced manufacturing customers. And then what we want to do is we want to extend that further up into the ecosystem. These are the suppliers to those customers. And then we also want to extend more of those learnings to the mainstream logic customers given that those are not opportunities that we've historically focused on. So that would address largely the growth. Obviously, we're continuing to invest in innovation. We're continuing to invest in node transitions, all those things the company has always done, but really just kind of expanding our lens with respect to where our products can play into the market so that we can start to drive not only top line growth, but then also start to fill some of these facilities that we have invested in that have significant available capacity. And then as we do that, not only obviously, do we get the utilization, start to get some of that fixed cost absorption that you'd like to get out of these facilities, but then that would also then translate into cash flow. And so that's how the priorities hang together. That was the feedback from investors. It was also the observations in my 10 weeks kind of on the ground here at Entegris. And to address the second part of your question, I'll address it 2 ways. You asked what could we do better? Let me just talk briefly on what I think we do well. I have been very impressed with the quality of the teams. And when I say the quality of the teams, I'm specifically talking about the technical expertise as well as the quality of the teams in region. We have some amazing employees around the world, and I had the chance to start in Asia. and the quality of our teams in Asia is very impressive, both technically as well as commercially. And so that's an area that was incredibly -- I had high expectations, and it's exceeded my expectation on that front. Things that we could do better. We do great work in region -- in all the regions. So whether it's Europe, the U.S. or Asia, we do great work in region. Sometimes we're a little slow in communicating across regions. So that's an area that we've already worked to improve. And so that's an area that we focused a bit more on. And then, of course, we're focusing on ramping these facilities. I think that's an area getting through the qualifications, getting the volume and release to manufacturing done so that we can start to produce more out of these facilities that we've invested in. That's another area that we want to continue to work on through 2026. Operator: Our next question will come from Alexky with KeyBanc Capital Markets. Aleksey Yefremov: I wanted to ask you about qualification of the KSP site. Where are you in that process relative to your goals? And once you fully qualify that site, do you expect that to have a positive effect on your margins? Or is this neutral because you're replacing production of one site with the other? David Reeder: We're happy with our qualifications in KSP, though I would say that we're behind schedule. We have worked diligently to qualify some of the highest runners. We still have some more products that are in call, but we do have some of the higher runners now qualified. We do believe we're going to be able to materially increase our volume in '26 versus what we were able to deliver in '25. But we still have some qualifications to go, and we are a little behind schedule with respect to where we thought we would be at this point in time. And so that's an area that has gotten renewed focus from us. We have put additional and incremental leadership into Taiwan to help facilitate this process. We're getting very frequent updates with respect to how we're performing not only on production, but also on incremental qualifications of products, so this is very much a top-of-mind process for us. In terms of positive impacts, Linda, do you want to comment on that? Linda LaGorga: Yes. Alex, let me help you a bit as you think about the margins and how it might relate to Taiwan. I step back and think about our ecosystem, our facilities. And as we mentioned, we're underutilized across the facilities. And then with our new facilities, Taiwan and Colorado, we have some incremental fixed costs. We also have state-of-the-art processes. These are state-of-the-art manufacturing facilities. So there is some marginal benefit to there to margin. But think about it as the whole ecosystem. And again, as we start to see the volume, and we mentioned we do expect to see some volume uplift and some growth in 2026, that's going to then help us see that improvement in the margins overall. Aleksey Yefremov: I think you already answered 2 questions so I'll let somebody else ask. David Reeder: I think we have time for one more question. Operator: Our last question today will come from Edward Yang with Oppenheimer. Edward Yang: My question is on AI. The 5% exposure that you referenced, is that for Entegris specifically or the industry? One of your competitors talked about getting closer to 15%. And related to that, one of the HBM manufacturers announced a long-term CMP agreement with a peer of yours. Do you have something similar? And is your CMP positioning within HBM, is that an area where you over-index or under-index relative to the rest of your business? David Reeder: Thanks, Edward. The 5% that we're referencing for AI, that's a percentage of total wafer starts. And so while those 5% wafers represent about 30% of the revenue, they're only 5% of the wafer volume. And so when you look at the total wafer volume that will be shipped and started in 2025, 5% of those wafers will be AI. That portion of the market is doing incredibly well. The other 95% of the market is probably still something like 15% down from peak. Obviously, it's slightly different by technology. Mainstream is probably close to that 15%. NAND is probably closer to 25-ish percent down from peak, although that's a layer discussion with respect to how much capacity is actually absorbed based on how many layers. But in terms of total industry, it's still down pretty meaningfully from peak. So the 5%, again, that's really just a reference with respect to how -- what percentage of the wafers are driven by AI. Obviously, our business, especially on the most advanced nodes, which commands -- tends to command premiums, that portion of the business is doing quite well across the board. And so much higher than the type of growth rates that we're reporting from unit volume, but it's being offset by the rest of the market as well as by CapEx. With respect to HBM and CMP, let's just talk -- maybe it's worthwhile talking briefly about advanced packaging. Advanced packaging in general is a portion of the market from a CapEx perspective is growing something like 25%. I don't have a number for you from a unit perspective, but advanced packaging is a portion of the market is growing quite rapidly. And the reason it's growing rapidly, obviously, is because it's connected both to the AI logic as well as to the high-bandwidth memory. And so advanced packaging is a portion of the market where historically, we've not played in a significant way. We are going to generate about $100 million of revenue from advanced packaging this year. We do have some strategic initiatives for some SAM expansion into the space, which will develop over time that we look forward to talking about at Capital Markets Day. But as it sits today, that's a portion of the market where we're playing a bit more narrowly because we tend to just, in general, be focused more on the front end. On the CMP process that you referenced, we do have some CMP wins in the HBM space. I think that portion of the business, albeit off a small base, is up 100%, I believe, on a year-over-year basis. So we've been quite pleased with that, but obviously, it's starting from a small base. Edward, did you have a follow-up? Edward Yang: Yes. And I'm looking forward to the upcoming Analyst Day. Last year's Analyst Day talked about outperforming the market long term by a pretty significant amount. Do you think that growth formula still holds? And in the context of the industry looking for about 5% MSI growth next year, where would you sit in the level of outperformance within that? I think you referenced like plus 3% to 6% range outperformance. David Reeder: Let me broaden the question out. And then at the end, I'll come back to it. We are doing quite well in the markets where we compete and where we do focus and participate. For example, slurries and pads are up 15% over the last 12 months. Selective etch is up 40%. Cleans are up more than 10%. And as we mentioned earlier, we just had a record quarter for liquid filtration. So if you look at the areas where we compete, we actually feel very good about how those areas are performing, and we feel quite good about our plan of record. On the CapEx side, we've spoken about it, but CapEx, and we're particularly tied to facilities, build-outs and construction, that portion of the market is down about 10%, and we're not that different. We're a little bit better than that. But we're down in a very similar vein and of a similar magnitude in that portion of our business, which is creating a drag, if you will, on our top line. The advanced packaging portion of the business, which is growing quite well. That's an area where our exposure is fairly small today. Obviously, we're expecting about $100 million in 2025, but that represents a big opportunity for us in '26 and beyond. So to come back to your question, with respect to the 3 to 6 points outperformance, 10 weeks in, I do believe that we have the opportunities to significantly outperform the market. And I do think that I look forward to talking to you about that at Capital Markets Day. Operator: I'll now turn the call back over to Bill Seymour for any additional or closing remarks. Bill Seymour: Yes. Thank you for joining our call today. Please reach out to me directly if you would like to follow up. Have a good day, and you can now disconnect the call. Operator: Thank you. This concludes today's Entegris Third Quarter 2025 Earnings Conference Call. Please disconnect the lines at this time, and have a wonderful day.
Operator: Greetings, and welcome to the Bright Horizons Family Solutions Third Quarter Earnings Release Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Michael Flanagan, Group Vice President of Strategic Finance. Thank you. You may begin. Michael Flanagan: Thank you, Shamali, and welcome to Bright Horizons' Third Quarter Earnings Call. Before we begin, please note that today's call is being webcast, and a recording will be available under the Investor Relations section of our website, investors.brighthorizons.com. As a reminder to participants, any forward-looking statements made on this call, including those regarding future business, financial performance and outlook, are subject to the safe harbor statement included in our earnings release. Forward-looking statements inherently involve risks and uncertainties that may cause actual operating and financial results to differ materially and should be considered in conjunction with the cautionary statements that are described in detail in our earnings release, 2024 Form 10-K and other SEC filings. Any forward-looking statement speaks only as of the date on which it is made, and we undertake no obligation to update any forward-looking statements. Today, we also refer to non-GAAP financial measures, which are detailed and reconciled to their GAAP counterparts in our earnings release, which is available under the Investor Relations section of our website at investors.brighthorizons.com. Joining me on today's call are Chief Executive Officer, Stephen Kramer; and our Chief Financial Officer, Elizabeth Boland. Elizabeth Boland. Stephen will start by reviewing our results and will provide an update on the business. Elizabeth will follow with a more detailed review of the numbers before we open it up to your questions. With that, let me turn the call over to Stephen. Stephen Kramer: Thanks, Mike, and welcome to everyone who has joined the call. We delivered another quarter of solid execution and performance with revenue increasing 12% to $803 million and adjusted EPS growing 41% to $1.57, both well ahead of our expectations. Demand persisted from both client employees and employers for our broad suite of education and care benefits, and our teams executed with discipline and focus. This quarter's performance positioned us to finish the year with strong momentum and confidence in our ability to deliver on our strategic objectives. Let me start with back-up care, which was a clear standout in the third quarter as it has been all year. Revenue increased 26% to $253 million with strong broad-based demand for all care types across our own supply and our partner network. The momentum we saw in early summer carried through the quarter, particularly in our programs catering to school-age children, supported by working parents' significant needs during the school breaks. More employees use care, existing users leaned in further and more employers signed on to offer the benefit, notably new clients, MIT and Appian Corporation. Our operations team executed exceptionally well, delivering record levels of care during this compressed high-intensity period. And our marketing and technology teams continue to progress our personalization efforts to attract and stimulate use among client employees. Back-up care continues to be an exciting growth engine, both financially and strategically and a core pillar of our long-term value creation. While today, it stands as our largest driver of revenue and profit growth, we believe we are still in the early innings of the opportunity. Our current reach spans more than 1,000 employers and millions and millions of eligible employees, but employer adoption and usage remains modest relative to its potential. Our strategy to close this gap is focused on expanding the number of unique users within our existing client base, increasing frequency of use among those who already value the service and continuing to grow our client roster. As we look ahead, we will continue to invest to support the growth of back-up care, expanding capacity, deepening personalization and reinforcing the value proposition for both employers and client employees. A critical differentiator in our model and our ability to deliver on this growth is the breadth and quality of our delivery network. Our full service centers remain foundational in that effort, serving as a direct source of care and as an essential infrastructure that supports reliability, responsiveness, quality and scale across our global platform. Now moving to our full service centers. Revenue in full service increased 6% to $516 million, driven by a combination of enrollment growth, tuition increases and new center openings. We added 3 new centers this quarter, including 2 centers for a new higher ed client and a third location for Dartmouth Hitchcock Medical Center. These openings not only reinforce our leadership in employer-sponsored child care, but also underscore the enduring importance of on-site care as a strategic workforce solution. Enrollment in centers opened for more than 1 year increased at a low single-digit rate, while average occupancy ticked down to the mid-60s sequentially given the usual summer to fall seasonality. While the pace of enrollment growth has moderated over the course of the year, we continue to see the fastest growth in select centers operating below 40% occupancy. Centers in the 40% to 70% occupancy range also continued to show enrollment growth and margin improvements. And among our top-performing centers, those with occupancy above 70%, we continue to have strong profitability, while the natural cycling of last year's strong occupancy levels tempered our overall enrollment growth. Outside the U.S., our U.K. full service business continues to regain ground. Enrollment growth has continued with increased demand among working families, a segment we are well positioned to serve, and more favorable government support to families. Operationally, we are seeing the benefits of disciplined cost management, improved staffing and retention and an improved labor environment. The U.K. remains a strengthening component to our full service segment and is now on track to contribute modestly positive earnings in 2025. As we exit 2025 and plan for 2026, our focus in full service remains on delivering quality at scale, expanding occupancy and fulfilling increasing amounts of backup use. We are also ensuring our portfolio is aligned with long-term opportunities for growth and margin improvement. Moving on to our education advisory segment. Revenue grew 10% this past quarter to $34 million, ahead of our expectations, led by the continued strength of College Coach, which contributed both top line growth and strong margins. In addition, EdAssist expanded its participant base as employees continue to explore education benefits to support their career development. We believe that our investments in this product offering and customer experience position us well to meet the evolving client upskilling needs and create value over time. We added new clients to the portfolio this quarter, including Sony Music and Premier Health Partners, expanding our reach and reinforcing the relevance of education and coaching benefits in today's landscape. Before I turn it over to Elizabeth, I want to take a moment to reflect on one of the most meaningful traditions at Bright Horizons, our awards of excellence celebration. This year, we once again had the privilege of gathering in person to honor the extraordinary contributions of our employees. With more than 20,000 nominations from colleagues, families and clients, the awards and the events were powerful reminders of the deep impact our teams have on the lives of those we serve. Celebrating together with our Westminster, Colorado and Newton, Massachusetts teams was a true highlight, a chance to recognize the passion, care and commitment that define our culture. To all our employees, thank you for the work you do every day and for the difference you make in the lives of children, families, learners and employers around the world. In closing, this terrific quarter reflects strong contributions across all of our service lines. As we look ahead, we remain focused on building a more integrated Bright Horizons, one that aligns our delivery model, technology and client partnerships to provide a more seamless experience for working families. Our broad portfolio is central to this effort and back-up care stands out as a cornerstone of our One Bright Horizons strategy, serving as a strategic lever for strengthening client relationships, enhancing employee productivity and driving enterprise-wide value. Given our results year-to-date and our current outlook for Q4, we are upgrading our full year earnings guidance. We now expect revenue to be approximately $2.925 billion, representing 9% growth, and we are increasing our adjusted EPS to a range of $4.48 to $4.53. With that, I'll turn the call over to Elizabeth, who will dive into the quarterly numbers and share more details around our outlook. Elizabeth Boland: Thanks, Stephen, and greetings to everyone on the call tonight. Let me start with our financial highlights. Revenue for the third quarter grew 12% to $803 million, driven by continued growth and disciplined execution across each of our segments. Adjusted operating income rose 39% to $124 million, with operating margins up roughly 300 basis points over the prior year to 15.5%. Adjusted EBITDA increased 29% to $156 million and represents an adjusted EBITDA margin of 19% in the quarter. Lastly, adjusted EPS of $1.57 came in well ahead of our expectations, supported by strong back-up revenue performance and operating leverage. Breaking this down a bit further into the segment results. As noted, back-up care revenue grew 26% in the third quarter to $253 million, driven by strong demand over the peak summer season. At this high watermark of utilization for the year, we also delivered significant operating leverage as adjusted operating income of $95 million increased $25 million over the prior year, and that translates to an operating margin of 38%. Full service revenue of $516 million was up 6% in Q3, mainly on pricing increases, modest enrollment gains and an approximate 125 basis point tailwind from foreign exchange. The centers that we have closed since Q3 of 2024 did partially offset these top line gains. Enrollment in our centers opened for more than 1 year increased low single digits across the portfolio. As Stephen mentioned, occupancy levels across our portfolio opened for more than 1 year averaged in the mid-60s for Q3, improving over the prior year, but naturally stepping down sequentially from last quarter given typical summer seasonality. In the specific center cohorts that we've previously discussed, we continue to show improvement over the prior year. Our top-performing cohort, that is centers above 70% occupied, improved from 42% of these centers in the third quarter of '24 to 44% in the third quarter of '25. The bottom cohort of centers, those under 40% occupied, improved modestly from 13% last year to 12% this past quarter. Adjusted operating income of $20 million in the full service segment increased $8 million over the prior year and represented 4% of revenue in the quarter compared to 2.6% in the same 2024 period. This improved operating leverage was bolstered by higher enrollment to help drive that growth in earnings. Lastly, educational advisory revenue, which increased 10% to $34 million, delivered operating margins of 26%, an improvement over the prior year with strong flow-through on the higher utilization of services. Recurring interest expense was $10 million in Q3, down from $12 million in Q3 of 2024, largely due to lower interest rates and lower overall borrowings. The structural effective tax rate on adjusted net income was 27%. Relative to the balance sheet, through September of this year, we have generated $203 million in cash from operations, made fixed asset investments of $59 million and have repurchased $105 million of stock. We ended Q3 with $117 million of cash, and we've reduced our net leverage ratio of 1.7x net debt to adjusted EBITDA. Now moving on to our updated 2025 outlook. We're updating our '25 guidance for both revenue and adjusted EPS to reflect the outperformance in Q3 as well as our expectations now for Q4. We now expect revenue to approximate $2.925 billion and adjusted EPS to be in the range of $4.48 to $4.53. In terms of our updated full year outlook by segment, we expect full service revenue to grow roughly 6%, back-up care to grow roughly 18% and ed advisory growth to be in the high single digits for -- again, for the full year. What this full year outlook translates to for Q4 is overall revenue in the range of $720 million to $730 million and adjusted EPS in a range of $1.07 to $1.12. So with that, Shamali, we are ready to go to Q&A. Operator: [Operator Instructions] Our first question comes from the line of Andrew Steinerman with JPMorgan. Andrew Steinerman: So obviously, I wrote a report sizing out the back-up care industry recently and your back-up growth was just tremendous. I surely wanted to ask you about the sustainability of these type of growth rates. I remember that you like to refer to kind of low double-digit growth as the sustainable rate, but you're growing above that now and into the fourth quarter. Elizabeth Boland: Yes. So thanks, Andrew. We're just looking at each other, who goes first. So thanks for the question. Well, as noted, we're looking at now, given the performance in the third quarter, which was certainly very substantial and outsized to our own expectations. We're looking at about 18% growth for this year. And that reflects, obviously, the growth over our prior year. And continuing that going forward, we would -- still it's early days. We're not going to be providing detailed guidance yet for 2026. But as we look ahead, certainly, that low double digits ticking up a bit probably from that to maybe 11% to 13% would be where we would be looking for next year, but it is a model that does have a tremendous amount of opportunity, as Stephen alluded to in terms of the piece parts of how we can grow that. And maybe I'll turn it over to him to talk a bit more about that. Stephen Kramer: Great. Thank you, Elizabeth. And Andrew, thank you for the note that you put out. It highlighted a really critical part of our business. And when we think about the long-term sustainability around the back-up care business, we were very encouraged this quarter, but candidly, for the whole year around our ability to continue to grow both the user base as well as the frequency of use. And look, at the end of the day, we're really focused around getting new users from among our client base, but also making sure that those who use return. And so when we think about the full scope of the opportunity, at this point, we have, call it, over 1,000 clients out of tens of thousands of potential clients. We have, call it, 10 million lives that we have the ability to impact. They're eligible for these services, of which we have less than 10% penetration. And so when we really think about the opportunity, we're really looking at it through that lens and believe that long term, this continues to be an important part of our growth algorithm. Operator: Our next question comes from the line of George Tong with Goldman Sachs. Keen Fai Tong: You mentioned enrollments increased in the low single-digit range. Can you clarify what low single digits means and if your full year enrollment growth outlook is still 2%? Elizabeth Boland: Yes. So we had -- as we talked about last quarter, George, we had probably about 2% growth last quarter and are looking at something closer to 1%, 1% plus this quarter. So low single digits being a little bit of a taper from where we saw last quarter, and that's the pace at which we would expect to exit the year similar to that 1%, 1% plus. Keen Fai Tong: Got it. That's helpful. And I guess following up on that, what would you think could be positive catalysts to drive a reacceleration in enrollment growth? Is it going to be external and market-driven? Or are there internal initiatives that you have that can help pick up that growth? Elizabeth Boland: Yes. I mean certainly, the opportunity through what we're controlling our own initiatives include a variety of the improvements to the customer experience, the ability to move from inquiry or just interest in a place to actual registration and enrollment. We have a number of both initiatives in terms of more effective marketing, more targeted outreach to our customers, connecting customers who are part of our employer base across our network of centers. So there are a number of initiatives in that way, but just smoothing the experience for a parent who is able to register and then -- and start using care when they need it. But certainly, I think external factors are in play. There is, I think, an environment from an economic standpoint that is -- continues to be a bit unsettled with different pressures on the consumers and the return to office cadence continues to be moving faster in some areas than others. And so parent demand can be somewhat variable there. But we're pleased with our general placement of our portfolio in terms of being close to where working families are living and/or working and where employers are able to generate a concentrated amount of use, but we are also mindful of the pressures on the end consumer who does typically pay the lion's share for this service. So being affordable in the market, our value proposition very visible and available to parents to see, those kinds of things are certainly in our control. Operator: Our next question comes from the line of Jeff Meuler with Baird. Jeffrey Meuler: Just given those economic conditions that you just referenced, how are you planning tuition pricing, I guess, in calendar year 2026 for full service? Elizabeth Boland: Yes. On balance, Jeff, we're looking at around a 4% average that would be at the higher end of our historic range. But in this kind of an environment, it's a bit of a middle-of-the-road pricing strategy. We have, as you know, a variable implementation of that. So that's an average, but we do make individual localized decisions that take into account market factors, other choices or competitors that may be in an environment. And in the centers that we have that still remain under-enrolled, we may take a more aggressive pricing approach. And in those that have higher demand, we may price higher. And by aggressive, I mean we may go lower than that average and then we may price higher than average where the demand is higher. But the average is looking to be in the neighborhood of 4%. Jeffrey Meuler: Okay. And then for back-up care, just with that big opportunity and also just with the demand we're seeing and the strong execution we're seeing in your results, I guess, how are those factors intersecting with the budgetary environment as clients do calendar year 2026 planning and budgeting for your service? Are they kind of leaning in like we've seen in the strong results this year? Or is there any sort of increased hesitancy for budgetary reasons? Stephen Kramer: Sure, Jeff. So we are through the lion's share of our renewal season at this point. And first, I would say that our clients were really pleased with the way this year has turned out for them and their employees. The feedback has been incredibly strong from their employee base, which is a real marker of the importance of the back-up care service. I think we have done an increasingly positive job of articulating the ROI, especially as it relates to productivity related to our service. And so I think we're well set up going into 2026 for our clients to continue to be interested in investing. Contextually, back-up care still represents a really small part of a benefits budget. And so when they think about some of the larger items like health care or even a 401(k), those are areas where, obviously, those are significant in terms of their investment. I think that for any individual client, while the kind of growth that we've experienced over the last several years is important for our business, I think it's very reasonably absorbed by our client base given that context and the importance of the service. Operator: Our next question comes from the line of Manav Patnaik with Barclays. Manav Patnaik: My first question was just in the back-up performance this quarter, where did you see the outperformance versus kind of the expectations of the guide that you had given? And maybe I don't know if that correlates with the context on, Stephen, you said it's very early innings in back-up care. Like is that new logos, upsell, a combination of both? I was just hoping for some color there. Stephen Kramer: Sure. Happy to. So I think we mentioned a couple of new logos. But in any given year, the reality is that the vast, vast majority of the growth that we experience is from the existing user base and existing client base. And so what we really saw was our ability to grow new users and continue to get existing users to come back and reuse was an important component of the outperformance. Clearly, in this quarter, we saw good use across the different use types, but school-age programs were an important component of the quarter. And what's nice about school-age programs, in particular, is our ability to flex up and down given ratios, given flexibility of space and the numbers of new opportunities through Steve & Kate's as well as through our extended network. And so all those things taken together really allowed for our outperformance. Manav, if you'll remember from the last quarter call, we highlighted that we saw some strong indications of early reservations. And I think what ended up happening was that got compounded with working families who came much more closer to the date of needed care and ultimately drove what we saw this quarter. Manav Patnaik: Okay. Got it. And Elizabeth, just you've given some good helpful color for the fourth quarter and some early look at '26. I was hoping you could just fill in the gaps on the margin front, like where do you think margins end up in '25? And then anything to keep in mind when we model out next year? Elizabeth Boland: Yes. So we obviously, maybe ticking through the different segments. So full service this quarter had a nice step-up in margin, 140 basis points or so. We would expect to finish off the year in the 125 basis points or so range for the full year. And back-up care obviously had a very strong quarter this quarter. The volume of use helps that. And we would expect to be at the upper end of the range. We've given a range of 25% to 30% as our expected long-term sustainable target for the back-up care segment. And so with the performance in the third quarter and that kind of volume, we would expect to be at the higher end of that range, again, for the full year. And then the ed advising business in the 20% or so plus, low 20s as we've seen in the last couple of quarters. Operator: Our next question comes from the line of Toni Kaplan with Morgan Stanley. Toni Kaplan: At least 3 of your representative clients have announced headcount reductions in the thousands in the past 6 months, 2 of which in September and October. Should we expect to see any impact from that? Or because of your multiyear contracts and maybe back-up care strength, would that offset any impact from those? Stephen Kramer: So Toni, I think the question you just asked was related to layoffs at some of our clients and the impact that, that might have on their investment. What I would say is I would hearken back to what I shared about the low penetration that we have within the existing eligible base of employees within our client employees, right? So at a sort of sub 10% penetration, we categorically have a lot of room even with some reductions in force. And so yes, we have multiyear contracts. But ultimately, what is going to drive the day in terms of where we see continued investment is going to be in our ability to continue to get new users and to get existing users to repeat their use. And so given the small penetration that we have, our expectation is that with our efforts, we should continue to see good progress going forward even in those accounts that are having reductions in force. Toni Kaplan: Great. Maybe in your experience of companies where they do have reductions in force, do they typically change their benefit levels? I'm sure there's like a delay or anything like that, but have you ever seen full service clients switch to back-up care? Or is that not really a thing because they've already normally built a center already? Stephen Kramer: Yes. So I think on the center side, as we've shared, I mean, that's a really long-term decision. And so I think clients generally, unless they get into an incredibly compromised position, generally will persist with their center. And so again, I think on the center side, we see really good retention rates on the basis that a client will understand that there'll be better and worse cycles and they'll continue to push through that. I would say on the back-up side, from a program design standpoint, again, we don't typically see clients change their program design, for example, how many uses an individual employee can have access to because ultimately, when they do find themselves in situations where they are reducing their force, what that really means is they're expecting more from the employees that remain. And so given that back-up is so aligned with being a productivity tool for employees who use it, employers generally understand that for those that remain, they need all the support that they can get as it relates to staying focused on their work. Operator: [Operator Instructions] Our next question comes from the line of Josh Chan with UBS. Joshua Chan: Stephen and Elizabeth, congrats on the good quarter. I guess on back-up, as you think about going into next year, how are you planning to resource the business, I guess? And if you were faced with kind of surprisingly high demand again, how do you or what do you do to kind of fill capacity in that scenario? Stephen Kramer: Yes. I mean look, we go through an extensive planning cycle, and we look at our expected demand client by client, and then we also look at it geography by geography. And so we have a really comprehensive team that focuses on the BI behind the business and then a provider relations team that really tries to map what expected demand is against the provider network that we have. And so what I would say is that we have fairly sophisticated tools to make sure that we don't get caught out with extra demand that can't be fulfilled. And because both in our own centers as well as in our own Steve & Kate's Camps in home care delivery as well as all of our extended partners, we are leveraging sort of excess capacity on any given day. We have a really good track record of being able to fulfill a high percentage of the care requests that ultimately are required. And so I appreciate the question. I think it's an important one, and we spend a lot of time making sure that we invest behind the capacity to make sure that it is available for our clients and their employees because that is such an important metric to those who we serve. Joshua Chan: And I guess how does the backup strength, does it alleviate the need for you to raise enrollment quickly in full service as you think about maybe having some of that capacity to serve your strong back-up demand? Does that change the way you're thinking about enrollment in full service? Stephen Kramer: Well, I'll say -- I'll start and then perhaps Elizabeth will play color. But I think if we take a step back on that question, which I think is an important one, as I shared in the prepared remarks, our center footprint is a critical component of our ability to fulfill back-up cases. And so when we think about the value of that center footprint, we are increasingly seeing the amount of care that we can fulfill through our own network of Bright Horizons centers as an important sort of shared resource between back-up and full service. So the implication of what you just said is true, which is the strategic value of our full service centers is not just about how quickly can we enroll, but it is also about how much demand can we fulfill on the back-up side of our business in our own centers because clearly, when we think about the margin profile for the company, the margin profile for the company of fulfilling back-up care cases, obviously, is strong and therefore, is important to make sure we're able to deliver on. Elizabeth Boland: Yes. And Josh, there's certainly some cases where we have been in a position where a center has not only pretty significant back-up demand, but predictable enough back-up demand that we can dedicate a room or 2 to specifically cover back-up care and/or school-age care in the vacation weeks and other things like that. So there are good opportunities for us to utilize the full service footprint in the way that you described that goes to what Stephen is talking about from the strategic fulfillment side of the equation, but also just utilizing the capacity that exists. In our full service centers now, certainly, some are still under-enrolled, but they have always had capacity since we don't operate full every day. And it's been both a helpful muscle that we've been able to develop over time. And as our systems of placement get more -- both speedier and more accurate from a time placement standpoint, we're able to fulfill more of that care. Operator: Our next question comes from the line of Stephanie Moore with Jefferies. Harold Antor: This is Harold Antor on for Stephanie Moore. Just real quick on the U.K. I know you guys are seeing some improvements there. So I just wanted to get any more color. What percentage of the centers are there? What percent of revenue is it running? And I think you wanted to break even this year. I guess how has it been running year-to-date compared to your projections? And then I guess, what would you be saying -- what would you be thinking the contribution to '26 would be? Just anything around that would be very helpful. Elizabeth Boland: Yes. Thanks for the question. And certainly, the team have been very hard at work in the U.K. to bring that well-positioned portfolio back to its prior operating capability. And the performance this year has been both steady. It's been steady for several quarters now, but it has been steady and improving enough that we are comfortable with the visibility of being more on the positive side than just breakeven side for the U.K. And as we look ahead to 2026, the performance for the U.K. has been a contributor to the improvement in the margin in full service this year. It still is a headwind, probably 50 basis points or so headwind. And as it continues to improve and contribute to next year, that will -- it still is trailing where we are in the U.S. business as an example. So it still is a bit of a tailwind but it will contribute to our momentum as well next year. Full service overall, I think that the point about enrollment, we talked about tuition rate increases, et cetera. Overall, we would continue to expect to see some margin expansion next year, maybe not at the pace that we're seeing this year, more like 50 to 100 basis points of margin expansion, but the U.K. would be a component of that. Operator: Our next question comes from the line of Jeff Silber with BMO Capital Markets. Ryan Griffin: This is Ryan on for Jeff. Just had a quick follow-up question on the pricing for next year. Just based on the data we track on child care service wages, they've been growing around 4%. I'm not sure if you're seeing anything differently. So wondering how you see the wage inflation dynamic evolving? And then what is your confidence level in just being able to price over that? I know it's a little bit different by market, but just in relation to the 4% pricing you said on average for next year? Elizabeth Boland: Yes. We have -- I appreciate the context of some general market factors. We tend to be paying at certainly the median to higher on wages. And so we feel like we will be able to sustain that. We have typically targeted a 100-basis point spread between average tuition increases and average wages. And we would, at this point, expect to be able to sustain that given where we see our labor cohort. So I think confidence -- we do feel confident that we can price ahead of wage, balancing out, as mentioned before, some of the conditions where we may be a bit more aggressive on price in order to continue to drive demand and enrollment in the centers that are more underperforming. Ryan Griffin: That's very helpful. And then just for the follow-up, I was wondering how we should be thinking about the net center openings for next year. Are you in a position now where you think you'll be a net closer of centers just looking at the, I think, the 12%, sub-40% utilization you called out? And how do you kind of think about that going into the next year? Elizabeth Boland: Sure. So this year, we had -- I think we entered the year looking to be plus/minus close to net 0 on the openings versus closures. And given the cadence of where we have a number of centers that are in development that have pushed into the early part of next year. So our openings are trailing by a handful this year. And then we have also been opportunistic about some of the closures. So we expect that we will be net closing this year, probably closer to 5 to 10 centers. As we look ahead to next year, and so that would be closures in the neighborhood of 25 to 30 or so centers. So we would be looking to close, I would estimate at this point, we're still in the planning process for 2026, but a closure level in that same range. So we may not be net positive in 2026, but that is really down to the -- those centers that are in the sub-40% occupied, as you mentioned. There's probably 80 P&L centers in that cohort. There are a handful of client centers, but there's 80 that are in our sort of P&L responsibility. And of those, a portion of them are operating at a level where they're partially covering their rent, and they have some strategic opportunity with the client relationships that Stephen mentioned, some back-up use. So not all of those would close, but they -- that's the group that would be the most likely candidates for closure. Stephen Kramer: Okay. Well, thank you very much. Really appreciate everyone joining today's call and wishing you all a good night and a happy Halloween. Elizabeth Boland: Thanks, everybody. Operator: And this concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation.
Operator: Good day, and thank you for standing by. Welcome to the Twilio Third Quarter 2025 Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Bryan Vaniman, Senior Vice President of Investor Relations and Corporate Development. Please go ahead. Bryan Vaniman: Good afternoon, everyone, and thank you for joining us for Twilio's Third Quarter 2025 Earnings Conference Call. Joining me today are Khozema Shipchandler, Chief Executive Officer; Aidan Viggiano, Chief Financial Officer; and Thomas Wyatt, Chief Revenue Officer. As a reminder, we will disclose non-GAAP financial measures on this call. Definitions and reconciliations between our GAAP and non-GAAP results can be found in our earnings presentation posted on our IR website at investors.twilio.com. We will also make forward-looking statements on this call, including statements about our future outlook and goals. Such statements are subject to known and unknown risks and uncertainties that could cause actual results to differ materially from those described. Many of those risks and uncertainties are described in our SEC filings, including our most recent Form 10-K and our forthcoming Form 10-Q. Forward-looking statements represent our beliefs and assumptions only as of the date such statements are made. We disclaim any obligation to update any forward-looking statements, except as required by law. And with that, I'll hand it over to Khozema and Aidan, who will discuss our Q3 results, and we'll then open the call for Q&A. Khozema Shipchandler: Thank you, Bryan. Good afternoon, everyone, and thank you for joining us today. Twilio had a great Q3, reaching $1.3 billion in revenue and $235 million in non-GAAP income from operations, another record for both. The team's operational rigor and discipline is paying off as we executed across the board and exceeded our quarterly guidance. As a result, we've raised our revenue, profitability and free cash flow targets for the full year, which Aidan will discuss in more detail. We saw broad-based strength across customer segments from innovative and high-growth start-ups to the world's largest global enterprises, all choosing Twilio to power their customer engagement. This momentum and the continued revenue growth across products like messaging, voice and software add-ons are a testament to the growing trust in the Twilio platform to help brands create amazing experiences. Our progress was repeatedly underscored by my conversations with customers this quarter who consistently expressed excitement and validation for the direction we're taking. During the quarter, Twilio's ISV and self-serve customers continued to be excellent growth drivers with both growing revenue more than 20% year-over-year. Importantly, our innovation bets on new trusted capabilities like conversational AI and branded communications are also paying off. In September, we hosted our annual Exec Connect event, where we spent a few days with our most strategic accounts, giving them a preview of the Twilio platform and road map. I witnessed customers ranging from global banks, AI startups and Fortune 500 software companies having multiple aha moments as they watched our demos and understood what is possible when you have a lifelong two-way omnichannel conversation with your customers over time. I believe Twilio's potential is to be the customer experience layer of the Internet. Our customers are eager to build on a platform that brings together three essential capabilities: multichannel communications, contextual data that creates a persistent customer memory, an AI-driven orchestration that turns every interaction into an intelligent two-way conversation. With these seamlessly integrated across the entire customer journey, Twilio empowers businesses to build relationships that grow stronger and more meaningful with every engagement. Go-to-market execution continues to be a key driver of our results. In Q3, we had several notable customer wins, including a nine-figure renewal spanning multiple products with a leading cloud provider, the largest deal in our company's history. Other wins included Genspark AI, GoGoGrandparent, Inhabit and Paychex, among others. Self-serve, a foundational growth lever for us and an important entry path for our customers to build and grow their usage on Twilio grew 20% plus year-over-year. As an example, last December, a leading AI model company started as a self-serve customer using e-mail for account creation notifications. In under a year, they've scaled into a 6-figure multiproduct customer, now using our voice stack to power their AI agent for outbound and inbound calling at scale. We're also seeing traction in cross-sell and our solution selling, in which we bundle multiple Twilio products together to help solve more complex customer use cases. Q3 marked the first quarter with our agent productivity solution in market, which is a new bundled offering that makes it easier for customers to purchase multiple products across the Twilio platform to transform their customer experience. More specifically, the solution helps businesses boost both human and virtual agent productivity, increase speed to resolution and provide better call deflection and containment. During the quarter, we signed our first set of agent productivity solution deals. A standout example is Inhabit, a leading property management software company who chose Twilio as the partner for its multiyear hybrid agentic transformation. This is powered in part by Twilio's Flex as the modern omnichannel contact center, integrating voice, SMS, e-mail and chat and ConversationRelay as the layer that powers Inhabit's virtual agents intelligent handling of inbound leasing inquiries. While it's still early with our solution selling motion, we're seeing encouraging traction in financial services, retail, travel and health care and have a healthy pipeline of new business with a strong mix of high-margin products. And finally, our efforts to target ISVs are continuing to deliver strong results as revenue from ISV customers grew 20% plus year-over-year. One notable win we saw with ISVs was a leading enterprise management platform who signed a seven-figure deal to use SMS, WhatsApp and RCS in their platform, in addition to Engagement suite running over the top. The incremental investments we made last quarter are paying off as we're continuing to see strong customer demand for voice, conversational AI and RCS. Our voice business accelerated to mid-teens revenue growth year-over-year, its fastest rate in over three years, aided by growth in the AI ecosystem. ConversationRelay call volume more than tripled quarter-over-quarter as customers are increasingly relying on Twilio's technology to power context-aware voice AI agents. For example, a long-time messaging customer turned to voice and ConversationRelay to create AI-enabled voice mail agents that helped redirect phone calls and send follow-up texts for customers' appointments. The customer chose to integrate the Twilio solution rather than trying to build or source this technology from multiple providers. We're also seeing a growing wave of AI start-ups choose Twilio as the foundation for their intelligent voice capabilities. Genspark AI, one of our top 10 voice AI start-up customers, signed a voice deal and launched within a week to power their automated call for me function, which allows their super agent platform to make phone calls to businesses, services or individuals on the user's behalf. Additionally, Genspark signed an e-mail deal for marketing communications. This rapid time to value remains a key differentiator across our platform. In Q3, RCS became generally available around the world, and we saw RCS messaging volume more than double quarter-over-quarter. These branded experiences are able to help consumers trust the brands they're communicating with, which is especially important as the holiday season is upon us. In fact, Partiful, the social events platform, onboarded with RCS this year and sent millions of messages in Q3 across multiple countries, powering a branded experience for event invitations and reminders. We also saw continued adoption of software add-on products, including Twilio Verify, which helps customers with authentication use cases while protecting them from fraud and abuse with AI-powered features such as Fraud Guard. Verify has been one of our fastest-growing products and grew more than 25% year-over-year, a clear signal of the rising demand for trusted verified communication in an increasingly digital and security-conscious world. Finally, today, we announced that we entered into a definitive agreement to acquire Stytch, an identity platform for AI agents that's built for developers. This is a small tech and talent tuck-in that will augment our ability to enable amazing digital interactions by delivering next-generation authentication capabilities built for the era of generative AI. In summary, our Q3 results showcase the continued hard work of our team as we execute on our strategy. I was pleased that Twilio made the list of Best Workplaces for Innovators by Fast Company, a recognition that highlights our strong culture of creativity and employee-led innovation. We remain focused on ending the year strong and helping our customers realize the power and possibilities of the Twilio platform. And now I'd like to turn it over to Aidan, who will walk you through our financial results. Aidan Viggiano: Thank you, Khozema, and good afternoon, everyone. Twilio had a record-breaking third quarter. We generated record revenue of $1.3 billion, up 15% year-over-year on a reported basis and 13% year-over-year on an organic basis. We also generated record non-GAAP income from operations of $235 million. Free cash flow was $248 million. We're continuing to drive top line performance through broad-based go-to-market execution. Messaging revenue grew in the high teens for the second consecutive quarter. Voice revenue growth accelerated to the mid-teens, its fastest growth rate in over three years. This was aided by strong growth from voice AI customers, which accelerated to nearly 60% year-over-year. In addition, revenue from our 10 largest voice AI start-up customers increased more than 10x year-over-year. Software add-on revenue growth also accelerated, led by Verify, which grew more than 25% year-over-year. Finally, from a sales channel perspective, we saw continued strength from both ISVs and self-serve customers, evidenced by 20% plus year-over-year revenue growth from both. Our Q3 dollar-based net expansion rate was 109%, reflecting the improving growth trends we've seen in our business over the last several quarters. We delivered non-GAAP gross profit of $652 million, up 9% year-over-year. This represented a non-GAAP gross margin of 50.1%, down 280 basis points year-over-year and 60 basis points quarter-over-quarter. As we called out in our expectations for Q3, we incurred carrier pass-through fees of $20 million associated with increased Verizon A2P fees, which drove the sequential decline in gross margin. As mentioned last quarter, we continue to take actions to stabilize and improve gross margins. We are taking price actions across our business while investing in initiatives to drive platform efficiency. We're encouraged by the acceleration in high-margin products such as voice and software add-ons, and we believe these actions will drive durable revenue and gross profit dollar growth over time. Non-GAAP income from operations came in ahead of expectations at a record $235 million, up 29% year-over-year, driven by strong revenue growth and continued cost discipline. Non-GAAP operating margin was 18%, up 190 basis points year-over-year and 10 basis points quarter-over-quarter. This included a sequential 20 basis point headwind from incremental carrier fees. In addition, we generated $41 million in GAAP income from operations. Stock-based compensation as a percentage of revenue was 12.2%, down 150 basis points year-over-year and flat quarter-over-quarter. We generated free cash flow of $248 million in the quarter. Additionally, we completed $350 million in share repurchases, up roughly 100% quarter-over-quarter. This brings our year-to-date share repurchases to $657 million through the end of Q3, representing approximately 95% of year-to-date free cash flow. Moving to guidance. For Q4, we're initiating a revenue target of $1.31 billion to $1.32 billion, representing 9.5% to 10.5% reported growth and 8% to 9% organic growth. Our revenue guidance assumes $22 million in pass-through revenue from incremental U.S. carrier fees in Q4. That compares to $20 million in Q3. Based on our year-to-date performance and our Q4 guidance, we're raising our full year 2025 organic revenue growth guidance to 11.3% to 11.5%, up from 9% to 10% previously and raising our reported revenue growth to 12.4% to 12.6%, up from 10% to 11% previously. As a reminder, our reported revenue includes the contribution from incremental increases to U.S. carrier fees, whereas our organic revenue excludes those contributions. Turning to our profit outlook. For Q4, we expect non-GAAP income from operations of $230 million to $240 million. We are raising our full year non-GAAP income from operations range to $900 million to $910 million, up from $850 million to $875 million previously. Based on our strong cash generation year-to-date, we are raising our full year free cash flow guidance to a range of $920 million to $930 million, up from $875 million to $900 million previously. I'm very pleased with the strong revenue growth we delivered in the quarter as well as our ongoing cost discipline that is driving robust profitability and free cash flow. We remain focused on executing against our product and go-to-market initiatives as we close out 2025 and build on our momentum into 2026. With that, we'll now open it up to questions. Operator: [Operator Instructions] Our first question comes from the line of James Fish of Piper Sandler. James Fish: Great quarter here. Appreciate the questions. Maybe just on Stytch, how should we think about what functions or features it really complements Verify with? Why couldn't you do it organically here? And Aidan, for you, is there any way to think about the numbers impact financially to sort of purchase price and whatnot? Khozema Shipchandler: Yes. Jim, thanks for the question. This is Khozema. Maybe I'll start. I would say just to maybe go back to our vision for a second, like our vision as we've articulated it, is to really ensure a world in which every digital interaction is amazing. And as part of that, what Stytch helps us do is to expand our capabilities to ensure that there's trust between businesses and consumers. And what we're finding is that for brands, that authentication piece is both a critical and foundational step in the customer journey in terms of creating that customer engagement. And so that was kind of the primary reason. It's an accelerant as far as that goes. And just I'll maybe take a part of it that you asked aid just since I'm talking. The revenue and the P&L altogether is pretty immaterial in the scheme of things. We don't think it's going to have a material impact on our financials going forward. In fact, it won't. And it's a small kind of tech and talent acquisition that we ultimately did for less than $100 million. James Fish: Got it. That's great. Maybe not to let Aidan off the hook here. I'm going to get asked this all day tomorrow. But any sense to -- obviously, a very, very strong net customer addition number here. Any sense to what's causing that? And if you saw any churn related to the price increase and the overall price increase impact on the quarter? Aidan Viggiano: Yes, I'll jump in here, but Thomas can add anything that he'd like. So just in terms of the net customer adds, you're right, Jim, it was a big quarter for us. Just as a reminder, last quarter, we announced that we were ending our free tiers for our e-mail and marketing campaign APIs. So we did that. Some fairly small accounts, I would say, ended up becoming active accounts, and that drove a big part of the add quarter-over-quarter. Now that being said, we still had solid customer account growth even adjusting for that. But that drove a big part of that number. And then as it relates to the price increase, we haven't seen churn associated with that over the last quarter or so. Thomas Wyatt: And just to add a little bit more to that. We saw a particular strength in our self-service business, which generates a lot of our new customer logo acquisition and some of the voice AI capabilities was really attractive, and that business grew well over 20%. And then our enterprise new business team had a really strong quarter as well. So encouraging signs overall on customer adds. Operator: Thank you. We'll move to next question. Our next question comes from the line of Siti Panigrahi of Mizuho. Sitikantha Panigrahi: That's great. Congrats on a great quarter. In fact, 13% growth against a tough comp, very impressive. And on the voice side, you said mid-teens growth specifically, I wanted to understand the voice AI adoption trends. And how should we think about this voice trends, especially with voice AI? What kind of trajectory we can expect versus messaging from here? Aidan Viggiano: Yes. As it relates to some of the numbers in the quarter, so you mentioned messaging there at the end. So that grew kind of high teens. That's our second consecutive quarter of high teens growth on the messaging side. And voice grew mid-teens, which is our fastest growth rate in over three years. A big part of that, we gave some of the voice AI stats, but let me repeat them. So the cohort of voice AI customers that we kind of look at, they grew nearly 60% year-over-year. our top 10 largest kind of voice AI start-ups were up 10x. So this continues to be an area for us where we see accelerated growth. We're really excited about it. Thomas just talked about how that's impacting kind of our self-serve business as well, and that kind of sales channel in total was up 20% plus. So we're pretty happy with the performance from a voice perspective, and it's something that we continue to be excited about going forward. Khozema Shipchandler: Siti, I'll add one thing, which is just generally in terms of voice AI. I mean it's still a relatively small portion of the overall business and the overall voice business at that. And so I think what we're seeing is like pretty healthy performance across the entirety of the voice business. It spans a wide variety of customers, industries and use cases. And so I think given all that, like we're kind of encouraged about where it could potentially go, just given the fact that we sit at the center of the AI value chain -- the results have been good. We obviously don't guide by product, but I'll just kind of leave it at that, that we're encouraged by the trends, and we have seen very good product adoption, especially as you start to think about the ongoing trends around voice AI and then some of our products like ConversationRelay, for example. Operator: Thank you. We'll move to next question. Our next question comes from the line of Alex Zukin of Wolfe Research. Aleksandr Zukin: Maybe just the strength that you're seeing in the non-messaging business, the sequential adds up a lot this quarter, I think almost double last quarter. So a two-parter. Maybe what drove that? Is that primarily voice? And if it is voice, why not -- when do you expect to see some of the positive gross margin benefits of that attach? And I have a quick follow-up. Aidan Viggiano: Yes, why don't I jump in here. So the net adds in terms of customers kind of quarter-over-quarter was largely e-mail actually. So we did away with our kind of free tier, and we saw, we saw a number of smaller customers kind of convert onto the platform as active accounts. But excluding that, even adjusting for that, we were up kind of quarter-over-quarter. As it relates to gross margins, I think maybe a couple of things. So, first, sequentially, we saw gross margins flat adjusting for the carrier fees. As we think about voice and how that impacts gross margins going forward, as kind of Khozema said, a lot of the AI start-up revenue is still pretty small. But as a company, we're driving a mentality of cross-sell, upsell, adoption of our software add-on products. And I think, as you know, Alex, most of our non-messaging products are very high margin. So as that continues to progress and as we make progress on that from a go-to-market perspective, that should help buoy gross margins going forward. Thomas Wyatt: And if I could just add one point on the growth we're seeing, in particular in self-service, a lot of those customer additions, 40% of those customers -- that was 40% growth was in voice in particular. So that's the strongest part of our self-service business as well. Aleksandr Zukin: And then maybe an embarrassing of good news -- embarrassment of good news this quarter between the large cloud service provider deal, nine figures that you signed, maybe kind of double-click on that. What drove that? Is that related to the partnership we saw with a named service provider earlier in the year? And also, to your point, the ISV relationships seem like they're inflecting the growth opportunity. Kind of what's -- is that [ ISA ], your lead agent driving so many leads so efficiently? Or what's driving some of these elements? Khozema Shipchandler: Yes. Alex, this is Khozema. I'll take that. So a couple of questions there. I'd say ISV relationships generally, we've done well there, like we've been able to grow that cohort particularly well. As Thomas said a number of times, like a lot of those customers actually start in self-serve and they grow from there. And then they, in many cases, grow to be very large accounts over time that grow with us over extended periods of time. And so I think that combination of self-serve then feeding over to ISV and then those ISV relationships growing, that's what you're kind of seeing play out there. In terms of the larger deal that you referenced, we're not going to provide necessarily additional financial details there. It's a customer that we had a relationship with for some period of time, and we're excited about signing a really material renewal. Operator: Thank you. We'll move to next question. Our next question comes from the line of Taylor McGinnis of UBS. Taylor McGinnis: Congrats on the quarter. When we look at the 4Q guide, so the 8% to 9% organic revs growth guide is solid. So maybe just two questions on that. One, I know 4Q volumes tend to be tied to the performance of the holiday season. So any early signs on what you guys are expecting there and maybe the puts and the takes of some of these emerging or other areas outside of messaging growing faster and how that could contribute to the guide and how you guys are thinking about the messaging holiday piece? And then second question would just be the performance in 3Q was really strong and greater than what we've seen historically. So just curious if anything surprised you guys or if there was any areas that performed better than expected? Aidan Viggiano: Yes. Why don't I start with the second one, and then I'll hit on the holiday season. I wouldn't say anything surprised us. What I'll say is it was pretty broad-based, which I think is encouraging. So we've kind of talked about the different pieces, right? But from a sales channel perspective, ISVs, self-serve, right, both were up 20% plus. Our software add-on product, which is something we've been driving with the go-to-market team, the sales team, we saw that accelerate, in particular with products like Verify. Then from a product perspective, our two biggest products in messaging and voice, both grew kind of mid- to high teens, which is great. A lot of the voice stuff driven by the voice AI start-up customer volume that we just talked about. And then from an industry perspective, I'd say consistent with kind of Q2 and Q1 is it was pretty broad-based, right? We saw healthy volumes in tech, health care, professional services, retail e-commerce. So I think that's kind of how I think about Q3. And then as it relates to the holiday season, I guess what I'd say is as we kind of called out last year, we had a very strong holiday season, which does create a little bit more of a challenging comparison for us this year. Obviously, the usage-based nature of our business, and I'd say maybe a bit more of a mixed macro does make it a little bit harder to kind of predict the holiday season, but we're pleased with the guidance that we're providing right today on Q4. And we're encouraged by the strength that we've seen across the product portfolio, across the sales channels and across the industry verticals. Operator: Thank you. We'll move to next question. Our next question comes from the line of Elizabeth Porter of Morgan Stanley. Elizabeth Elliott: I wanted to follow up on some of the comments around demand for voice, and you've really highlighted some great adoption with AI start-ups. So my question is, how are you seeing adoption trends for some of the newer products like Conversational Intelligence and ConversationRelay among some of the more traditional non-AI parts of the customer base? And how are you thinking about the traditional enterprise customers engaging with these products? And any sort of pathway you see for broader adoption outside of the early AI company? Thomas Wyatt: Yes. Thanks, Elizabeth, for the question. This is Thomas. I think just broadly, we saw a really solid traction of our enterprise and ISV customers with multiproduct growth. In particular, add-ons, as Aidan said, grew 20%, but also multiproduct customers count grew north of 20% as well. And to give you some examples of that, ISVs in particular, we saw a lot of early traction with our agent productivity solution, which really brings together a lot of core capabilities of voice, SMS, e-mail and chat all into a unified experience and ConversationRelay is really what powers that to create these virtual agents that can allow customers to power customer care use cases or presales use cases. And there's a number of examples that we've already talked about. One in particular that we're excited about is Inhabit, which is a company that does leading property management, but a great example of how you can use a number of Twilio technologies in an integrated way to deliver a new experience. So we're seeing it in enterprise. We're seeing it in ISV as well as the voice AI start-ups. Elizabeth Elliott: And then just as a quick follow-up on the net dollar-based retention saw a nice uptick again, particularly against a harder comp. So could you just unpack that a bit? How much of the uplift was pricing related, if any, versus underlying expansion? And as you continue to see success with these larger customers and deals, how should we think about the durability of that NRR trend? Aidan Viggiano: Yes. I'd say it's mostly expansion. I don't think the price increase that we did in June around U.S. messaging. I don't think that had a material impact in the quarter. What I would say is contraction and churn remained stable. So it really was an expansion story this quarter. The one other tidbit I'd give is we did have an impact from the carrier fees. They were $20 million in Q3, $6 million in Q2. So that did have a 180 basis point impact quarter-over-quarter. But even adjusting for that in both periods, DBNE or dollar-based net expansion was up slightly. Operator: Thank you. We'll move to next question. Our next question comes from the line of Joshua Reilly of Needham. Joshua Reilly: I just wanted to hit on the AI voice start-ups as well in terms of their usage and growth trajectory. Is there an inflection in the last couple of quarters in terms of volumes here, whereas before it was more of an experimentation phase by these kind of hundreds of thousands of AI voice start-ups? And if so, what would you say is driving that? Khozema Shipchandler: Yes. I wouldn't say an inflection per se. I mean I think it's part of the overall trend that we're seeing around AI a little bit more generally. And obviously, we're a beneficiary of it as it relates to voice AI. I mean I think from our perspective, we're seeing more voice AI agents go into production. But as I mentioned earlier, like for us, it's still a relatively small contributor. I mean we're seeing an impact with those companies. They're accelerating. We talked about the growth characteristics, about 60% in the quarter, but both for the business and then actually as well as even for voice, it's still a relatively small proportion. So I think we're kind of encouraged by the trends that we're seeing, just given that it is still relatively small. We do feel like we sit in the center of the AI value chain. You heard Thomas talk a moment ago about the way in which that's getting adopted into some of our more multiproduct and perhaps more even complex offerings like a ConversationRelay, like an agent productivity solution. And so I think all of these different things are coming together at the right time to be able to drive some additional growth for us. But again, still relatively small in the scheme of things. Joshua Reilly: Got you. And then is it fair to say that the momentum continued for international messaging in Q3 as well. And curious, what are you seeing in the competitive landscape for international messaging that may be helping you win more? And thoughts around -- that was historically a price-sensitive market, but it seems like you're taking market share with international messaging and what may be driving that? Thomas Wyatt: Yes. Thanks for the message, Pat. In general, we had a really strong quarter in international as well. It's one of our key growth levers and overall growth was at 18%. So we like that. The -- if you think about it competitively, what we're just seeing more broadly on a global basis is that the multiproduct capabilities that Twilio offers has really helped us differentiate from specific point players in messaging only, for example. And some of the solutions that we've wrapped around our core channel capability has really allowed us to become a more strategic player for some of these customers and helped us win a lot of competitive bids that maybe we wouldn't have won in the past. So we're encouraged with the traction that we're seeing there. I think Genspark AI is a great example. We talked about earlier in the call, but the ability to bring e-mail messaging, voice all together in an integrated experience is a powerful value proposition. Operator: Thank you. We'll move to next question. Our next question comes from the line of Patrick Walravens of Citizens. Patrick Walravens: So maybe for Khozema and Thomas, I'm curious what areas you guys feel like you want to invest in the most to help continue driving growth next year and beyond? And then maybe, Aidan, I'll just give you my question upfront. I mean, so on the A2P fees, Verizon raised them. I mean, realistically, shouldn't we expect T-Mobile and AT&T to do it at some point, too? And how do we think about that? Aidan Viggiano: Why don't I start with the last question, and then I'll hand it back to Khozema. Yes, they may. I mean, listen, what we've factored in is what we know, which is the Verizon impact. We don't know of anything else. We haven't forecasted anything else in our guidance yet, but there could be a day when those AT&T and T-Mob follow the Verizon action. And that would present an additional pressure to kind of our gross margins. But as a reminder, the way this works is it's kind of a gross up of revenue and a gross up of cost of goods sold, but it has no impact on our ability to generate gross profit dollars, profit dollars or free cash flow dollars. Khozema Shipchandler: Yes. On the first question, Pat, in terms of priorities for investment, like I wouldn't call out anything really different than the things that we've been talking about previously. we feel like we've got kind of the right OpEx envelope for the company. We alluded to some investments in Q2 that we thought were ephemeral in terms of their timing and the impact on the P&L. They've obviously paid off in terms of some of the results that we've seen, in particular, voice AI and RCS adoption, still pretty early days, I would say, on that latter one. And then we made an inorganic investment that we announced today with Stytch. That's an identity company. We think that, that's an important space as we continue to build out our platform. And so I wouldn't call out anything like radically different than things that we've articulated in the past. I think even identity for us is much more about like how do we deliver platform value and a true authentication experience through the platform in a world that's more agent going forward. Operator: Thank you. We'll move to next question. Our next question comes from the line of Samad Samana of Jefferies. Samad Samana: First, maybe just if you think about the voice AI customers, I know it's been asked about enterprise versus AI start-ups. But maybe within that enterprise cohort that you're signing up, is it more customers that you have existing relationships with on the messaging side that are exploring voice AI with you? Or is it actually bringing in new customers that are completely new to Twilio because of the voice AI use case? And then I have one follow-up question. Thomas Wyatt: Yes, I'll take that first one. It really is a balance. A lot of our enterprise customers, again, we do have strategic relationships with and maybe they were a messaging customer initially with just a little bit of voice, and this has accelerated -- Voice AI has accelerated their usage of voice. So that's been a trend for us. But the other is our self-service business is just growing well over 20%. It's -- voice is a big chunk of that growth, as I said, grew 40% this quarter. So that's largely coming from new customers that are doing more with voice. So, in general, it is a pretty good balance across the customer base. Samad Samana: And then maybe as I just think about the context of a lot of parts of the business firing really well right now, it's been quite impressive, just like sales and marketing has been very consistent in dollar terms. And so I'm just trying to think how do you feel about current capacity, especially as you think about more -- selling more of the products and capturing the opportunity that's ahead of you right now? How should we think about maybe sales and marketing going forward and maybe a sneak peek at 2026 and how you're thinking about that? Thomas Wyatt: I could start just talk a little bit about how we're running the go-to-market organization more efficiently, and I think that's helped us a lot. But we've been a big user of our own technology. We've got AI assistants that power a lot of our presales motion. In fact, [ ISA ] is what we've mentioned before is our AI assistant for our self-service business. And the AI assistant handles the vast majority of inbound leads for us and helps customers not only get acquainted with Twilio, but also onboard and get activated and upgraded as part of the process. That's allowed us to scale our go-to-market motion there. And the same is true on post sales, where we handle a lot of our typical customer cases and service tickets powered by AI, and that's given us a lot of productivity gains as well. So we'll continue to invest in capacity as we need to, but we've been able to grow through an efficient manner using our own technology. Operator: Thank you. We'll move to next question. Our next question comes from the line of Ryan MacWilliams of Wells Fargo Securities. Ryan MacWilliams: Just a high level to start on macro in the quarter. Anything worth calling out that deviated from your expectations either from a seasonality standpoint or a linearity standpoint in the quarter? Unknown Executive: In short, no. Ryan MacWilliams: Perfect. And then just on RCS, the existing customers are able to upgrade with no code changes. So will customers immediately begin sending RCS as part of their traditional messaging? And how is interest so far for net new RCS use cases? It's early and you can have different use cases like two-way messaging, but how are folks approaching that at this point? Khozema Shipchandler: I think it's still pretty early, honestly. Like I think what we are seeing is -- so we're seeing growth, right? So that's encouraging. But I think we're seeing growth off of a relatively low basis. I think what we're finding is that there's a lot of experimentation happening. I think we're finding a lot of that is happening kind of going into this holiday season. I'm not sure that, that's going to manifest itself in terms of like kind of the broad variety of different kinds of RCS use cases that you've seen kind of described. So I think it's still a little bit slow going as far as that goes. But I do think customers that have tried it are excited about the potential for the technology. Obviously, it's very, very strong for marketing, for promotional activities. I think some of the other use cases, especially around notifications, obviously, 2FA, like a more traditional SMS is still kind of hanging in there. And so I'd say it's still early days in terms of what we're seeing. But I think the thing that we're most encouraged by in terms of RCS in terms of like kind of a longer-term view is it is branded. And I think anything that's branded in this world where there's a lot of communication coming at us as consumers is just higher efficacy and more trusted. And so we like those characteristics about RCS, but again, early days. Operator: Thank you. We'll move to next question. Our next question comes from the line of Rishi Jaluria of RBC. Rishi Jaluria: Nice to see continued underlying strength in the business. Look, I think we've been talking about some of the margin expansion, capital returns, gross margins. Maybe taking a step back, if we think about the key drivers here where you have durable top line growth and a mix shift story and an AI story, you've got margin expansion and cost discipline, and you've been doing a good job of returning capital to shareholders via buyback. Just how should we be thinking maybe about what is the steady-state free cash flow per share growth profile for this business look like? And I'm not asking for a specific number, but just as you think about aligning the business towards that, how should we be thinking about what that sort of profile on a durable kind of steady-state basis looks like? And then I've got a quick follow-up. Khozema Shipchandler: Yes, Rishi, this is Khozema. I'll try. I mean it's -- we're obviously not going to provide guidance on it, right? So I think that it's kind of hard to answer the question in that context. But what I would say is that, look, when we kind of went into Investor Day and we kind of tackled this as a newer management team, we are very intent on just driving more financial discipline, more operating rigor in the way that we ran the place. And then in terms of the innovation bets that we were placing to just be a lot more focused about those, right? So I'd say it really starts just in terms of the way that we run the company with those three things. Now as a result of those three things, we've been able to do many of the things that you've been describing, right? So you heard Thomas talk a moment ago about the way in which he's running the go-to-market team. That's been done well. But on top of that, that's also been able to be done efficiently based on some of the investments that he and his team have made into productivity in terms of running that team. As it relates to R&D, I would say there are a handful of bets that we've really put wood behind the arrow on. We're excited about identity, but there, again, relatively small investment in terms of doing a tech and talent tuck-in to augment some of our existing capabilities. As it relates to kind of leverage and then cash flow going forward, you've heard Aidan in the past talk about that it's still relatively early for us. I mean we have undergone some mix shift as it relates to the geographic characteristics of our workforce. I think that's played out pretty well. I think we've been able to keep our employment relatively steady state. And so by definition, we're getting some volume leverage there. I think on top of it all, we still are making investments behind AI, behind automation. I think that drives ongoing leverage and free cash flow. And then look, we're not kind of prescriptive about it per se, but we've said that there's sort of a framework for which we're going to do stock buybacks. When we think that the stock is a good value, we're going to step on the gas a little bit, and we've got a grid that otherwise kind of dictates that. So you put all that together, we feel pretty good about where we've been certainly. But as we look forward, we're pretty optimistic about the trajectory of the company. Rishi Jaluria: Got it. That's super helpful. And then maybe as we think about some of the AI adoption that you're starting to see, obviously, very impressive. How are we thinking about the opportunity now internationally? I think it's been clear from prior technological ways a lot of the adoption maybe outside of the U.S. takes a little bit longer or happens a little bit of a lag. Maybe how do you think about investing for that opportunity? What are you seeing? And maybe where are there opportunities for you to take advantage and out-innovate maybe some of your competitors outside the U.S.? Khozema Shipchandler: Yes. It's a good question, Rishi. I guess what I would say is you heard Thomas talk a moment ago about the strength in self-service. And so I think, honestly, like we're doing a lot of what we're already kind of investing in our OpEx window is how do we make that self-serve experience like easier and easier and easier with every turn of the crank. And I think what you're going to see from us going forward is that, that experience is made even simpler. The compliance hurdles are even easier to kind of get over. The AI capabilities that are embedded so that when a customer attaches themselves to our console, it's just like a much simpler, more fluid experience. And I think that will benefit all customers, obviously. But I think with respect to international customers who want to get up and running, I think that will make us even more sort of the vendor of choice. And so I wouldn't say there's something like idiosyncratic that's international versus domestic that we're investing in there. And then as it relates to kind of the go-to-market engine, we pretty selectively invest in Australia, in Japan and Singapore in terms of like having boots on the ground. But obviously, you do have a number of countries in that part of the world that are participating in this. We just held our SIGNAL event in Australia just a few weeks ago. And I would say just based on the conversations that we had there, the excitement that customers have around AI with and without Twilio, frankly, we're pretty encouraged about the trends that we're seeing there, and I think it's going to take off fast. Operator: Thank you. We'll move to next question. [Operator Instructions] Our next question comes from the line of Andrew King of Rosenblatt Securities. Andrew King: Really good detail on the cross-sell motion. If you could just give us a little color into the initiatives that you've put in to really help fuel that growth. And then just off of that, if you could give us a little bit of an update as to your current penetration to your customer base, as I know, the majority still hold just one product. Thomas Wyatt: All right. Great. I'll start with just the sales motion that we're driving, and it's largely powered by the innovation that we're building in the products. And the products are working better together in terms of the various primitives and channels that we have and the ability for our go-to-market team to put together a compelling set of solutions and business outcomes that our enterprise customers and our ISVs can take advantage of. And it's about driving the enablement. Our marketing programs are tied to it. Our compensation plans have been tying to it. So there's a variety of go-to-market initiatives that we've been doing to drive this type of performance. And I think it's still early days. We have a lot more upside when it comes to getting a broader set of customers to consume more and more Twilio services, but we're pretty encouraged with the start that we've had since the beginning of the year. Andrew King: Great. And if I can just sneak one more in there. It's obviously seemingly, you've been landing more products with new customers at a more rapid pace. Can you just give us any color as to those trends that you're seeing amongst initial purchases? Thomas Wyatt: Yes. I think a lot of it comes to the self-service business that's really been a great accelerant for new customer additions. And part of that is just we're getting more efficient in managing our funnel, leveraging AI to help us onboard customers faster and upgrade customers faster. And when we do that, that the value and the ROI becomes quicker and customers realize it and then eventually, they expand faster. So it's just been this flywheel of little tighter marketing, leveraging AI a bit better, better integrations across the products to make it simpler and reduce friction. And all of that's helping the flywheel of customer additions that ultimately helps us scale into the enterprise as these customers get larger and larger, our strategic relationships with them grow and it gives us a lot more white space opportunity within those accounts over time. Operator: Thank you. I'm showing no further questions at this time. Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.
Operator: Ladies and gentlemen, welcome to the DexCom Third Quarter 2025 Earnings Release Conference Call. My name is Abby, and I will be your operator for today's call. [Operator Instructions] As a reminder, the conference is being recorded. I will now turn the call over to Sean Christensen, Vice President of Finance and Investor Relations. You may begin. Sean Christensen: Thank you, operator, and welcome to DexCom's Third Quarter 2025 Earnings Call. Our agenda begins with Jake Leach, DexCom's President and Interim CEO, who will summarize our recent highlights and ongoing strategic initiatives, followed by a financial review and outlook from Jereme Sylvain, our Chief Financial Officer. Following our prepared remarks, we will open the call up for your questions. At that time, we ask analysts to limit themselves to 1 question each so we can provide an opportunity for everyone participating today. Please note that there are also slides available related to our third quarter 2025 performance on the DexCom Investor Relations website on the Events and Presentations page. With that, let's review our safe harbor statement. Some of the statements we will make on today's call may constitute forward-looking statements. These statements reflect management's intentions, beliefs and expectations about future events, strategies, competition, products, operating plans and performance. All forward-looking statements included on this call are made as of the date hereof based on information currently available to DexCom, are subject to various risks and uncertainties, and actual results could differ materially from those anticipated in the forward-looking statements. The factors that could cause actual results to differ materially from those expressed or implied by any of these forward-looking statements are detailed in DexCom's annual report on Form 10-K, most recent quarterly report on Form 10-Q and other filings with the Securities and Exchange Commission. Except as required by law, we assume no obligation to update any such forward-looking statements after the date of this call or to conform these forward-looking statements to actual results. Additionally, during the call, we will discuss certain financial measures that have not been prepared in accordance with GAAP. Unless otherwise noted, all references to financial measures on this call are presented on a non-GAAP basis. This non-GAAP information should not be considered in isolation or as a substitute for results or superior to results prepared in accordance with GAAP. Please refer to the tables in our earnings release and the slides accompanying our third quarter earnings call for a reconciliation of these measures to their most directly comparable GAAP financial measure. Now I will turn it over to Jake. Jacob Leach: Thank you, Sean, and thank you, everyone, for joining us. Before we begin, I'd like to take a moment to recognize Kevin Sayer, who is not on the call today, and as many of you know, has taken a temporary medical leave. Kevin, I know you're listening today, and I look forward to catching up with you after the call. Now on to the quarter. Today, we reported third quarter organic revenue growth of 20% compared to the third quarter of 2024. We continue to benefit from category growth, recent CGM access expansion and solid share performance in both our U.S. and international businesses. In the U.S., we again saw more of our new customer starts coming from the entire type 2 population as we benefited from the growing type 2 coverage and expanded reach within primary care. As a reminder, we now have coverage established for anyone with diabetes with the national formularies of 3 of the largest commercial PBMs. This includes active coverage for nearly 6 million type 2 non-insulin lives, which represents about half of the type 2 NIT commercial population in the U.S. Of course, the journey is not done, and we will continue to work tirelessly until we have coverage for this entire population of more than 25 million Americans. What continues to give us confidence is the growing body of CGM outcomes evidence for this population. This leads us to believe that this access expansion is a matter of when, not if. Given the significant level of CGM usage that already exists among this cohort, we have more real-world evidence available today than we have ever had in any of our prior advocacy campaigns. We already have seen positive updates to the latest standards of care for this group, which we expect to be further strengthened as randomized controlled trial data continues to emerge. This summer, we saw the first wave of non-insulin RCT outcomes presented at the annual ADA conference, and we are now working to build on that with our own well-designed RCT. We built our trial to be representative of the wide spectrum of people with type 2 diabetes and look forward to providing a readout early next year. Similar to our MOBILE and DIaMonD Studies, we believe this data set can become the cornerstone of our ongoing type 2 evidence road map. This not only helps us advocate for the remaining type 2 lives in the U.S., but it also helps us as we push for greater type 2 coverage across the globe. As our customer base becomes increasingly diversified with this broader coverage, we have also continued to iterate our product experience to make it more personalized for each of our users. One example that I'm particularly excited about is a new feature called DexCom Smart Basal. As we continue to learn more about the type 2 customers on basal insulin and their health care providers, we've observed several trends. First, there is apprehension to start basal insulin for those who truly need it. More than 1 in 3 patients avoid basal insulin altogether because of the fear of hypoglycemia. For those who are on basal insulin, about half of the customers who ultimately progress to mealtime insulin never reach an optimal dose of basal insulin. And for those that do, it typically takes several months to find the right dose. We have an opportunity to make this experience so much better for our customers. DexCom Smart Basal is a titration module built within the DexCom app that is designed to make basal insulin titration and management simpler, faster and personalized for our customers. Our algorithm team designed this new software to learn from the daily glucose patterns of customers and better identify the ideal timing and dose of their basal insulin. With Smart Basal, we also expect to improve adherence and greatly reduce the required workflow for the prescribing community as titration has historically required ongoing manual inputs and frequent office visits. DexCom Smart Basal is currently under review with the FDA and for CE Mark. Once available, this feature will further advance our value proposition amongst the type 2 basal population and for the physicians that treat them. We also continue to enhance the value proposition of Stelo with ongoing software updates, broader distribution and new metabolic health partners. I'm very proud of how far Stelo has come in such a short period of time. In just the first 12 months in the market, Stelo has surpassed $100 million in revenue and has increased awareness of what CGM can do for everyone to improve metabolic health. We are continuously making the app more personalized and engaging. We simplified ordering and reordering and our growing base of partners has enabled broader health insights for our customers. And this is just the beginning. We'll continue to make this feel like more of a consumer experience over time. We've also been getting a lot of inbound interest recently in bringing Stelo to the international market and look forward to these extensions in relatively short order. In addition, everyone at DexCom is very excited for the broader launch of our G7 15-day system. Over the past few months, our team has done an incredible job securing reimbursement for this product at the same net price to DexCom and low out-of-pocket cost for our customers. In fact, we now have contracts finalized with Medicare, every major commercial payer and our commercial DME partners. By finalizing these contracts, we've cleared a key step to enable our broad-based launch. As we've previously mentioned, we're currently in our initial launch with our Warrior community as we gather feedback for our broader launch. We are looking forward to our broader rollout in the coming weeks. As we expand this launch, we are also continuing to innovate on the entire customer service experience. We recently introduced a completely new digital experience called My DexCom Account, which is rolling out country by country as we speak. My DexCom Account is a new online account portal that streamlines and simplifies the DexCom digital experience. Built on direct customer feedback, this new platform will allow instant connectivity for online support, real-time visibility into orders or open tickets and active tracking for sensors. It will also greatly simplify service requests for our customers as the site can autofill necessary user information, including the serial number of a sensor that may require service. Between updates like this, our new pharmacy replacement model, ongoing software investment and our continued focus on product performance, we are demonstrating our commitment to advancing the customer experience. And this is just as true today despite some of the media that has been circulating on this topic. So let me make one thing clear. The customer is and will always be the North Star for this company. This is what drives us every single day, and it's what's also driven me here at DexCom for over 20 years. That will not change. I recognize the investment community is attempting to interpret data on this topic. As we recently shared, our complaint rates for G7 have been largely stable over the past couple of years, and this continues to be the case across important categories, including sensor performance. But I also want to speak to our loyal customers and prescribing community today. If any of you have an experience with DexCom that does not meet your expectations, we understand and that is not good enough for us. We're always listening and we're always making improvements as a result. For G7, this has included improvements in Bluetooth connectivity, improvements to the adhesive and most recently, addressing deployment challenges that we identified earlier this year. Through this ongoing work, our product continues to get better. Status quo has not and will never be our guiding light. I'm confident to say that the quality of the sensors coming off our lines today is exceptional and meets our high standards and the expectations of our customers. To close, I just want to note that I am honored and excited to be serving as DexCom's next CEO. During the fall conference circuit, I had the opportunity to lay out my initial vision as the next CEO and share my conviction in this business over the long term. I look forward to sharing even more over the coming months. Our future remains very bright. Our team is incredibly strong, and the opportunity ahead of us to transform metabolic health is unlike that at any company I can think of. With that, I'll turn it over to Jereme for a financial update. Jereme Sylvain: Thank you, Jake. As a reminder, unless otherwise noted, the financial metrics presented today will be discussed on a non-GAAP basis. Reconciliations to GAAP can be found in today's earnings release as well as the slide deck on our IR website. For the third quarter of 2025, we reported worldwide revenue of $1.21 billion compared to $994 million for the third quarter of 2024, representing growth of 22% on a reported basis and 20% on an organic basis. As a reminder, our definition of organic revenue excludes the impact of foreign exchange in addition to non-CGM revenue acquired or divested in the trailing 12 months. U.S. revenue totaled $852 million for the third quarter compared to $702 million in the third quarter of 2024, representing an increase of 21%. As Jake mentioned, we continue to see all areas of type 2 diabetes become a bigger contributor to our U.S. new starts given our broader presence within primary care, significant new coverage within the non-insulin market and the continued growth of the basal market. We'll work to further build on this momentum, particularly as we push for even broader coverage for this group. International revenue grew 22%, totaling $357.4 million in the third quarter. International organic revenue growth was 18% for the third quarter. This marked our third straight quarter of accelerating growth internationally with particular strength coming from regions where we have expanded access in recent quarters. For example, France continues to stand out as one of our fastest-growing markets year-to-date. In fact, our growth in France has accelerated during every quarter of 2025 as we have built off the significant new coverage that we finalized late last year. Canada also performed very well during Q3 as we saw a nice uptick in demand followed quickly behind our new coverage in Ontario. As a reminder, in both of these markets, we now have coverage secured through basal insulin use, and we expect more markets to move this way over time. These are great examples of the type of growth we can deliver as this type 2 coverage emerges. Our third quarter gross profit was $741.3 million or 61.3% of revenue compared to 63.0% of revenue in the third quarter of 2024. During the third quarter, we made continued progress in stabilizing our global sensor supply as we were able to fully restock our level of educational samples in the field and further rebuild our finished goods inventory levels internally. Given this progress, we were able to taper back our investment in expedited shipping by the end of Q3. In fact, we recently began shipping via ocean freight once again, beginning the transition back to more cost-efficient methods of transportation as we close 2025. While these supply dynamics have progressed in line with our plan, our third quarter gross margin was impacted by scrap rates at our manufacturing facilities that were higher than expected, albeit an improvement from the second quarter. As Jake mentioned, earlier this year, our team identified certain third-party components that were contributing to an uptick in deployment issues for our sensors. While we have since addressed that issue directly, we have chosen to provide extra scrutiny to supplied products to ensure the highest quality product gets into the field, even if this results in higher costs in the near term. We expect these scrap rates to continue to improve in the coming months. Operating expenses were $468.4 million for Q3 of 2025 compared to $413.9 million in Q3 of 2024. Despite some of the challenges on gross margin, the company has been incredibly focused on managing operating expenses even as we increase our investment in R&D spend. Operating income was $272.9 million or 22.6% of revenue in the third quarter of 2025 compared to $212.0 million or 21.3% of revenue in the same quarter of 2024. Adjusted EBITDA was $368.4 million or 30.5% of revenue for the third quarter compared to $300.1 million or 30.2% of revenue for the third quarter of 2024. Net income for the third quarter was $242.5 million or $0.61 per share. This was the highest quarterly earnings per share in the history of our company. We remain in great financial position, closing the quarter with greater than $3.3 billion of cash and cash equivalents. We had a very strong free cash flow quarter, which helped us increase our cash and cash equivalents balance by nearly $400 million, even as we repurchased shares over the course of the quarter. This cash level provides us with significant flexibility. And given where our shares are currently priced, we plan to settle our upcoming $1.2 billion of convertible notes in cash. In addition, we plan to remain in the market this quarter, repurchasing additional shares. Even after settlement of this convert, we'll have plenty of cash on hand to assess ongoing capital allocation opportunities, including additional repurchases. Turning to guidance. We are raising our revenue guidance to a range of $4.630 billion to $4.650 billion, representing growth of approximately 15% for the year. For margins, we are lowering our 2025 non-GAAP gross profit margin guidance to approximately 61% to reflect the additional scrap dynamics we discussed earlier. For both non-GAAP operating margin and adjusted EBITDA margin, we are now guiding to a range of 20% to 21% and 29% to 30%, respectively, as we expect to offset some of the gross margin pressure through continued OpEx leverage. With that, we can open up the call for Q&A. Sean? Sean Christensen: Thank you, Jereme. As a reminder, we ask our audience to limit themselves to only 1 question at this time and then reenter the queue if necessary. Operator, please provide the Q&A instructions. Operator: [Operator Instructions] And our first question comes from the line of Travis Steed with Bank of America. Travis Steed: First, I want to send well wishes to Kevin. I hope things are going well. Look forward to having you back. But the question is there's been a lot of attention on Street '26 estimates and what your growth might look at -- look like in '26. And just curious if there's any color you could share with us today as we start to think about our 2026 growth and the modeling at a high level. Jacob Leach: Yes. Thanks, Travis. While we're not going to provide specific guidance for '26, I'm happy to give you a little color on how we think about framing up our guide for '26. So the way we look at it as we're building it up for the year, when you start the year, a lot of different variables that can play out throughout the course of operating throughout the year, there's lot of puts and takes. And so we obviously -- that's why we often frame it based on a range. And so when I think about the current coverage landscape that exists today globally, so those that today have coverage and access to CGM, it certainly unlocks and affords a nice runway of growth for the next couple of years, and certainly in that double-digit range. But I think as we look at our range, the top end of our range is probably slightly below where the Street is today for our base case. Certainly, there are opportunities for us to outperform should they happen, things like expanded access and our ability to take share based on our innovation pipeline. But from a base case perspective, we really think that the top end of that range probably comes in just under where the Street is. Operator: And our next question comes from the line of Larry Biegelsen with Wells Fargo. Gursimran Kaur: This is Simran on for Larry. So I just wanted to maybe start off with the commentary around G7 and G7 performance and the noise during the quarter. It sounds like those issues have been resolved from an engineering standpoint or a manufacturing standpoint. So can you just please confirm that? And then has the noise been disruptive to new starts or prescribing patterns in Q3 at all? And do you expect it to be disruptive in Q4 or 2026? Jacob Leach: Yes. Thanks, Simran, for the question. So as I mentioned, we feel really good about the quality of the sensors that we're producing, both from accuracy, reliability and also addressing those deployment challenges that we ran into at the beginning of the year. Our team has learned a tremendous amount about those and been able to really solve them in the factory. So we're feeling great about the product. I've actually been out in the field recently talking to customers, spending quite a bit of time with both prescribers and those using our products and really listening and making sure that we're addressing all their concerns and understanding what they're experiencing. And I am hearing from all of them that things have improved since those deployment challenges we experienced in the front half of the year. So we feel really good about where we're headed. Jereme Sylvain: Yes. And then to your question on potential impact on patients in the field, around the fringes, we have heard questions out there. And so those are things we're out addressing, as Jacob mentioned, getting out into the field and making sure folks understand what happened. And the reality is we see that the complaint rates, while they're consistent with where they've been in the past, we know those types of complaints are the frustrating ones. So there's likely been a bit of an impact on new starts here over the course of the third quarter. The good news is we're still hundreds of thousands of new customer starts in the U.S. and certainly strong outside the U.S. as well. So while the quarter was impacted by slightly below a record, still really strong performance over the course of this quarter and really proud of that. I'm really excited about what happens now as we've addressed any of these concerns out there. We're really excited to see how this impact along with our sales force, along with some of the educational samples that are available, along with supply being in a good position, that will impact us here in the fourth quarter and beyond. Operator: And our next question comes from the line of Robbie Marcus with JPMorgan. Robert Marcus: I wanted to ask, as you look at the new patients, where are you seeing the most growth? Is it kind of slowing down in type 1 and type 2 intensive and getting most from basal and nonintensive? And do you need to do anything differently out in the market and whether it's advertising or the field force to keep driving uptake of these increasingly new and important patient groups? Jereme Sylvain: Sure, Robbie. Yes, this is Jereme. I can answer that. I think where we see the growth, we still see strong performance really across all the type 2 markets. That includes intensive as well. So we've seen a lot of new patients coming in type 2 intensive basal and certainly in non-insulin as coverage is out there. We still see a decent amount of type 1 patients. But of course, as you know, type 1 is most penetrated and smallest population. So naturally, as we get bigger and more coverage, you're going to see that. To your question then how do we go to market and where do we go, you're 100% right. I mean our teams are constantly looking at where we call, who we call on, which channels we market in and where folks go. And so we do think about it a little bit differently. I often compare it to shaking a tree, right? Sometimes you shake a tree, you got to move to the next tree to shake it. And so we are doing those kinds of things as we look at where the opportunities are. So well taken, something I know the internal team has been looking at and we'll continue to look at is making sure that we continue to drive the growth and find the patients. I mean when you look at how much coverage is out there, there are many more people with coverage than there are people that are already using CGM. So there's a lot of opportunity out there to go get. Operator: And our next question comes from the line of Danielle Antalffy with UBS. Danielle Antalffy: Jake, I just wanted to follow up on Travis' question, and thanks for the color you gave in the framing. I guess I just want to clarify one point, and that is, so it sounds like that is assuming no expanded coverage. I mean how -- what are your latest thoughts on potential for expanded coverage in 2026? And I guess the bigger question is, will you guide according to your thoughts on expanded coverage? Or will you only reflect guidance based on coverage today? And I'll leave it at that. Jacob Leach: Yes. Thanks, Danielle. Yes, to be clear, when we think about a base case for next year's guide, it includes the coverage that we have today, what the landscape looks like, both across insulin use and noninsulin use and then as we look globally. So that's really how we're going to think about our base case guide for the year. Jereme Sylvain: Yes. And as we move through the course of the year, we'll make sure we point out the wins that are significant, right? There's always little wins here and there, but the wins that are significant. And Danielle, you know there's some potential big wins out there, both across non-insulin, basal and even really -- even as you get into some more emerging markets. So there's a lot of opportunities for wins. But again, our base case won't include those. Operator: And our next question comes from the line of Matt Taylor with Jefferies. Matthew Taylor: I guess I'll stay on the thread for a minute. You've gotten the 6 million commercial lives covered. I think based on MOBILE and prior analogies, we might expect it will be natural to see you have that readout, submit it and get NIT2 coverage by the end of next year around that time frame. But there's been some chatter that maybe that comes earlier. I don't know exactly where that's coming from. Could you talk about the potential to get broader NIT2 coverage earlier in '26? And what would be the mechanism to do that? Jacob Leach: Yes. Thanks, Matt. So I think, as I mentioned before, this is really our expectation that it's not if, it's just when this coverage is going to come. The benefits for users are so clear in this population of non-insulin users as we continue to see further expansion, whether you look at it from the cost savings perspective to a payer in the first year or you really look at those outcome results that patients get. One of the things I think about is the study that we did in primary care in a very focused area in Ohio, where when we started that trial, the patients -- there was over 170 patients in that study, only one of them was meeting the ADA's recommended guidelines around A1c. And then within the 12-month period, more than half of that group was hitting the recommended target, and that was all based on CGM use and this is, again, a non-insulin population. So just that type of powerful outcome is clearly some of the things that's powering this expanded coverage over time. So timing is hard to predict, but we're going to be ready for it when that coverage comes. Operator: And our next question comes from the line of Joanne Wuensch with Citibank. Joanne Wuensch: And Kevin, I hope you feel well soon. My question has to do with the 15-day sensor. It sounds like it's in limited launch right now with the Warriors and then it will expand. What does it take to expand into a broader group? And how do we think about the revenue contribution as well as the operating margin or gross margin potential? Jacob Leach: Yes. Thanks for that question. We are incredibly excited about this product launch, and it is in the Warrior community today. We've got a number of folks on the sensors. And we're getting great feedback both about the performance of the sensors as well as the new extended duration and the accuracy of the product. And so we plan to be shipping into -- with our channel partners here in the next couple of weeks to really being out that broader launch. And a lot of like getting ready for that was around making sure we got the coverage, as I mentioned, making sure we're working with our insulin partners on the integrations and really just doing all the training and everything necessary to make this a very successful introduction of our next innovation. Jereme Sylvain: Yes. And to your question on the margin impacts, given the timing of the rollout, we've never really expected it to be a big contributor this year. It will have a pretty nominal contribution from a gross margin perspective and from a revenue perspective. We do expect next year, it becomes an opportunity to go after additional patients for those folks that certainly are looking for longer wear time. I think it's a great opportunity there. And clearly, from a margin perspective, all of the things we've historically said around the 15-day product, that still all rings true. So I think as that rolls out, we'll be pushing it out into the field. And we'll give you updates over the course of 2026 based on how that rollout is taking place. But we sit here in a great position to launch it because our coverage is going to be robust when we launch it. Obviously, we're going to have partners that are going to be ready to catch it and handle it and integrate it. And so having both of those ready, I think, is going to provide for a really exciting 2026. Operator: And our next question comes from the line of David Roman with Goldman Sachs. David Roman: I appreciate the feedback and updates regarding the performance of G7 and what you're seeing in your own data. Can you maybe go into a little bit more detail about some of the actions you're going to undertake to ensure that, that message is clear within the broader community? And one of the just highlights that comes to mind here is the extent to which there is such a consumer element to this category versus some of the other segments that all of us follow. You have a much broader swath of stakeholders to target. So maybe just talk to us about what the plan is to make sure that the message is consistent across all relevant stakeholders and maybe what investments you're making to enable that? Jacob Leach: Yes. Thanks for the question, David. So we are out in the field. That's one of our primary communication points with customers, both the prescribers and our users. So we're out there making sure they understand all the things we've done to address this issue. One of the things I'd like to introduce is the fact that we mentioned that our complaint rates have been generally stable over time, and that is true. One of the things we have seen though is at the beginning of the year, we saw those complaints around out-of-box failures increase. And what was really good to see is that the -- those increases in rates there were offset by decreases in accuracy complaints, Bluetooth complaints, a lot of things over time that we've been working on. So as we fixed the issue with the deployment, we really do anticipate seeing those complaint rates come down overall, which has really been our goal for a while. When it comes to engage with consumers, we're really looking at how do we make sure that the message is clear on exactly what performance looks like and how much we've done to improve things. And so that's really the message that I'm carrying as well as our entire sales team and all of our team members here are really focused on interacting directly with our customers. Operator: And our next question comes from the line of Marie Thibault with BTIG. Marie Thibault: Just wanted to go back to the scrap rate issue, make sure I understand that better. It sounds like that had to do with materials around deployment. Is that to do with the inserter specifically? And as we think about it improving, is that something we can put in the rearview going into 2026, going into the 15-day rollout? What's kind of the timing on putting that all behind us? Jereme Sylvain: Yes. And that's -- the way you think about it is exactly that. It's how the needle ultimately drops the sensor off into the skin. And I think you can expect to see that really playing out. We're expecting some of that to dissipate here into Q4. The underlying -- when you look at the underlying standard performance and the standard costs and margin, that's been really, really solid year-over-year. In fact, what you would see is you'd be really pleased with what that looks like. So what you're seeing is and what's playing through in the results is a few hundred basis points of what's played out in the combination of freight and some of the scrapping we're doing around these deployments. So what I would expect to see as we move into 2026, and as Jake alluded to, we're really putting this behind us, we'd expect a lot of that to dissipate. That gets you back to more of where we expect it to be a more normalized margin rate. And then you have the contributions, of course, of 15 days. So we do expect to be in a good position as we exit this year and get into next year. And with some of the things Jake had alluded to with lower warranty rates around Bluetooth, complaints around either accuracy and/or adhesives. As these get to be fixed as well, I think that's also a potential opportunity. So some work to be done here, but I think we're putting it behind us. Obviously, we see -- we've improved a little bit from Q2. We expect to improve again in Q4. And you can see that implied by our guidance, which puts us in a good spot as we move into 2026. And we'll give you one more clarity when we give official guidance for 2026 here in the next few months. Operator: And our next question comes from the line of Matthew O'Brien with Piper Sandler. Matthew O'Brien: And again, I hope Kevin is recovering right now. But just wanted to talk about the guidance for Q4. We -- on a 2-year stack basis, we've decelerated here in Q3, especially domestically. And I think Q4 is also implying a pretty -- another step down on a 2-year stack basis. And I think, again, most of that's probably domestic based on how well you're doing internationally. Why is that decelerating? And then if you do the 2-year stack in Q4, it's a little less than 10% growth. Why are we comfortable in low double digits in '26 if you've got some deceleration here at the end of '24 -- sorry, end of '25? Jereme Sylvain: Sure. Yes. Let me maybe talk about the quarter and just especially maybe more importantly, the guidance. I think that's what you're getting at is exit rates. And we understand we are getting at. So I'd first and foremost say, when you look at the year over time, the one thing to be mindful of is we are starting to see a more normalization in the seasonality of our business. So I think first, you have to remember, and that's been happening over years now. And I think as you go back, you'll see it, where the contribution as a percentage of the full year has been declining in Q4. And the contribution from Q1 has been increasing. And I would expect that to continue to take place this year. So as you're comparing it, I think the one thing to be thoughtful about is Q1 actually has now a seasonality benefit. You saw it this year, quite frankly. So I think you expect to look at it from that perspective. When you peel that back, actually, what you're seeing is a pretty solid stack growth rate. I mean when you peel back those -- remember, that Q4 dynamic now has been happening now for multiple years. So I think it's important that as you zoom out and you think of it from that perspective, you look at the underlying patient base, which I think your models will show the underlying user growth has been solid. I think what you're also expecting to see is the delta between unit volume growth and revenue start to come closer. You're seeing it here in the third quarter, and you're going to see it here for the back half of the year. So you put all those together, solid underlying user growth, which is how we really measure the business, and that continues to go well with consistent pricing and then the seasonality effect in effect, I think you can start to see exactly how we're thinking about next year. And that's just as a base case. So hopefully, that gives you some context. Always happy to talk further about it, but I would include those as you're assessing kind of modeling seasonality. Operator: And our next question comes from the line of Michael Polark with Wolfe Research. Michael Polark: I wanted to ask on gross margin and the fourth quarter implied guide, which were the last 2 questions. So I guess I'll follow up on the gross margin, Jereme. I heard a few hundred basis points cumulatively from scrap and freight. Can you spike out or remind us on just how much is the freight component, how much is the scrap component as we run that out through the rest of the year into '26? Jereme Sylvain: Yes. It's a little -- yes, it's basically 50-50. It's in that ballpark of the impact. If you remember, we had in Q1, we had to expedite some freight and then we talked about for the rest of the year being about 75 bps for the rest of the year -- on the full year numbers, by the way. So you can see why on the full year, when you put it all together, it's about 50-50. Now as we get back to more ocean freight, and we expect to do that here, obviously, we put some stuff on ocean here exiting the third quarter and into the fourth quarter. Next year, the goal is to have a majority, if not all of our product really moving via ocean, especially as it comes over from Malaysia. So I'd expect to see certainly some benefit there. And as again, as Jake alluded to, the out-of-box failures through the work we're doing around sensor deployment as that comes down, again, we expect to see that dissipate. So think about 50-50 on both of those. And you can think about that on this year. So it gives you your jumping point exiting off of 2025 as to how to think about 2026. Operator: And our next question comes from the line of Jayson Bedford with Raymond James. Jayson Bedford: Maybe just for me on the type 2 uptake, can you just comment on the utilization within this user base versus those type 1 users? Jacob Leach: Yes. Thanks, Jayson. So when we think about the utilization of our system across different customers, obviously, AID customers have the highest utilization, greater than 90% or so. So really, because of the fact that they need those sensors to power their system, they're high utilization in that group. And as you kind of step down into the intensive insulin users, not on AND, you're still in that north of 85% utilization for that group, again, because of all the benefits of the CGM and the fact that they're on intensive insulin. So I want to make sure they don't have the issues with hypoglycemia or anything. Now if we start to take a look at the broader type 2, starting with basal, that group historically has been pretty strong on utilization between like 80% to 85%, so pretty close to those IIT users. And that, again, really comes from the benefit -- shows the benefit they're getting from the product. And we saw that in our MOBILE Study. We asked patients after they participated in that study, we want to continue using CGM. And 95% of them said yes, and we saw high utilization rates during that study. And that's what we see in our field data. And as we step down into the non-insulin type 2, it's lower than the previous categories, but still around that 75% utilization mark. And so something that we're seeing also in our Stelo product as we have quite a few type 2 non-insulin users there that don't yet have coverage for CGM. They're using Stelo, and that's definitely the highest utilization group for our Stelo product. Operator: And our next question comes from the line of Shagun Singh with RBC Capital Markets. Shagun Singh Chadha: I was just wondering, to what extent are the quality issues impacting new patient starts or did in Q3? When do you expect to return to record levels? And do you need that expanded access to return to record levels again? Jereme Sylvain: Yes. So I think we covered a little bit earlier, and I know you're jumping between calls. The expectation is there's a little bit of an impact here in Q3, and we've seen it. And we've said basically that Q3 was still hundreds of thousands of patients, but just slightly below a record here. The expectation is certainly as we move into Q4, I mean, the internal expectations for Q4 is to push and get back to those records. And obviously, next year and we get into 2026, our assumption is going to be record new year for patients in 2026. And that's, again, in our base case. And so -- and that's with existing coverage. So I don't think we need necessarily new coverage to push into that. And that wouldn't be our expectation going into it. Obviously, more coverage provides more opportunity, but those would be our expectations. And hopefully, that gives you some context. Operator: And our next question comes from the line of Brandon Vazquez with William Blair. Brandon Vazquez: Jereme, you were talking a little bit about the gap between growth in the volume and pricing closing a little bit. I was curious if you could quantify it at all, where if you do the math kind of in the U.S., especially, where our model suggests something like $1,400 to $1,500 annual revenue per patient somewhere in that ballpark, down a lot over the past couple of years, as you've alluded to. Where -- are we in the ballpark there on that pricing? And then how does that pricing trend over the coming years? Where do pricing declines on a year-over-year basis start to level out? Jereme Sylvain: Sure. Yes. I don't think you're far off. I mean, at the end of the day, we give patient numbers at the end of the year, and you can do the math globally, and we've talked about kind of the various splits. So I think you're in the general ballpark there. The price -- the year-over-year price isn't much of an impact channel by channel. And so I think that's really important to note. We don't necessarily have significant pricing impacts, say, retail to retail or DME to DME year-over-year. Those typically fall in that 2% to 3% range. Where we typically see it is in mix. And in mix, it's where you have folks moving -- typically, there's been a move to the pharmacy over time. That has been stabilizing over time. And so what you're seeing is you're starting to see that coming in. And you'd expect it to see it come in, and we talked about this at the beginning of the year. So it's playing out as we expected. The interesting thing going forward is just going to be -- and this is why it's not necessarily giving a number, but it's just talking through how it's going to work. As you start to think about where coverage exists today and as coverage gets knocked down, most of the new coverage opportunities are coming via the pharmacy. So you think about type 2 coverage, type 2 coverage in NIT is coming through the pharmacy. So that's where your volume is going to continue to grow. On the flip side, there's been a lot of talk about CMS coverage for type 2 and where that would be. And a lot of that would come through our DME partners, where you have Medicare fee-for-service going, and that would then change the method over time. In both of those models, remember, the price year-over-year isn't necessarily impact. It's where patients are getting access to their product and then therefore, the underlying mix that makes that up. So I think what I would say is price isn't the challenge. It isn't the headwind, it's more mix. And the mix has really stabilized. But usually, what happens is when we pick up a lot of new coverage, that's a good thing at the end of the day. And obviously, a lot of coverage in type 2, that's a great thing. And hopefully, and I know we've kind of talked about it a little bit here earlier on the call, we're expecting a time when there's CMS coverage over type 2 non-insulin and that could swing it the other way. So it's just important to have your model set up that way. It will help you follow along. Operator: And our next question comes from the line of Jon Block with Stifel. Jonathan Block: The OpEx leverage has made up for some of the gross margin shortfalls throughout 2025 to help with margin expansion this year. And so I'm just curious, when we think about 2026, is that sort of like a pure role reversal due to 15-day. And Jereme, you mentioned the underlying GM getting better? Or are there arguably additional OpEx opportunities that you still have? I guess what I'm getting at is how do we think about catch-up spend, if that's the right way to frame it into '26 on the OpEx line? Jereme Sylvain: Yes. So what I would say is the work we've done this year is less about catch-up spend and deferral and things along those lines. It's really the work we've done is more around -- how do we get more efficient leaning into tools, leverage? Where do we hire folks in the world and how do we support things? How do we leverage the investments we've already made in technologies that we've made, quite frankly, years ago. So I don't necessarily know that there's a lot of catch-up spend. But we have done a lot of great work around it this year. And so we'll give you a guide next year as we get there. But I mean, we do obviously talk about opportunities for gross margin in 2026, and we expect there to be those opportunities there. In turn, I think there's an opportunity to continue to lever in OpEx over time. We'll see the pace in which we do that. I think there's -- we want to balance investment and don't want to necessarily miss out on opportunities. If there happens to be expansions in coverage next year, we want to be well suited to take advantage of that. So we'll make sure we balance the 2. But we know at the end of the day, our goal is to continue to deliver operation margin improvement over time. So we'll make sure we balance those 2 in the best interest of growing the business long term, but also delivering results back to shareholders. Operator: And our next question comes from the line of Bill Plovanic with Canaccord. William Plovanic: The first off is really, I was wondering if you could talk just about the cadence of the new patient starts as we went through the quarter. Was it back-end loaded, front-end loaded to give us confidence that the fourth quarter might become a record quarter? And then I just -- I know you talked in general about attrition rates, but have you seen any trends in the attrition rates, especially as you dealt with some of the quality issues? Jereme Sylvain: Yes. I'll start with the second one first. The attrition rates have been relatively stable. It's all within the normal kind of ranges we look at. We pay a lot of attention to it. We track it really every week, we have a report out. We pay close attention. So we keep a close eye on it, and they've been stable. In terms of trends over the course of the quarter, I think what we're seeing, at least I'll maybe say anecdotally because I think it takes us a little time to get all the patient data in. I think you guys know this, it takes about 45 to get it all in. So I don't want to make any sort of statements about the back half of September other than I think it's very easy to take some of the anecdotal evidence. And we're hearing a lot of very positive anecdotal evidence. As we speak to our sales leadership and as they kind of pulse the field, I think the sensor deployment issues as those have waned in samples in the field and those have waned in the doctor's offices, you're seeing a lot of anecdotal positive feedback. And obviously, that then typically leads to performance. So it'd be too premature for me to give you a readout on September until I have all the data in the hands, and that's the prudent thing to do. But anecdotally, I think we're very encouraged by what we're hearing. And Jake, you've been meeting with physicians all the time. Maybe you can walk through kind of what you've been hearing out there. Jacob Leach: Yes, certainly. So we are hearing from our prescribers that they had some challenges earlier in first half of this year, in particular, around some of those deployments kind of flowing through into both their offices and then into the customers' hands. And when customers have issues, they tell their prescribers about it, and we heard from everybody. And so when we saw it, we jumped on it and we resolved it. And it's very consistent feedback as I talk to users and prescribers that things have improved dramatically. That being said, issues can still happen, right? You can have an accuracy issue. You can have sensor fall off. All those things, that's why we're making the investment in our service platform and making sure ultimately that it is a competitive advantage for us. The digital investments that we've made are just the beginning around making it easy for customers to get exactly what they need. And that's been a focus of mine, particularly over the last 6 months, looking at how can we improve what we're doing. We've had a lot of plans that have been in place, and I think we've got a lot more coming. So it is a real area of focus for us to make sure that the experience of our users is the best possible. Operator: And our next question comes from the line of Mike Kratky with Leerink Partners. Michael Kratky: I'd echo sending our best to Kevin. I'd like to circle back on a prior question, just about the breakdown of price versus volume growth in your U.S. 3Q number. So our expectation is that we would probably start to see you anniversary some of the significant pricing headwinds that you've seen just coming from channel shifts. So to what extent do you really see that in the third quarter? How should we think about that moving forward, both in 4Q and '26? Jereme Sylvain: Yes. It's a good question. You clearly see some of it based on the growth number, right? And the unit volume growth is based on a patient base. And our ultimate unit volumes don't necessarily change as much quarter-to-quarter. They're based on underlying patient growth. And so what you see is a comp delta there. And that comp delta, as you know, is a channel mix issue last year that certainly hit us that we're anniversary-ing this year, and that's why you see the growth rate number there. So clearly, what you're seeing is a narrowing based on the growth rate this year, but it's a bit artificial. It's a little bit -- this is a bit higher than you otherwise would have seen because of the comp to last year. But nevertheless, you are seeing it. And so I think you can see it here playing out in the third quarter. I think you'll see it play out in the next quarter as well. Certainly, the comps get a little bit different next quarter. So I think that's important to be mindful of. But as you step back over the course of the year and you look at the growth rate in the U.S., I think what you're going to see is underlying unit volumes and revenue performance are starting to tighten up. And that's what we've talked about over the course of the year. So quarter-by-quarter, it can get a little lumpy just based on some of the challenges we had last year. But step back, you can see that playing out over time. And to your point, we do expect to see that playing out in 2026. Operator: And our next question comes from the line of Richard Newitter with Truist Securities. Richard Newitter: I was just wondering, keeping with the very preliminary 2026 commentary, can you describe what's in your base case for any kind of competitive dynamics, possibly even intensifying with Abbott coming out with a dual analyte. Would love to just kind of hear what you're factoring in there. And then same kind of question, just what else are you willing to tell us about 2026 puts and takes as the base case as we're thinking about next year? Jereme Sylvain: Yes. And I appreciate the question. Our goal in at least talking to this was to give you guys some directional feedback as to what the base case would look like next year. Now the base case doesn't represent what I would say is what we aspire to be over time, right? The base case is what I would say is a prudent way to start with the puts on the year. And so things like assumption around competitor product, those are absolutely always considered in there. Obviously, we'll be thinking through anything from coverage -- from known coverage decisions this year, which are already obviously in those base numbers. We'll consider all of that really around the world. So that's why we give you some of that context. And getting into the specifics, I think we got to give you the official guidance before we then get into the official specifics. And that's why we're a little hesitant to start walking through each of the specifics. Obviously, we have a budget for next year. We have a long-range plan, a 5-year long-range plan that we all have in-house here. We'll meet with the Board here in December and roll that out for you guys as we get into next year. But again, I think the context was trying to make sure everybody had an idea for how we were thinking about base case, and we'll get into those specifics when we officially give guidance because then you can put math officially to the numbers. Operator: And our next question comes from the line of Josh Jennings with TD Cowen. Joshua Jennings: I wanted to just -- I know it's only been a couple of months since ADA in the 2Q call, but just any updates on the G8 platform and whether or not ketone sensing has kind of moved up the priority list? And any time lines when we could learn more or any time lines you can provide just in terms of when G8 could move forward towards commercialization. Jacob Leach: Yes. G8 is an incredibly important part of our product portfolio in the future and our future innovation. It is a multi-analyte platform. And as we think about just in general, the cadence of innovation and what we're looking at is we're really focused on meeting broad user needs. So unmet needs across a broad base. We think about it in the type 1 space. We also think about it in some of the higher growth segments as well as the market like our Smart Basal technology that we were talking about. That's a really important way to drive growth in that basal population and really meet those unmet needs. So yes, certainly, multi-analyte is an important part of the future platform. But as we look at G8, we're not going to get into the time lines now. But we will -- one thing I want to let everybody know is we are planning to put together an investor event first half of next year. We're actually going to hold at our Mesa manufacturing facility to give you guys a glimpse into our operations and our high-volume manufacturing plant. And that will be a good opportunity for us to talk about things like LRP and the portfolio of products and all the things we plan to do to drive this business forward. Operator: And our next question comes from the line of Matt Miksic with Barclays. Matthew Miksic: Can you hear me okay? Jereme Sylvain: We can hear you. Matthew Miksic: Terrific. So one question. I'm not sure if this has come up, but it's one of the things we hear in the community recently is some folks holding on to G6 or going back to G6. And I'm just wondering if that's a factor in sort of manufacturing efficiency or line management and what your thoughts are on how and when you'll be able to transition off of that? And I have one quick follow-up, if I could. Jacob Leach: So yes, for G6, we are consistently transitioning customers over to G7. And so the number of G6 users is consistently coming down. We have heard of some folks going back to G6, and it's a very small number. It doesn't really move the needle much at all. And we're going to continue to make sure that G7 meets the needs of all users across the whole spectrum. So no one has a reason to stick with G6. Now we know that as we've seen in some of our previous upgrades between generations, when people are familiar with the technology and they're happy with what they got, they're going to -- they may stick with it, right? And so over time, we're going to keep moving people over to G7. And we haven't announced the official conclusion of G6 in the market. We will, when the time is right, and we'll make sure we give people a heads up when that's going to happen. Matthew Miksic: Okay. That's great. And then on just general product strategy, the DexCom ONE strategy overseas, I think, has been successful in some geographies and kind of met the need that you had set out for that program. But generally, DexCom, of course, has been kind of a core central line product with much of the innovation building generations around the same -- the central platform. I was just wondering if, at some point, you're thinking about adjacencies or alternative approaches to helping patients manage diabetes or other glycemic elements of their life, but with a truly different platform, not a different version of G7 or G8. I'd love to get your thoughts. Jacob Leach: Yes. I appreciate that question, really going into the thinking of broad markets and how do you address those unmet needs. DexCom ONE+ is doing great and a lot of that growth in France that we talked about is on that platform, and it's really allowed us to compete in market segments that we weren't previously because we were focused on the G Series products and the more acute end of the diabetes spectrum. So yes, DexCom ONE+ is a super important part of our portfolio approach to serving the needs of different customers. And the mobile apps and the experience are different there. I mean one another example I'd kind of point to as we expand the opportunity here is Stelo, right? Stelo is a product that spans a pretty broad spectrum of users from type 2 all the way down to prediabetes and then those that are looking at better understanding the metabolic health. We will be taking that product internationally next year. And so we'll see it in a number of markets where we've had a pretty good request and demand for Stelo outside the U.S. And we are -- Dex Basal is a great example. I kind of mentioned it before, but that ability to help a prescriber and a patient really get to the right outcome safely in the clinical study around Dex basal, it was focused on getting people to the optimal dose as fast as possible with no hypoglycemia, and that's what we saw in that study. And we're also excited about the opportunity for it to drive better adherence. So once users, they're going on insulin for the very first time, they're taking an injection. They've maybe never done injections before. There's some apprehension there. But when you show them how much better their diabetes control is when they've got the right dose of basal insulin, it's pretty motivating. And so we do expect to see some adherence improvements there and really just drive general outcomes. So focusing on outcomes for the broad population is what we're trying to do here, and we do it in a number of different ways through different products and different software experiences. Operator: And our final question comes from the line of Anthony Petrone with Mizuho. Anthony Petrone: Best wishes to Kevin as well. Maybe one on gross margin as it relates to the G7 transition and one on just penetration. When you think about the transition to G7, how long do you think it will take to fully roll over the 10-day to 15-day? And what does that do to gross margin once you're kind of on a 15-day heavier user base? And then some chatter just on penetration, even competitive results. When you think about type 2 noninsulin-intensive hypo risk and basal-only, you have basal-only penetration at 20% to 25% and non-insulin-intensive hypo at under 5%. What do you think a reasonable penetration for those 2 segments is over your long-range plan? Jereme Sylvain: Yes. So I'll start with maybe the second, which is getting into the markets. And we've always talked about basal as an example, being a market that should get to about 60% penetration over time. And that's kind of our crystal ball. But it's been pretty darn accurate as we thought about type 1 historically and type 2 intensive. So it's what we think about, obviously, somebody taking insulin, having that sensor on there is a really nice thing, and we've proven time and time again the combination of the sensor plus insulin plus now obviously, DexCom Smart Basal in there. That's a huge opportunity to meet an unmet need in a growing market. So we're really excited about that offering and that can help people manage it. So we do expect that. In the non-insulin and the type 2 hypo-risk population, it's hard to know. That's such a big wide swath of population, especially type 2. And those hyper-risk folks, while they're covered, they do kind of sit typically -- they're typically seen like a type 2 patient, right? So we expect that to be -- 60% is obviously higher than we would -- it would be a high mark there just given where we think basal is. But anything more than 5%, which is where it is. And as it goes up to 10%, 15%, 20%, you're talking about millions and millions and millions of people on the product. So more to come as we go there. We know it's a lot more than today. And we know that with coverage, it's going to be a lot more than today. So we're really excited about that. To your first question on gross margin, what can 15-day do and how long will it take? If you look at historical patterns of how long it's taken from G5 to G6, G6 to G7, it does take a couple of years. As Jake alluded to, folks do get comfortable with technology and to get folks to change over, it does take a little bit of time. Our goal is obviously to go faster. And obviously, with the form factor very similar across 10-day and 15-day, I think there's an opportunity, but it does require a different script. So we're going to work on it over time. We'll give you more feedback as it's getting out into the field. We obviously -- as we get into guidance next year, we'll give you a little more color about what our assumptions are, and we'll have a little bit of time under our belt. So more to come on that one. But the impact obviously is significant for us as we move more and more from 10-day to 15-day and 3 sensors to 2. And obviously, the impact on margin can be significant. But it could also allow us to grow the business more, going into markets where with maybe a DexCom ONE+ product or other products where that 15-day wear life allows us to really compete with what would be a cash pay or a lower reimbursement market. So it allows both. It allows top line growth and going after more markets, and it allows opportunities to expand margin. Very excited about it. Operator: And ladies and gentlemen, that concludes our question-and-answer session. I will now turn the call back over to Mr. Jake Leach for closing remarks. Jacob Leach: Okay. Thank you, everyone, for joining us today, and thank you for the well wishes to Kevin. I know he really appreciates that. And I'd like to wrap up the call today by expressing my deep appreciation to all the employees of DexCom. I'm extremely proud of this team and how we've continued to focus on serving our customers and not getting distracted. In the end, our core values are clear, and we will continue to be unrelenting in our mission to empower people to take control of health. We have a remarkable opportunity to improve the lives of millions of people around the world, and I couldn't be more excited about the future. Thanks, everybody. Operator: And ladies and gentlemen, this concludes today's call, and we thank you for your participation. You may now disconnect.
Operator: Ladies and gentlemen, welcome to TotalEnergies' Third Quarter 2025 Results Conference Call. I now hand over to Patrick Pouyanne, Chairman and CEO; and Jean-Pierre Sbraire, CFO, who will lead you through this call. Sir, please go ahead. Patrick Pouyanné: Good afternoon, good morning, everyone. Before Jean-Pierre goes through the details of the third quarter results, I would like to make a few opening comments. Almost exactly 1 month ago, we updated you our strategy during our Capital Markets Day in New York, and we had 4 key messages: consistency and resilience of our 2-pillar strategy, strong and secure production growth in our Oil and Gas business, accretive cash flow generation and capital discipline. I believe that this company strong results -- for third quarter results, but again, Jean-Pierre will detail with you, perfectly illustrates these key catalysts and highlights the value proposition of our consistent and profitable growth model. Strategy is clearly in motion and is translating into more cash flow even in a more challenging environment. Indeed, despite oil pricing dropping by more than $10 per barrel year-on-year, the cash flow for the third quarter increased by 4% and adjusted net income for the third quarter held steady. Why? Primarily for 2 reasons. First, the hydrocarbon growth -- production growth is a reality and is highly accretive. The new project barrels coming online, such as Mero Fields in Brazil, deepwater projects in the U.S. offshore, going for oil, Tura and Phoenix for gas have an average cash flow margin, which is roughly twice higher than the base portfolio, and they have contributed 170,000 barrels per day during the first 9 months of 2025 compared to 2024. These new barrels have generated around $400 million of additional cash flow year-on-year. So growth volume around $200 million and higher margin, another $200 million. And so they have contributed to absorb the equivalent of $6 per barrel of decrease in the Brent in terms of cash flow. So that's, I think, a strong demonstration that of disciplined investment framework that includes strict sanctioning criteria, less than $20 per barrel, technical cost of $30 per barrel breakeven for E&P projects is delivering its fruits. And we expect, of course, that this cash flow tailwind from new high-margin barrels will continue as we work our way through our deep project queue. As a reminder, starting from '25, continuing in '26, the company is growing upstream production by 3% per year through 2030. And what is the differentiation factor that the standout of our business model is clearly that more than 95% of this production by 2030 is already either online or under construction and largely under lump sum EPC contracts, which seems to significantly derisks the cost. So our projects are in hand, and we are executing them. And again, this year and this last quarter demonstrate that we are well in the delivery mode. Some people think we are borrowing, but we are borrowing for the good. Cash is growing. The second pillar of these good results have been the recovery of the downstream, which contributed to the company's resiliency with cash flow up by almost $500 million. It is true that the refining margin were better. It's also true that we managed to capture them, thanks to a good availability of our assets. We -- and in particular, there were several turnarounds during the quarter, but they were executed in time, in schedule and in budget, and it allows us to reach our objective. And of course, Marketing and Services continue to deliver consistent results and demonstrated by the priority given to value over volume in this segment is the right approach. In addition to highlighting the strength of our consistent strategy, this third quarter demonstrates as well that we are delivering in the short term, specifically on the second half of 2025 plan that we laid out during the July earnings call, which included 4 key elements. Again, the accretive production growth, giving more cash flows, the downward inflection in our net investments coming back to the capital discipline, which decreased by $3.5 billion quarter-over-quarter, a reversal of the seasonal working capital as we have released this quarter of $1.3 billion. And lastly, of course, all these elements improved the gearing that is now close to 17% compared to next to 18%. So the end result is that during the third quarter at $69 per barrel, the company generated excess free cash flow. With cash flow, including working capital variation, more than covering net investment plus $4.5 billion of shareholder returns in the form of dividends and buyback. It's leading me to shareholder returns. The company, of course, continues its strong track record of dividend growth. The Board of Directors decided to increase the first interim dividend of close to 8% in euro and more than 10% in dollars as compared to 2024. On the buyback side, as announced on September 24, the Board of Directors authorized up to $1.5 billion of share buyback for the fourth quarter of 2025. And therefore, assuming annual cash flow between $27.5 billion and $28 billion, in particular, supported by the better refining margin that we observe currently, the 2025 payout ratio is expected to remain around 56%. Looking forward, we expect to maintain a strong momentum for the fourth quarter. Upstream production is anticipated to grow more than 4% year-on-year like this quarter. The net investments are expected to decrease quarter-over-quarter, in particular, because we will deliver the disposal proceeds, $2 billion are expected. And at the end, the net of acquisition will represent $1.5 billion of inflow -- cash inflow in the balance sheet. And that with another anticipated positive contribution from the seasonal working capital, we anticipate to continue to strengthen the balance sheet with gearing forecasted further decline to 15%, 16% at year-end. Last but not least, we have -- Board of Directors has approved the road map to transform our ADRs into ordinary shares. And we're happy to announce that we ordered today, JPMorgan, to launch the termination process of the ADR program with the objective that ordinary shares are expected to begin trading on the New York Stock Exchange from December 8. This is, of course, an important milestone for the company as it will allow for a single class of TotalEnergies shares to trade with extended hours. It will be essentially a continuous listing from Paris 9:00 a.m. to New York 4 p.m., 10:00 p.m. Paris time. And we hope that this ordinary shares listing will be a clear catalyst for the stock in 2026 in both Paris and New York markets, and we intend to market these ordinary shares on the U.S. market even more actively than today. I will now turn the call over to Jean-Pierre, who will go through the details of the third quarter financials. Jean-Pierre Sbraire: Thank you, Patrick. I will start by commenting on the price environment in the third quarter versus the second quarter. Brent averaged $69 per barrel during the third quarter versus $68 per barrel in the second quarter, up 2%, but down more than $10 per barrel compared to the third quarter of '24. ETF averaged $11.3 per MMBtu versus $11.9 per MMBtu, down 5% and the average LNG price decreased to $8.9 per MMBtu versus $9.1 per MMBtu, down 2%. On the other side, for refining, the European refining margin significantly improved to $63 per ton compared to $35 per ton during the second quarter, up close to 80%. In this price environment, the company reported strong financial results with third quarter '25 cash flow increasing by 7% compared to the second quarter and adjusted net income increasing by 11%, thanks to the continued positive impact of the new attractive upstream barriers and strong downstream results that reflect the company's ability to capture higher refining margins in Europe. Overall, profitability remains strong with return on equity for the 12 months ending September 30 at 14.2% and ROACE close to 12.5%. Moving now to the business segments, starting with hydrocarbons. On a year-on-year basis, third quarter hydrocarbons production exceeded expectations and increased by more than 4%, making it the company's highest growth quarter so far this year. We anticipate that this trend will continue with fourth quarter hydrocarbon production expected to grow more than 4% compared to the fourth quarter of '24, notably benefiting from the restart of Ichthys LNG in Australia. Turning to the quarterly results and starting with Exploration and Production. This segment generated during the third quarter of '25, an adjusted net income of $2.2 billion, up 10% quarter-over-quarter in a similar price environment and outpacing quarter-over-quarter E&P production growth of around 4%. Similarly, cash flow growth was strong at $4 billion, up 6% quarter-over-quarter. Importantly, our project portfolio is delivering new low-cost, low-emission oil and gas production that is accretive with an average upstream CFFO per barrel that is roughly 2x the base portfolio. Regarding the E&P projects, we are progressing on all fronts. On the project side, we achieved first oil at the Begonia and CLOV 3 offshore fields in Angola, and we sanctioned Phase 2 of the redevelopment of the Ratawi oil field in Iraq, which is part of the GGIP project. As we have now launched all phases of GGIP, we are looking forward to the first oil for Phase 1 of the redevelopment early '26. On M&A, the company is consistently high-grading its portfolio. During the last earnings call, we mentioned that we are expecting several E&P divestments in the second half of the year. And during the third quarter, we divested 2 international blocks in Vaca Muerta in Argentina, which closed this quarter and 3 satellite fields in Ekofisk in Norway, out of our strict investment criteria, which is expected to close in the fourth quarter. And lastly, on exploration, we continue to reload the hopper to complement existing opportunities. And this quarter, we announced new license awards in Nigeria, in Republic of the Congo and in Liberia. Moving to integrated LNGs. Third quarter LNG sales of 10.4 million tons were essentially flat quarter-over-quarter as third-party purchases offset lower sales from equity production. Cash flow of $1.1 billion was in line with the second quarter in a stable price environment with an average LNG price of around $9 per MMBtu. Adjusted net operating income of $0.9 billion was down 18% quarter-over-quarter, primarily due to the planned turnarounds at Ichthys LNG in Australia that impacted production by around 50,000 barrels of oil equivalent per day for the quarter. On the price outlook, forward European gas prices continue to be sustained at around $11 per MMBtu for the first quarter of '25 and winter of '25, '26 due to anticipated winter demand. Given the evolution of oil and gas prices in the recent months and the lag effect on pricing formulas, the company anticipates an average LNG selling price of around $8.5 per MMBtu for the first quarter of '25. On the advancement of our LNG strategy, we are pleased to continue to grow our U.S. presence with the recent FID on Rio Grande LNG Train 4 in South Texas, and we enhanced resilience in our LNG and gas to power strategy by acquiring interest in shale gas assets from Continental Resources in the Anadarko Basin in the U.S. Turning to Integrated Power. Net power generation increased 9% quarter-over-quarter to 12.6 terawatt hour due to increased output from flexible generation capacity in Europe. The value of TotalEnergies unique integrated model is illustrated in the third quarter financials. Total cash flow from operations was $0.6 billion, up 9% quarter-over-quarter and in line with annual guidance. To provide more granularity in the Integrated Power financial performance, this quarter, we disclosed the split in cash flow between production assets, renewable and gas-fired power plants on one side and sales activity, B2B, B2C and trading on the other side, showing that each contributed equally this quarter. During Q3, Q4, sorry, sorry, during the third quarter, the company has executed well on the farm-down side of its integrated power business model, which contributes capital recycling and will generate a tailwind for free cash flow in the fourth quarter. The company signed an agreement for the sale of 50% of the 1.4 gigawatt renewable portfolio in North America and closed the sale of 50% of 270 megawatts renewable portfolio in France. These deals have a combined cash impact of around $1.5 billion. And in this deal, TotalEnergies retains a 50% stake in the assets and will continue to be the operator after closing and to offtake 100% of the [indiscernible]. This is in line with our business model. As an important reminder, our attractive upstream growth is not the only contributor to the company's resilience. Integrated Power will take the key role in this too, since it is differentiated and growing cash flow stream that is outside of crude cycles and with strong demand fundamentals. Moving to Downstream. As Patrick mentioned, during the third quarter, Downstream efficiently captured the high refining margins in Europe and contributed to the company's resilient financials. Third quarter adjusted net operating income of $1.1 billion, was up more than 30% quarter-over-quarter. Cash flow of $1.7 billion was up 11% quarter-over-quarter, thanks to good availability of assets that allowed us to successfully capture improved European margins. In terms of free cash flow during the third quarter, downstream cash flow from operating activities exceeded net investment by over $2.5 billion. In Refining, the European Refining Margin Marker strengthened during the third quarter due to the tension on the diesel supply chain in the context of low inventories. Utilization was 84%, which was towards the high end of the guidance range of 80% to 85%, and it reflects efficient operations and planned turnarounds at Port Arthur in the U.S. and HTC in Korea. In Marketing & Services, results remain consistently strong with high-margin activities, offsetting lower volumes. Looking ahead, we anticipate refining utilization of 80% to 84% in the fourth quarter, which accounts for scheduled turnarounds at Antwerp and SATORP. Moving now to the company level and starting with working capital. As expected, we benefited from the working cap release during the third quarter, which was a $1.3 billion positive contribution to cash. Furthermore, for the fourth quarter, we anticipate another positive contribution. On net investments, they meaningfully decreased to $3.1 billion in the third quarter, which includes $0.4 billion of divestments, net of acquisitions. In the fourth quarter, as mentioned by Patrick, disposal are estimated to total $2 billion, including the closing of Nigeria and Norway divestment for exploration and production as well as farm-down of renewable assets in North America and Greece for Integrated Power, and we reiterate full year of '25 net investment guidance of $17 billion to $17.5 billion. Based on anticipated net investments and working cap, we expect gearing to decrease to 15% to 16% at year-end compared to 17.3% at the end of the third quarter. With that, Patrick and I are now available to answer your questions. And the operator, so please open up the line for questions. Operator: [Operator Instructions] The first question is from Lydia Rainforth, Barclays. Lydia Rainforth: Two questions, if I could. The first one, can I just get your clarification on where we are on the tax issues in France. I've seen headlines this morning about tax on share buybacks, what that actually means? And then the second one, I think, Patrick, this comes back to your point around the growth in production is obviously doing quite well, but also the growth in cash flow numbers. So when you're thinking about 2026, can you just -- can you give us an indication as to how much more cash flow might grow than production for next year? And just remind us of that. Patrick Pouyanné: Okay. Good morning, good afternoon, Lydia. Well, first, as you observed, there is quite a huge -- quite a big fiscal creativity in the French parliament these last days. And clearly, the full recipe will not work, and we don't know, and so be careful not to overreact to the night news. There was a super tax on multinationals, which is completely out of the rule of law. France has signed 125 fiscal agreements with many countries. The principle is no double taxation, and this is very anchored, and as the government reminded to the parliament, this is the right rule. So we will not be touched by that. And there is also in the constitution some already decision when you want to tax above what is reasonable, then there is this type of taxations are not approved or canceled. So honestly, the situation -- political situation in France is not very stable. There is a huge debate, making a lot of noise. But I trust that at the end of the day, we will land to a reasonable avenue. And as you all know as well, we -- TotalEnergies does not make a lot of benefit in France, so I would say we'll follow this debate. But again, I'm comfortable with the fact that at the end of the day, government will take the right decisions to maintain, in fact, which is fundamental, what we call the supply policy to you know if you want -- before you redistribute in a country, you need to create wealth. You need to produce. You need to create results, revenues and then you can speak about distribution, and we will come back to that. So I understand that -- and I think, by the way, that this situation in France is weighing on the share price of TotalEnergies, but I remind you as well that we are a global company. And that again, largely 90%, 95%, I think, of our cash flows and our results are not coming from our country where we have the headquarters. So again, I think we -- from this perspective, the profile of TotalEnergies is quite different from other French companies, and that market should integrate it. For 2026, honestly, Lydia, you are asking me a question to which I will answer more precisely in February. As we know, we have a meeting for annual results, and what is the plan for '26. So I mean, my -- as I told you, in New York, we anticipate a growth of 3%, more than 3% for '26 again. For the cash flows, I don't have all figures. Of course, it's related to the new production coming on stream. But part of the, I would say, new production of '25 like the Brazilian production will have the full effect in '26. So I anticipate another accretive effect on our -- accretive effect, the size of it, I mean, you have to be a little patient. But again, clearly, we are in a delivery mode. We delivered the production growth more than 3, then this year, probably it will be next to 4, in fact, at the end of the year 3, 3.5 to 4 for '25, next year, at least 3. And then let's deliver the, okay, the accretive cash. But this is a road map, not only '25, '26 for the next 5 years. And if they miss, we reminded you and we, I think, gave you comfort during the New York presentation that we will deliver this $10 billion of additional free cash from all our segments from -- in the next 5 years. Operator: The next question is Michele Della Vigna, Goldman Sachs. Michele Della Vigna: Congratulations on the strong growth. Two questions, if I may. First, I was wondering if you feel like you're able at the moment to capture the extraordinary refining margins we are seeing, and how the improvements to your Port Arthur and Donges refineries are progressing? And then secondly, I was just wondering what you're seeing in terms of disruptions of the Russian volumes following the latest sanctions and if you start to see an impact on the physical market through your trading and optimization division? Patrick Pouyanné: Thank you for this question, Michele. To be honest, when I read again our press release, I think we are a little bearish on the oil price and the refining margins. The refining margins that we captured since the beginning of October for the last month is around $75 per ton. So when we guided you it's above $50, I think we are a little shy. And in fact, it's fundamentally linked because we begin to see real impact in the market of these last Russian sanctions. I think the market is underestimating what it means when you have U.S. sanctions, 2 large Russian company, which are at the core of trading Russian oil, by the way. And when Europe say that we are targeting countries which are considered, I would say, dangerous like India, Turkey and China. But if you trade oil or products from these countries, you could be under sanction. The reaction today in the market, and I shared some views with some of my colleagues, including in -- I was in Riyadh last 2 days, I can -- clearly today, trading hours as well are more cautious. And we see that everybody is taking this risk very seriously, including secondary sanctions, which might become. And so I see some impact. And I think clearly, the refining margins today instantly is more around $100 per ton than the $75 as an average. And it is linked clearly to, in fact, this sanction will oblige to reroute some volumes and to find a way to bring, I would say, products and crude oil more expensively to the different locations of the planet. So I think this is clear. That also could have an impact, by the way, on the oil price. I mean, the crude oil price. We've seen a reaction whatever announced today, it's still $65, but $65, I think, is a good assumption for this quarter, maybe a little more. So I would say, more bullish, that's what we wrote a few days ago because I begin to realize that these sanctions will have a real impact in this market. And most of the players are becoming -- are taking them seriously, which is good, by the way. TotalEnergies, we stopped trading any Russian oil for -- since end of '22, somewhere we penalized ourselves compared to other practice. But I think it was the right way to comply and to be strict on the Russian sanctions. So capturing the refining margins, for sure, the good news of the third quarter is that we managed to do it. We had a turnaround in Port Arthur, which is done. So it's fully back online now. Donges as well is running. So let's not fully -- not the last equipment we are waiting for by the end of the year, but it's running. So we deliver results. The third quarter -- fourth quarter, we have 2 turnarounds, one in Antwerp, one in SATORP, which are 2 big machines in our results. But I expect -- I would -- I expect that this will be, I would say, compensated again by the other assets and by the fact that the margins are higher. So I'm positive. And when I gave you a guidance of $27.5 billion or $28 billion, I was maybe too bearish by stating $27 billion in New York. It's because as well, I integrate these elements, which again and the duty and all the organization of refining chemicals and rest of Total are dedicated to capture these margins, which are good. So this is where we are, and I'm bullish on that. Operator: The next question is from Doug Leggate of Wolfe. Douglas George Blyth Leggate: I wonder if I could start with your upstream margin. The volume guidance is, again, pretty strong for Q4. But what we're -- I guess what we're observing is that your upstream margin seems to be moving up as well as the volumes. And I'm trying to understand what happens as the mix changes going forward. So for example, Iraq never historically had great margins. So how do you see the margin mix continuing as the growth trajectory sustains over the next several years? That's my first question. And my second question, if I may, is a quick one. Oil appears still to be in a very technical market. So we all see the oversupply, but it seems to keep bouncing around that 60 level. I guess my question is, if you ended up with better cash flow than you thought when you reset the buyback, what would be the first call on cash? Would it go to the balance sheet to continue deleveraging? Or would it go to the higher end of the buybacks? Patrick Pouyanné: The second question is clear. It will go to the balance sheet. So the second answer, I would say, is clear, will go to balance sheet. It will go to the balance sheet because I observed that -- and I have spent quite a lot of time with investors in the last month and clearly, I would say, long-term investor, deleveraging balance sheet is important for all of us. And if you want to be -- the best buyback policy would be to countercyclical. To be countercyclical, you need to have a strong balance sheet. So that's the position I would take and give you. So consider the guidance we gave you, we gave you quite a good guidance, and we told you [ $0.75 billion to $1.5 billion ] between $60 and $70, $2 billion at $80. But -- and I'm answering for '26, to be clear. If we continue and we see the plan to deliver more and more free cash on the road map to $10 billion, then we might revisit this scheme. But today, in '26, if it's coming, in your case, if we are above $60 in '26 or above $70, then we will continue to deleverage. Upstream margins, no, Iraq is a good contract. So I know historically, but it's not at all the case. As we always -- I mean, as I told you, we are far away from the historical service contract. We have -- when we came back in Iraq, it was clear that either we had a good contract, a strong contract, it was a matter of risk and reward and in particular, the Iraqi contract is quite reactive to the oil price. We capture some upside on it, which, of course, is important. We benefit in Iraq from quite low-cost production. So the breakeven is low. And so it will contribute. The Iraqi barrels, don't make a mistake, are contributing to the increase, are accretive. And again, I can give you -- but I think we gave you in New York and in fact, the base barrels at an average around $19, $20 per barrel. And today, these new barrels are more between $30 and $40 per barrel. So it's why we have an excessive growth in upstream. So I think you will continue to see, again, the free cash flow from upstream will move quicker than the growth of production. Operator: The next question is Biraj Borkhataria, RBC. Biraj Borkhataria: Firstly, nice to see that production growth being -- the accretion coming through. That really is a differentiator. Two questions. The first one is on the divestments for the year. I know you mentioned Nigeria in the $2 billion. I believe there was -- there were 2 deals that you're planning to do, one of which wasn't approved. So could you just outline whether the SPDC side, that sale was -- is that in the $2 billion, or is that on top of the $2 billion? And then secondly, recently, you signed a letter with a number of other CEOs around European competitiveness. I was just wondering if you could talk about whether that letter has actually catalyzed any kind of response on the policy front? Any color there would be helpful. Patrick Pouyanné: What is the second question? Sorry, I didn't catch it well. Oh, okay, I understood. I know, I know, I know. Okay, understood. European competitiveness. Okay. First, on divestments, I will be very precise with you. The $2 billion, I will give you where it's coming from. We intend to close, and we have already closed some of them, but we are intending to close. And all I think we have signed, and we are in the process, and it's a matter of closure. The Bonga divestment in Nigeria, Norway, the satellite Ekofisk field, some renewable assets in the U.S., renewable assets, which we announced in Greece and as well, we have another project where we will -- but I cannot yet disclose to you guys, another $300 million, which will be announced soon. So it's a $2 billion. This but does not include to be precise, the SPDC JV divestment, not only because of what was approved, but because we -- in fact, we were not able to close. There were some conditions precedent on our side. And we consider that it was not reasonable to close with, I would say, the supposed buyer. So we have relaunched -- not relaunch, we are discussing today. We have advanced discussions with 2 additional -- 2 new buyers, which are, I think, serious ones. And so -- but we will not be able to be clear to answer your question, to close it before this quarter. So it's for next year. By the way, it's good because it's part of the plan for next year. So from this perspective, what we have observed is that divestments of E&P assets generally takes time. It takes more time even if we have demonstrated with our divestment in Argentina that we were able to sign and to close in the same quarter. So sometimes it's going quicker. But -- so the plan is clear. We will -- and we have some interested buyers and serious buyers on it. So we are working on this one. There are others, like I mentioned to you, other IDs for this year and next year that I mentioned in New York on which we work as well. On the European Competition letter, the answer you probably follow that some tweets are linked in. European leaders are not really -- I mean, are listening to our request. They have been, I would say, we had some calls, we had some discussions with some European commissioners who took the letter seriously from 40 CEOs, to say, look, probably understood. I think we are maybe asking them too much, but I think it's a sort of wake-up call from these 40 CEOs. We, myself and the Siemens CEO, we are the spokesperson. Let's be clear, we were just reflecting what people expressed during our meetings between French and German CEOs. I've seen that on some topics, which are, I would say, more -- giving some more poly mix. There have been some calls that were not only from European CEOs, but from U.S. Energy Secretary and Qatar Energy Minister to call to revisit some of this legislation, which seems to be, in fact, against competitiveness. And again, for some of them putting at stake the security of supply of Europe. So I think this is something which is serious. And we are European CEOs, and we, of course, want to continue to contribute to Europe development and growth. But to do it, I think it's also our job to speak up when we consider that conditions are changing and it might be difficult for us to contribute to European prosperity. So it's a moving -- it's a continuous, I would say, fight, but let's contribute to it. Operator: The next question is from Martijn Rats, Morgan Stanley. Martijn Rats: I've got 2, if I may. First of all, what I thought has been sort of really surprising this year is the strength of new LNG FIDs. Already 1 year, 1.5 years ago, many of us were writing reports about the surplus in the LNG market in the second half of the decade, and yet 2025 has been a near-record year of new LNG capacity to be commissioned. And Total still has a few projects that needs to decide on. I was wondering if you perhaps could share with us your thoughts on despite the outlook, the number of new FIDs being as strong as they are and also how it impacts your own decisions in terms of future LNG FIDs? And the second one I wanted to ask is about the shares and the equivalence between sort of the Paris shares and sort of U.S. shares and so consolidating this into one single class of shares. I was wondering if this could impact the execution of your buyback program in the sense that I was wondering if this is in place from December 8 onwards, as I now understand it, if some of the buyback program could be executed in sort of New York listed shares. And of course, the context behind the question is then also like if that could then be a way to avoid some of the proposals that have creatively been floated as I think you put it in the French parliament over the last couple of days. Patrick Pouyanné: Okay. The second question on ADR. No, it does not impact at all the execution of the buyback program. I remind you that the ADR conversion is about around 9%, 10% of our shares. So obviously, the buyback program will be executed on the Paris Stock Market to be clear and so -- and not on the New York listed because it will be strange for us to buy back from New York where we want on the contrary to give more life to the New York market. So I prefer more activity and finding more -- we will buy back shares in New York when we will see we'll have much more active shares on this side of the Atlantic, I would say, so first point. And honestly, no, it will not -- by the way, it would not avoid in any way tax proposals. And again, the tax proposals are funny proposals. Again, there are some principles. When the President, Aurelien tried to impose -- by the way, he tried to impose a 3% tax -- extra tax on dividend, which was canceled by the European Union and by the French Constitutional Group. And all of us have recouped the money they took during 3, 4 years. So again, there are some principles. We are in a rule of blue continent and a rule of blue country. And this is the reality. So you must make a split between the political debates which are quite vigorous, I would say, and very creative and the reality of the rule of law, and we know that there is some limit. And when I see the figures, and I will tell you what I'm thinking, the higher it is, the better it is because then I'm sure it will not go through the system. So I mean I'm -- that's the reality. And there is -- you can -- in the constitution of -- French constitution, you cannot deprive people unreasonably to their -- rest of their profits and the results. And buybacks are not at all a profit. Buyback, it's just a matter of distribution. And by the way of investment in the company. We invest in the company. So I mean, I'm ready -- again, I think it's a topic on which I'm ready to continue to explain to parliament members with our buybacks. But I think we'll -- again, don't overreact to this type of, I would say, news. And I'm afraid we'll have all the news during the next 30 days coming from the parliament. At the end of the day, I trust the government. Martijn Rats: And on FID? Patrick Pouyanné: First question, FID, sorry, FIDs. Okay. I mean I'm not sure. I mean, there was a lot of announcements. I'm not sure about how many FIDs exactly because between the announcements and you have a flows of news of projects being revived because they get the permitting, or they get the approvals for non-FDA countries export from the U.S. administration. So you have a news flow coming. Then FID, I know Train 4 and 5 in next decade, yes, I know them. I know that 1 or 2 competitors are serious and are progressing because as I said in New York, all these projects, they need to find the financing. To find the financing -- and again, an acceptable -- a good financing, a good financing, not an expensive one. Otherwise, you will destroy the value on Train 4. We managed to put in place a project financing at Rio Grande 6.4% around 6.5%, which was good -- good project financing, which has the leverage on it. Other projects does not have the same good finance, I would say, Rio Grande and Rio Grande LNG. So then, of course, I agree that we need to take that into consideration. We have a strong policy, a clear view. We decided to transfer most of our exposure on the GKM, I would say, LNG spot market to the Brent formulas, and we have been active. I think we are very right to do it. I'm more bullish on the oil price, as I explained that on this one by the end of the decade. So of course, then we need to assess and to take into account that we postponed Cameron '24 because the CapEx were too high. It's not the time to run again on Cameron '24. And the other decision we have, in fact, in our portfolio is Papua and New Guinea. You know that we are working on the CapEx, to lower the CapEx. And it's clear that lowering the CapEx is of utmost importance in a market which could be from this perspective, weaker when we launch the project. So that's a topic on which we will have to work. And we have demonstrated already that we now have to be disciplined in that market, giving priority to, I would say, first and second quartile projects in our portfolio. And that's an element of -- which will have to be taken in consideration. By the way, we have announced that we lifted the force majeure on Mozambique. There is a funny figure, which is in some press news agencies, which speak about $25 billion. We are not at all, and I want to be clear and strong on this news, I don't know people are playing games, which is not acceptable. They have access to -- some people have relinquished a letter that I sent to the President of Mozambique. It's clear, it's written $20 billion in the letter, out of which $4.5 billion came from the -- what we spent in the last 4 years. So the budget in '20, when we left in 2021 was around, it was approved $15 billion, $16 billion. You add $4.5 billion, you are down to $20 billion, $20.5 billion. That's the reality of this budget. And by the way, this cost -- real cost, what we've done is that we spent -- we've done all the detailed engineering and all the procurement has been done. And so today, when we -- as soon as we fully remobilize everybody, we are purely in a construction mode. And that's why we said we are able to deliver the project by 2029. And so I've discovered some people were surprised. But in fact, we spent some money in order to, I would say, recapture part of the time, which was under force majeure. So the budget is not a total $25 billion, and I want to be strong, it's $20 billion, $20.5 billion as we will restart. And again, I can confirm it because we had long discussions, of course, with contractors. And so we have put all these figures together with them. And so -- and including on the delivery in '29, we have strong commitment. So we have realigned the whole system in order to be able to execute properly this project. Operator: Our next question is from Kim Fustier, HSBC. Kim Fustier: A couple of weeks ago at an industry conference, you mentioned that the LNG market is getting more competitive and it's harder to make money in trading. I guess that's not exactly a secret, but I was wondering if you could provide any more color on this. And I was wondering how much of the decline in LNG trading profits would you ascribe to heightened competition versus the more normalized conditions, lower volatility, lower spreads, et cetera? And then I also wanted to come back to the EU sustainability rules. I mean, I suppose let's see if the EU rules could be amended, but if they broadly stick, then how would you ensure compliance with the CSDDD rules in practice? And then hypothetically, what would be your options if some LNG supply is deemed to be noncompliant, would you be able to redirect it? Patrick Pouyanné: Okay. First question. I mean, to be clear, I think we made a demonstration in New York, the message is not that we have a decline of LNG trading. We told you that there were exceptional trading profits in '21, '22, '23 and that we are back to a normal environment with lower volatility. And that by the way, the results of '25 on integrated LNG are in line with '24. So I'm just that we don't benefit from the growth on this part at this stage. Later, we'll have a growth of volume, but this stage is stable. And in fact, they are quite related to the results of 2019 before this crisis. So I cannot -- what is also true is that you have observed, like me, that there are more trading hours, which came to this LNG business because maybe we were considering we were making good money. But today, answering your question, no, it's just -- my view is that today, we have to -- we came back to, I would say, more standard revenues. And I hope, of course, the main growth for LNG trading profits from TotalEnergies will come from the growth of volume of assets. So we have a volume impact on our trading business, which will generate additional profits. And we made a mistake when we were planning 2025 because we were thinking that we could replicate the last quarter '24 in full '25, which is not the case. So I have to -- and again, because that's clear that the volatility in '25 from the gas, the European gas price moved between $11 and $12 MMBtu. So it's not a big volatility. By the way, I'm not unhappy because $11 or $12 per MMBtu from my Norwegian gas and my British gas and my Danish gas, it's a very good price. So I'm maybe -- so I mean, people -- we should not give an overweight to the trading business. Trading business is adding value, but the base business is in fact, our upstream and our production. So I'm happy to -- I prefer to gain $12 per MMBtu of profits on my North Sea gas and maybe a little lower volatility on the trading. So let's be -- we never -- we -- maybe because there was exceptional years, incredible years, '22, '23, again, '21, '23, you consider it was the new normal. We never said it was a new normal. We even told you, be careful. There are exceptional results each time we -- exceptional means exceptional. So that's what I want to comment. And again, I remind you and why I'm linking back to our growth volume is that the trading within TotalEnergies is trading around assets. It's an asset-based trading. It's not -- we don't take casino. No, it's not the case. So that's the base of what we do. There are more competitors. But again, we have more assets than others. So it will help our trading business. And I think this is the idea. This is fundamental idea of integration. It's because we have more assets, more volumes, but we have more medium and long-term contracts with Asia. This -- what we signed in the last year, these brand-related medium- and long-term contracts offer some optionalities to our traders. And the optionalities that we included in these contracts have a value. And this is why I'm linking that to my assets and my business. This is the base of it. And some competitors do not have the same assets and contracts. Then about the competitive sustainability rules, I mean, the question is not to have energy noncompliant has not been -- the CS3D does not define the compliance. The CS3D is a matter of putting in place some rules, but you have to have a duty of vigilance on the way on the supply chain. Some countries have been strong in the letter. I invite you to read the letter of the Secretary, Wright and Minister, Al-Kaabi, if you didn't read it, they sent a letter to the European leaders telling them if you keep that in place, we will not deliver -- we will not take the risk to deliver LNG to Europe. I would say, it's -- if we don't have LNG coming neither from the U.S. nor from Qatar, we have -- my European North Sea assets are taking a lot of value. So I'd say it's not. I mean -- so it's not a matter of compliance, a matter of legal risk because, in fact, while you may be compliant is that in this CS3D if you were found guilty by a judge, your penalty could be up to 5% of your worldwide turnover, which is just crazy. So the sanction size is completely disproportionate to, in fact, a rule which is against, of course, basically, we are all -- we are for human rights, but you can ask efforts to company to control the supply chain, but we don't control everything. But if you transform, supposed not enough vigilance in such penalty risk, then it's completely disproportionate. And this is a call coming from these 2 countries. So for me, so again, we'll -- and I consider to be honest, that what we -- when we produce LNG in the U.S. as we are the largest exporter of U.S. LNG, we are fully compliant with the duty of vigilance law with all what we produce in the U.S., in Qatar as well, by the way. Operator: The next question is from Matt Lofting, JPMorgan. Matthew Lofting: I wanted to follow up on your earlier comments on the refining portfolio, 80% to 84% utilization in the fourth quarter looks towards the lower half of the historical range. Obviously, from a near-term perspective, planned turnarounds and maintenance need to be done and undertaken. But when you look forward into 2026, how do you see the normalized throughput of the business now? And has there been any deterioration in that normalized level versus what you saw and how you saw it, say, 2, 3 years ago? Patrick Pouyanné: Yes. I think -- so maybe we are cautious. Again, we were cautious on the $50 per ton. Maybe the 80%, 84% is just as I told you, we have Antwerp and SATORP, which are 2 big machines we have entered into a large planned turnaround, so they execute. But of course, it has an impact on the global, I would say, delivery from our portfolio. Let's say, you can keep -- if you take 82% this quarter, I think we were at 84%. Maybe the 82% is probably the mid average of the guidance, probably the right one to take into account. But I told you that it will be more than compensated with capturing better margins on all the other assets. For next year, we are more in the range of 84%, 86%, I think, for our budget. But again, I don't -- I didn't begin to look to what our colleagues are planning. So I'm waiting to see, but I think there are less turnarounds next year. So we should have -- from this perspective, it should be a better year. And as well -- and again, as we mentioned to you, there were some, I would say, difficulties before the turnaround on Port Arthur, turnaround is done. So we expect to have a better survivability. And on Donges again, we intend to put into service these new units, which will enhance the margins on Donges by beginning of 2026. So from this perspective, the perspective, if the refining margins remain at quite a good level, we will be able to capture even more than this year. Operator: The next question is from Irene Himona, Bernstein. Irene Himona: My first question is on marketing, if I may, because your unit margins were up this quarter. And I wonder if you can talk around the drivers of that margin improvement, whether it is structural or temporary? And then my second question, I noted this quarter, you signed some partnerships on the deployment of AI and a global data platform. I obviously don't have the context of your ongoing digitalization effort. I wanted to ask whether it is correct to look at these partnerships perhaps as an effort to speed up and widen the digitalization you have been working on for a number of years. Patrick Pouyanné: Yes. I'll take the second question, first. As I told you -- we told you, yes, we have -- and I think it will be a topic on which we could focus more on what we are doing. In fact, since 2020, we put in place a digital factory in a bottom-up approach with 300, I would say, data experts or data scientists and at a very high level, a good team. But what we observed is that if we want to deploy these new technologies, which are speeding up on a worldwide basis, going from a bottom-up to scale up is difficult. So we decided that it's time now to have a broad effort, a worldwide effort on organizing all these data because there are plenty of data on platforms in refineries, but all that is not connected. And if you want to really, for example, enhance your linear program in refineries, it's the best would be to have access to all these data to develop new tools in order to enhance another additional percent of, I would say, use of the refinery and better margins. So we have engaged with 2 large programs, which are quite an investment, an investment on the platform with Emerson, which is called, I don't remember the name now -- with Emerson in order to -- Inmation - in order to connect all these physical data to, I would say, a large database all physically, and it will take 2.5 years, 3 years to deploy because we need to go on all the sites. We know where the data is, but we need to connect them and then they will be available. And we have also engaged in a very large worldwide program on the E&P side with Cognite, which is, in advance, I would say, from digitalization, and we have made some different pilots with them. Now we are all convinced. So another big program to equip, to deploy this Cognite software, which obviously will help us to really accelerate the use of AI. So for me, 2025 will be the year where we have really decided to scale and to go from a scale and to take some large worldwide program to give us the capacity to take the most of these new AI tools. It will take a few years to install all of that. But if we want to be efficient, and I'm sure -- and it's not cost cutting in our case. It's more additional revenues. If we -- if I can with advanced process control tools, thanks to AI, produce 1% more of all my oil fields and my refineries, I can tell you, it's quite a lot of free cash. So it's worth making the investments, and this is where -- what we have done. On marketing, so I think there is different drivers. But again, fundamentally, the strategy which is put in place in marketing is value over volume, which means not chasing the additional growth, even it's difficult for marketers. They love to show you more tons. But what we discovered is that it's quite mature markets. They are mature markets. Whatever in European market, it is mature, the lubricant market is mature. So it's very difficult to gain market share. The only way to do it is to do it at the expense of margins. And what we have decided is to enter into a policy, which is a bit higher margins and not less volumes, but not to sacrifice, I would say, the margins at the expense of the volume. And this is why, by the way, if you observe our results, we have sold our network in Germany and Netherlands and half of Belgium. There is not much impact. In fact, because we have managed to absorb it, I would say -- so it's also because fundamentally, in marketing, we have decided to divest or to stop when -- not divest, but to stop a business, which was very low margin, which was, I would say, sharing some logistics assets with which we were creating a lot of pass-through volumes, but with a minimum margin. So this has been reduced because it was not really adding money. It was quite using a lot of people. So structurally -- so answer to your question is that structurally, we are in a mode to enhance the margin on Marketing and Services. That's where we are. And this will continue. I hope I am clear. Operator: The next question is from Christopher Kuplent, Bank of America. Christopher Kuplent: Patrick, I wonder whether we could talk about another area of French creativity. There is an idea floating around that we should remunerate electricity or wholesale power prices differently. What can you tell us, is current appetite for signing new PPAs? How has that market evolved considering that rather interesting regulatory backdrop? You've recently signed a project deal with RWE in France, but also have some considerable CapEx left to go in Germany on the offshore wind front. So maybe you can put things into context and give us the risk reward behind taking that regulatory risk. And then you've mentioned it already. I just wondered whether you could give us an update on how quickly we should expect news from Mozambique on the ground now that the force majeure has been lifted. Patrick Pouyanné: On Mozambique, as you -- again, we have lifted the force majeure. We are now expecting the government to approve our new plan and budget, and we are remobilizing the contractors in order to be able to execute the project within this schedule with time work -- time table of 2029, and that's where we are. So I think, consider we are moving on. On the first question, it's a complex question because I'm not sure to have fully understood. Let me be clear, I'm not in favor of regulations and regulatory approach. We are more merchant people. We like the market. So for us, that means that signing PPAs is the best way to commercialize, I would say, our assets. And so -- and we know that we need -- in Europe, you need to sign when you develop, I think you were referring to offshore wind. We signed a contract in France at $65 or $66 kilowatt or megawatt hour, which is a contract, by the way, which the price can be adapted if the CapEx are higher. So the price, the CapEx risk is, in fact, covered because we could -- we have -- not only we have given the price, but the CapEx linked to the price. So that's a protection. It's also partly inflated through the OpEx. So -- and at this level, honestly, we can develop an offshore wind project in Europe because it is projects where, in fact, the connection is developed and paid by the TSO, not by us. So we are only in charge of the plant itself. But again, we follow that. I think today, there are many creativity there again in different circles. All that we are in a European market, European market, is a unique European market, which are some -- fundamentally driven by some market rules, in fact, -- and when I discuss with European authorities, I see little appetite from -- in the commission to put into, I would say, even in some countries like Germany, we believe in the market to change the rule of this, I would say, electricity market. So again, that's a debate. But I'm -- and you know, by the way, in France, the same people who were complaining about the famous system of nuclear commercialization, which was called RN 2 years ago, now are complaining of the new system. So people will never be happy. What they want is electricity for free, but that's difficult. At the end, we need to invest. And if everything is too much regulated, it will be against investment and Europe desperately needs to invest more in renewable gas-fired power plants, grids if we want to ensure security of supply, but the reality, so you cannot get both. So I think I would say I trust there again the political leaders, which are spending a lot of time on this energy story to take the right decision and not to be complacent. Operator: The next question is from Lucas Herrmann, BNP. Lucas Herrmann: And another slightly generic question, but I just wanted to ask for your sort of thoughts on the one part of the complex, which is really having a difficult time, chemicals and the extent to which when you talk within -- when you look at the industry, look at where margins are, you're starting to see better signs of movement to try and restructure not necessarily your own business, but business across the industry so that we might actually move to a place where profits start to improve. And as ever, I mean, if you could give us some indication of the extent to which the associates line within -- well, the profit within the Refining and Chemicals business, what proportion of profit actually comes from chemicals now given just how difficult the environment is? Patrick Pouyanné: Okay. I'm not a chemical company. We are refining and petrochemical company, and we make crack ethylene and polyethylene basics of... Lucas Herrmann: Sorry Patrick, that's what I'm referring to. Patrick Pouyanné: No, no. But just to tell you, the truth is that you know the situation. The situation is that, in fact, in terms of cracking capacity, ethylene capacity, China in the last 5 years went from 50 million tons of cracker to 100 million tons of cracker. And so they have, in fact, almost self-sufficient. So if they were moving from a large importing country to almost self-sufficient, even exporting. So of course, that changed the world patterns. By the way, Chinese companies also suffer from the situation, but other places suffer from the situation. For me, I've always been very clear with you. If you want to invest in petrochemicals, you have the fundamental matter or fundamental competitive factor is feedstock. Either you are an ethane, cheap LPGs in the U.S. or in the Middle East, or you will face difficulties. So that's the situation. So we know that our naphtha crackers in Europe are facing competition, which is super difficult, either from the U.S. crackers or from Middle East. By the way, TotalEnergies, since I'm CEO, we have invested in 2 crackers, one in Port Arthur, with [indiscernible] one with Amiral in Saudi Arabia. So consistent with that's what we -- I think fundamentally. And we are shutting down some crackers like the one we have just decided in Hamburg. So that's my view. To come back on the proportion, I don't know, it's not big. It's not good. I have no miracle recipe compared to my competitors on this one. But again, it's not a major part of our downstream results and cash flow. So most is coming from refining and trading rather than -- more than chemicals. But again, it's part of the integration. When the margins are good, we are happy to capture them. But again, the fundamentals, let's invest in the U.S. and in the Middle East. That's all. Operator: The next question is from Peter Low, Rothschild & Co. Redburn. Peter Low: The first was just on integrated power. The ROACE has been below 10% for a few quarters now. How confident are you of hitting your 12% target? And really, what are the steps to get it kind of up to that level over the coming years? And then perhaps just a follow-up on the kind of proposed EU ban on Russian LNG imports from 2027. I think you said in the past, you'd expect, you'd be able to divert your Yamal cargoes to alternative markets outside of the EU. Is that still the base case? And what you expect to happen? Patrick Pouyanné: First question, I think Stephane Michele in New York gave you some answers to that. We never told you we will hit 12% tomorrow, we told you it's a 5-year plan going by the way, from 10% to 11% from 11% to 12%. Part of it, as I told you, is that today, we have a sort of burden on our capital employed because we have, I mean, acquired a large pipeline of projects, which are, of course, nonproductive, I would say, capital employed assets, which will be because we continue to grow. We have a growth of 20% per year, and we will execute, which will, of course, as we don't intend to make large M&A on this part, not which will transform, I would say, nonproductive assets into productive assets. So part of it is that. Then the second part, that's 1%, the other percent will come from, I would say, rationalization, better use of the assets, industrialization, and this is what we are doing. We also, I think, framed, in New York, a clear road map by concentrating most of the investments of Integrated Power on some major markets, the oil and gas countries, which are in E&P. And then the rest, we are clear, but where we don't see potential to contribute above 12%, there is no future for them in the portfolio. I mean, so that's -- I would say, in a way, what we told you, it is a recipe to go to 12%. So honestly, today, we are a little lower than 10%, but we will recover from it. And don't forget that the contribution from farm-downs, they will come in fourth quarter. So all that will give you color. But I would say I'm there for -- we will raise the 10%, and it's a 5-year journey, but I'm happy with the development of this business. The next target is to be for me net cash positive. As soon as we are net cash positive, I'm sure that the valuation of this part of the business will be better because when I will tell you, this business is contributing to your dividend, it's a way to have a better leverage on this business. And we plan 28. If we can do 27, we are working on that. EU ban on Russian LNG, honestly, there have been a new regulation, which needs to have some clarification because there is some language there we need to understand what it means exactly. Like by the way, when EU banned oil in 2022, '23, it was the exact situation. There was a regulation and the LNG regulation is copy-paste of the old one. There was what they call FAQ where you need to have answers to clarify what is the real scope of ban. For sure, the ban is not going any more Russian LNG in Europe, but we want to be sure that the ban is not larger than that. So before to answer your question. And otherwise, yes, in this case, we have a commitment. If there is no further, I would say, ban, I cannot choose a force majeure to cancel the contract. If I don't have force majeure, I am committed to offtake some cargoes. We are looking to that, precisely today, our lawyers are working, to be honest. We have -- which -- because, of course, for us, the rule is to be sanction-compliant to be clear. So our lawyers are working on it. It's a fresh regulation, so I don't have the full clarity. And I don't want to make more answering longer because I could say something which could become wrong if the lawyers -- and again, if we have to be -- we are always at the Executive Committee on the cautiousness side, I would say, from this perspective. And so I'm waiting to see the report and to understand exactly the scope of the new EU regulatory. Operator: The next question is from Paul Cheng of Scotiabank. Paul Cheng: Two questions. I want to go back, Patrick, in your answer to the question of adoption of AI, you think that is fairly sizable investment. Can you quantify how big is the investment over the next couple of years and whether you have sufficient talent within your organization to really adopt or that you need to go out to hire? And at this point, it seems like it's pretty difficult to get the good talent in the AI adoption area. And what is your target in that what you aim to get from AI over the next, say, call it, 5 years? The second question is Yes. The second question is on Iraq. Patrick Pouyanné: Move on with your second question, sorry. Paul Cheng: Okay. Sorry, Patrick. Second question is Iraq. Can you tell us that how is the situation on the ground? I suppose that the security is good enough for you to deploy your people. So what's the bottleneck or the barrier for Iraq to significantly increase their production at this point? You and some of your peers that are rushing in and signing contracts. And if you think that those contracts, the terms are good. Is there a concern that Iraq could turn into a major production growth area, which in turn is going to depress oil prices over the next several years. So just want to hear how you think about that. Patrick Pouyanné: First question, AI is the program I mentioned when I -- represent more or less EUR 300 million, so $350 million, I would say, worldwide. So it's quite an investment in these data platforms at the worldwide level, first comment. Second comment in terms of people, we have some assistance from the Emerson guys, AspenTech or from Cognite. But remember that we have 300 -- digital factory with 300 people. And of course, we are using part of these people to help to deploy the program. They are there, they are available. They know about it. We have built these competencies in the last 5 years, the second answer. The third answer is that there is a nice country in order to get access to good, very high competencies with not so high cost, which is called India. So it's also a way for us to, in fact, grow in the digital. For us, we are looking today to -- we need to grow, I would say, our technical competencies and in terms of people to have more resources in the side of electricity of power and in the area of digital. And today, we are seriously thinking to enhance or to grow our presence there, and we speak about -- we are discussing about competence center in India. It's part, by the way, of our way as well to contribute to the, I would say, cash saving program that we mentioned. So this is the area. So I know it's a point. But in fact, what I've observed is that we have been able to attract people in this field with a reasonable price. We are -- because we offer them some real, I would say, use case. We have very interesting use case. In the field of energy, you can use AI in many areas, so it's good. Iraq on the ground, it's okay. Otherwise, I mean, we just signed the full contract -- EPC contracts. If we were in doubt, we will not have done it. honestly, in the Basra area, the situation is good. I don't -- I can speak only for the areas where we are. And we have deliberately located our teams in the south of the country, in the Basra area because it's a more, I would say, united area, unified area from, I would say, in terms of Iraq. There are other areas that I would be more careful to be clear. But in our area, we are fine and no barrier. But the barrier partly is still security because you cannot -- what I say for Basra is maybe not true for the whole country, to be honest, and it's not true. And second, in fact, you need investment. And investments, you know the issue for Iraq, and again, I'm happy to have been the big company which came back first. But we went there in '21. We finalized the contract in '23. We will FID all the phases in '25, and we'll produce in '28, '29. So the cycle is 8 years. So I think we are maybe a little slow. I'm not sure because I can tell you it's -- all that is, in fact, from my point of view as a CEO, quite a remarkable journey in a new country. So I'm very happy with all the work the teams have done. I contributed myself by supporting them many times there. And I can -- but -- so when people think today that, yes, there is a potential in Iraq, it's clear, but it will not depress oil prices before many years. So it's good for the country. And again, the country -- and I know what will happen if there is more companies to come, the temptation will be to decrease the margins. And then again, it will not work. So that's the history. I hope the country has taken some lessons of what happened from 2010 to 2020. If we don't have the right reward for the risk we take, there is no investment. So that's a question of capital allocation. So yes, and that's why, by the way, to answer to your question, to be clear, if we decided to move to come back in Iraq in 2021, but we see quite a long perspective. And in my plan, in my view, Iraq will be a growth area for TotalEnergies beyond 2030, and we will work on other projects. So that's what I'm thinking. So I don't see an impact on the short term or short medium term. Thus potentially... Operator: The next question is from Henri Patricot, UBS. Henri Patricot: Just 2 on the topic of exploration. I think you have a new Head of Exploration since the start of the month. And I was wondering if we should expect any changes in your approach, exploration? And also on that topic, can you give us an update on the latest plans for exploration in Namibia and South Africa in the next few months? Patrick Pouyanné: Okay. Exploration. I've been consistent since I'm CEO, I think there is one thing which did not change, which is the budget for exploration. It was $800 million to $1 billion. I put it as a sort of rule of the game when I became CEO because strongly, I think it was -- it's not because you spend more but you find more. At a certain point, you need to be efficient and oblige your exploration team to take searching. I'm happy, by the way, that the way Kevin has led this team during the last 10 years. He became Exploration Team Manager and Vice President almost the same time. He has, I would say, developed some ideas. The thing is, it is a long cycle in exploration. So when he told us one year ago that he has tried to do something else, it was fine for us because we thought it was the right time to renew, in fact, having the proper approach because, again, exploration is different business. Again, it's not a matter of dollars, it's a matter of IDs of which to approach. I'm very happy to have welcome in a company, Nicolas Mavilla, which is coming from a successful exploration company. He has, of course, had different -- himself has been educating in different environments of new ideas. He will have -- I told him that he's free to do and to let the team. It's not a one-man show exploration. It's a team building, quite a lot of people. You need to take the risk to explore, you need to build some consensus, but you can drive your people in different, I would say, directions in terms of concepts and being creative. So I think it's very good. I hope and I'm convinced that Nicolas will be able to have the same success that we had with Kevin in the last 10 years. But it's not a matter of money. It's a matter of ideas and then to make choices. And by the way, you noticed that in the last quarter, we have been active on taking some licenses back in Nigeria, which has been unexplored for more than 10 years. It's a pity. It's probably the most potential delta, it's probably the most prolific Delta in Africa. So no license were awarded. We are happy to have the first ones, 2 IOCs. We went as well to a country like Liberia. It's a new one. Congo is more mature, but we managed to get a license on which our explorers were excited. I hope they were fine. We'll have a nice gift for Christmas, we'll see. And again, we'll continue to explore in other countries. And so exploration, I heard during the [indiscernible] that it seems that some companies are rediscovering exploration. For Total, we never give up on exploration. I always consider it as part of the value creation. And again, listen to my colleague, not because you spend more, when you will find more. If you spend more, you actually take more risk. And if you take more risk, you have more disappointing wells. So it's a question of finding the right metrics. And I think it's good for an IOC, a major like us when we can drill 20, 25 wells per year, that's good. That's enough to find some nice wells. Namibia, South Africa; Namibia, that we have some exploration to continue to do, and we look to priorities also to develop business. And South Africa, you follow, like me, the news. There is a legal context, which seems to be more complex than in other countries. Each time we want to drill, we need to go to court. It's a little difficult. So we want -- but I think that the South African government has made some public statements that they want to find a way to go to ease the exploration. So we hope we will manage because, of course, for us, it's important. We cannot explore, we cannot spend money in a geography, if we have to face permanently courts and being -- and the permitting become really too complex. And because it's not only drilling 1 or 2 or 3 exploration wells, when it will be to develop. And we explore to develop. We don't explore just to find oil. So we need honestly, on the South Africa side, I hope the government will take the right decision as soon as possible. Operator: The next question is from Jason Gabelman at TD Cowen. Jason Gabelman: I wanted to ask firstly on CapEx trajectory. And it looks like organic CapEx has been a bit volatile the past few quarters. I'm wondering what's driving that quarter-to-quarter volatility. We've seen some other peers that have more stable CapEx that kind of peaks in 4Q. So wondering, moving forward, is this level that you're at now a better go-forward pace to consider? Or should we expect more volatility quarter-to-quarter? And then my second one is just on the ramp-up in production next year. You've previously guided to a reduction in reinvestment rates in 2027, which I suppose, implies higher cash flow ramping at some point next year along with new production coming online. So how should we think about that production and cash flow ramp next year and into '27? Is it back half weighted? Is it 4Q weighted? Just looking for kind of the arc of that growth. Patrick Pouyanné: Jason, you are very quarterly driven there in your questions. But my commitment to you is the commitment of the company is the annual budget of CapEx. And by the way, it's an annual budget of net CapEx. It's organic CapEx plus acquisition minus sales, minus divestments. I think we have a long strong track record of being complying -- compliant with our budget -- annual budget of CapEx. I think since I've been CEO, I think, 10 years in a row, you don't see that we have not respected the CapEx budget, the annual CapEx budget. And again, what we told you today, and what we said at the beginning of the year, it will be $17 billion, $17.5 billion. And I can tell you, we'll land in $17 billion, $17.5 billion. As we told you that the net acquisition is expected to be at $1.5 billion. You can calculate yourself the organic CapEx for the fourth quarter. I don't follow honestly the stability of the organic CapEx 2 quarters. It depends on some projects when you put into production as we have done this year, all Mero in Brazil, Tura in Denmark, Ballymore in the U.S. Ballymore -- yes, Ballymore. That this means that this quarter, there was a lot of CapEx and then it's decreasing because you have put into production and some of our CapEx, some of our projects are ramping up. So it just -- so I'm not at all -- I have no KPIs to have a stable quarterly organic CapEx, to be honest. At the end of the day, my KPI is to be sure that we are within the annual budget. And if we can be a little lower, I'm happy. But it's -- but not so much I'm not happy because sometimes it means that some projects are late. So I prefer to really be in our budget. So first point. So sorry to disappoint, but it's not a major issue. I'm not in a -- I mean, to be clear, we are not in a company which makes short-cycle CapEx permanently, where you make -- you can maybe make more -- less volatility. The second one, I think the same answer to Lydia, if I remember the first -- beginning of the first question I have. You have to wait for 2026. Let's keep -- you have to be a little patient until February. We'll give you more color. It's clear that, again, we gave you a point, I think, in the chart of 2027 when we speak about reinvestment rate. So we told you that in '27, yes, I remember, the reinvestment rate will go down from 70% to something like 50%. It was a chart which was in the New York package and slide deck, sorry. And that's the reality. So that's -- and it's coming from whom? It's coming from, on one side, higher cash flows because we are delivering along the 3 years. So let's be clear, the figure of '27 means by end of '27. So it's a 3-year decrease. It's not beginning, I don't know which quarter. And it's an annual one. So it's at the end, to be clear. It doesn't mean that all the growth is backloaded. It just means that it's an average of the year '27. And it's coming as well from the discipline of the CapEx because we have your guidance is $16 billion. So it's both, will contribute to this reinvestment rate, which is lower by 20%. So if you have 20% -- if you are lowering reinvestment rate, it's good and it's consistent with the free cash flow per share increase that we have announced. So that's a way to explain why we will be able to increase the free cash flow per share because we have more cash and less CapEx. And that's what we want to -- where we want to embark all our investors who trust TotalEnergies. I think it was the last question. Yes? Operator: There are no more questions registered at this time. Patrick Pouyanné: Okay. So thank you to all of you for your attendance. I hope that all the analysis you've done will be reflected in the stock price. It was not the case this morning. But again, we are delivering. This is the message. We are delivering. We have a consistent strategy. We are just executing in. We deliver. And frankly, Board of Directors and myself as CEO, we are quite pleased with the results of this quarter because that demonstrates and again, that all what we explained you quarter and year after year is on the delivery mode and that free cash flow will increase. Thank you for your attendance. Operator: Ladies and gentlemen, this concludes the conference call. Thank you for your participation. You may now disconnect.
Operator: Good day, and thank you for standing by. Welcome to the OneSpan Third Quarter 2025 Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Joe Maxa, Vice President of Investor Relations. Please go ahead. Joe Maxa: Thank you, operator. Hello, everyone, and thank you for joining the OneSpan Third Quarter 2025 Earnings Conference Call. This call is being webcast and can be accessed on the Investor Relations section of OneSpan's website at investors.onespan.com. Joining me on the call today is Victor Limongelli, our Chief Executive Officer; and Jorge Martell, our Chief Financial Officer. This afternoon, after market closed, OneSpan issued a press release announcing results for our third quarter 2025. To access a copy of the press release and other investor information, please visit our website. Following our prepared comments today, we will open the call for questions. Please note that statements made during this conference call that relate to future plans, events or performance, including the outlook for full year 2025 and other long-term financial targets are forward-looking statements. These statements involve risks and uncertainties and are based on current assumptions. Consequently, actual results could differ materially from the expectations expressed in these forward-looking statements. I direct your attention to today's press release and the company's filings with the U.S. Securities and Exchange Commission for a discussion of such risks and uncertainties. Also note that certain financial measures that may be discussed on this call are expressed on a non-GAAP basis and have been adjusted from a related GAAP financial measure. We have provided an explanation for and reconciliations of these non-GAAP financial measures to the most directly comparable GAAP financial measures in the earnings press release and in the investor presentation available on our website. In addition, please note that all growth rates discussed on this call refer to a year-over-year basis unless otherwise indicated. The date of this conference call is October 30, 2025. Any forward-looking statements and related assumptions are made as of this date. Except as required by law, we undertake no obligation to update these statements as a result of new information or future events or for any other reason. I will now turn the call over to Victor. Victor Limongelli: Thank you, Joe. Hello, everyone, and thank you for joining us today. Before turning to our results, I'd like to recap our progress in the transformation of OneSpan. 2024 was about fixing the cost structure of the business, ensuring that we could operate both business units in a profitable manner. The OneSpan team did a great job working through those challenges, and we entered this year in a much improved operating position. In fact, that improved operating position will enable us to return about $25 million to shareholders between dividends and buybacks by the end of this year. And in addition, we also completed an acquisition and made a strategic investment, all funded by cash generated by the business. In 2025, as we have discussed previously, has been about putting the pieces in place while continuing to operate with strong profitability to enable growth. It has been a remarkable year in that respect. Indeed, today, we announced that our software business, now over 80% of the overall business, delivered double-digit subscription revenue growth and ARR growth. Turning to the specific components that we've been putting in place to drive growth. First, right before the year started, we hired a new CTO, Ashish Jain, to lead our R&D efforts and improve our internal development efforts. Second, in June, we acquired Nok Nok, bringing the best FIDO2 software product called S3 to our portfolio. I'm happy to report that in the first 4 months since the acquisition, we've already closed 2 new logos for S3, both in the low 6-figure range, and we have built additional pipeline for Q4. We believe that there is a large opportunity in the coming years for S3 as FIDO2 becomes more widely adopted. Initially, we see the U.S. and Japan as the leading markets for FIDO2, but over the coming years, we expect Passkeys to become the standard around the world. Third, in October, we announced a strategic investment in and partnership with ThreatFabric to further enhance our value proposition to customers by offering mobile threat intelligence and fraud risk insights. We are in the midst of sales enablement so that our team can effectively sell the ThreatFabric products and are optimistic that those products will add to growth in 2026. Finally, you should not in any way consider OneSpan to be finished in our efforts to improve the value that we provide to customers, and hence, our growth prospects as a business. We are working on additional initiatives. While there might not be announcements each and every quarter, we will never be done improving our value proposition to customers, whether through internal development, through acquisitions or through strategic partnerships. And we expect these efforts to drive growth, particularly in our software business as we continue to work towards achieving a Rule of 40 performance. Turning to our results. I'm pleased with the team's efficiency, which drove another strong quarter of profitability and cash generation, including $17.5 million of adjusted EBITDA or 31% of revenue and $11 million in cash from operations. I'm especially proud that over the first 9 months of the year, we generated record adjusted EBITDA of $58 million, representing 32% of revenue and $47 million in cash from operations. We ended the quarter with annual recurring revenue of $180 million, up 10% year-over-year. In regards to revenue, we have seen strong bookings in certain regions, including our security business in North America, our Latin America business and the southern portion of our EMEA region. I'm also heartened by the progress in APAC. And our DA business grew subscription revenue by double digits. And as I mentioned a few minutes ago, we're encouraged by the progress we've seen with our new S3 product acquired as part of the Nok Nok deal. With respect to hardware, as we have discussed many times, there has been a long-term secular shift away from consumer banking tokens to the point that in the first 9 months of the year, hardware was less than 20% of our overall business. That trend is part of what drives us to broaden and strengthen our product offerings. In the quarter, total revenue grew 1% to $57 million, driven by double-digit organic subscription revenue growth. This growth was primarily offset by a reduction in security hardware revenue due to the shift described earlier in consumer banking strategies in EMEA and APAC, where banks continue adopting mobile-first authentication approaches. Subscription revenue grew 12%, led by 13% growth in security and 11% growth in digital agreements. The increase in security subscription revenue was driven by both cloud and on-prem authentication software, along with mobile app shielding software. Both business units remained solidly profitable at the segment level, with digital agreements delivering record high segment operating income. Security absorbed a modest cost impact from the Nok Nok business in Q3, although we expect it to be accretive to Security's operating income in Q4. As I mentioned earlier, we continue to generate significant cash from operations, $47 million in the first 9 months of the year, and we ended the third quarter with $86 million in cash on hand. In Q3, we used $6 million to repurchase shares of our common stock and combined with our quarterly dividend payments, we returned more than $20 million to shareholders in the first 9 months of 2025. We also used cash to make the strategic acquisition of Nok Nok and after the third quarter ended, to obtain a 15% equity stake in ThreatFabric. Our investment in ThreatFabric as well as our acquisition of Nok Nok in Q2 and our internal development efforts are designed to enhance our product portfolio and move faster to deliver great products that provide additional value to our customers. To that end, we will continue investing in internal R&D and pursuing targeted technology-driven investments with proven market fit to enhance our product portfolio. Our Board remains committed to a balanced capital allocation strategy weighing shareholder returns, organic investments and targeted M&A. Accordingly, the Board will consider additional share repurchases and has approved another $0.12 per share dividend to be paid in the current quarter. In summary, we're making solid progress in building the foundation for growth in our journey towards achieving Rule of 40 performance. At the same time, we remain committed to driving efficient revenue growth while maintaining strong profitability and cash generation and returning capital to shareholders. With that, I'll turn the call over to Jorge. Jorge Martell: Thank you, Victor, and good afternoon, everyone. I am pleased that we reported another strong quarter of adjusted EBITDA and cash generation and that we are making good progress in building our long-term growth foundation. Before I review our third quarter results, I want to remind you that our acquisition of Nok Nok Labs, which closed in June 2025, modestly contributed to our Q3 operating results this year, but did not contribute to the same period in 2024. ARR increased 10% to $180 million and NRR, our net retention rate increased sequentially to 103%. Third quarter revenue was $57.1 million, an increase of 1% compared to last year's Q3. Subscription revenue grew 12%, including 10% organically and was largely offset by the secular decline in our hardware token business, which is directly related to banks continuing with a mobile-first authentication approach and to a lesser extent, maintenance and professional services revenues. Third quarter gross margin was 74%, consistent with last year's Q3. GAAP operating income was $8.2 million compared to $11.3 million in Q3 of last year. The change in operating income primarily reflects an increase in operating expenses, including share-based compensation and other nonrecurring items, along with the expected dilution related to our acquisition of Nok Nok. As a reminder, we expect the acquisition of Nok Nok to be accretive to earnings in Q4 2025. GAAP net income per share was $0.17 as compared to $0.21 in the same period last year. Earlier this year, we made changes to our non-GAAP net income and non-GAAP net income per share reporting framework to better reflect our profitability trajectory and to ensure consistency across interim periods in 2025 and in future years. Please refer to our 2025 quarterly earnings releases and investor presentations for additional details. Non-GAAP earnings per share was $0.33 in both the third quarter of 2025 and 2024. This metric excludes long-term incentive compensation and related payroll taxes, amortization, restructuring charges and other nonrecurring items and the impact of tax adjustments. Adjusted EBITDA and adjusted EBITDA margin was $17.5 million and 30.7% compared to $17 million and 30.2% in the same period of last year. Turning to our cybersecurity business. ARR increased 11% to $115.5 million. Revenue decreased 1% to $40.3 million. Subscription revenue grew 13%, driven by cloud and on-prem authentication software, including a modest contribution from Nok Nok and app shielding software. This growth was offset by the expected decline in hardware revenue and to a lesser extent, maintenance and professional services revenues. Subscription revenue primarily benefited from expansion of licenses and to a lesser extent, new logos, the acquisition of Nok Nok and conversion of customer contracts to multiyear terms. Gross margin was 74.4%, similar to last year's third quarter gross margin of 74.7%. The change in gross margin was primarily driven by product mix. Operating income was $16.7 million or 41% of revenue compared to $20.2 million or 49% of revenue in the prior year quarter. The year-over-year change primarily reflects increased operating expenses related to the Nok Nok acquisition, higher share-based compensation and other nonrecurring expenses, such as advisory-related expenses. Turning to digital agreements. ARR grew 8% to $65 million. Revenue grew 9% to $16.7 million. New SaaS contracts, expansion of renewal contracts and an increase in onetime revenue was partially offset by reduced maintenance revenue from the sunsetting of our on-prem e-signature product. Subscription revenue grew 11% year-over-year to $16.7 million. Maintenance and support revenue was negligible compared to $0.3 million in Q3 of last year. The year-over-year decline is attributed to the sunsetting of our on-premise e-signature solution. As mentioned previously, we have substantially completed the transition to a SaaS business model in our digital agreements business. Gross margin was 72%, consistent with last year's third quarter. Segment operating income was $4.2 million or 25% of revenue compared to $3.4 million or 22% of revenue in Q3 of last year. The year-over-year increase in operating income was driven by increased revenue. Now turning to our balance sheet. We ended the quarter with $85.6 million in cash and cash equivalents compared to $92.9 million at the end of Q2 and $83.2 million at the end of 2024. We generated $11 million in operating cash flow during the quarter. Uses of cash in the quarter included $6.3 million to repurchase approximately 450,000 shares of common stock, $4.7 million to pay our quarterly cash dividend and $1.9 million deferred consideration payment related to our acquisition of Nok Nok among other items. We have no long-term debt as of the end of Q3 2025. Geographically, our revenue mix was 46% from the Americas, 38% from EMEA and 17% from APAC. This compares to 39%, 40% and 21%, respectively, in the third quarter of last year. The year-over-year changes by region were primarily driven by growth in the e-signature business and mobile application security in North America. The acquisition of Nok Nok in June 2025, which has its largest presence in North America, growth in hardware revenue in Latin America and a decline in hardware revenues in both Europe and Asia Pacific, consistent with mobile-first strength in those regions. Moving to some modeling notes on our financial outlook. We are very pleased with our Q3 profitability and cash generation and the progress we've made in positioning the company for long-term growth. As Victor mentioned, we are seeing strong bookings in most geographic regions, but have also seen challenges in some regions, largely due to the secular shift away from consumer banking hardware tokens. We are working hard to improve our sales momentum in all regions and believe the steps we have taken this year, combined with our continuous focus on improving the value proposition we provide to customers better positions us for stronger growth in future years. For the full year 2025, we are updating our revenue guidance to be in the range of $239 million to $241 million as compared to our previous guidance range of $245 million to $251 million. We expect software and services revenue to be in the range of $190 million to $192 million, representing an increase of between 3% and 4% in 2025. We also expect hardware revenue to be in the range of $49 million to $50 million, representing an approximately 16% decline from 2024. As Victor mentioned previously, OneSpan as a business is approximately 80% software and 20% hardware. We are updating our ARR guidance to be in the range of $183 million to $187 million, up from $180 million at the end of the third quarter and as compared to our previous guidance range of $186 million to $192 million. And we are maintaining our adjusted EBITDA guidance in the range of $72 million to $76 million. That concludes my remarks. I will now turn the call over to Victor. Victor Limongelli: Thanks, Jorge. To recap, we are making progress in strengthening our foundation for long-term growth while continuing to deliver strong profitability and cash generation and returning capital to shareholders. We are working hard to deliver greater value to our customers and to create value for our shareholders. Jorge and I will now be happy to take your questions. Operator: [Operator Instructions] Our first question comes from the line of Anja Soderstrom with Sidoti. Anja Soderstrom: I'm just curious, what do you think now compared to last quarter that leads you to scale back on the revenue and ARR guidance? If you can just double click on that a bit more. Jorge Martell: Okay. Anja, can you -- sorry, you were -- there were some feedback. So can you repeat your question for me? Anja Soderstrom: Yes. Can you just sort of double-click on the -- on what you're seeing now compared to last quarter that leads you to scale back on the revenue and ARR guidance for the year? Jorge Martell: Yes. I can start and then Vicky, if you want to chime in as well. So there's a couple of things, Anja. First is we saw a little bit of a higher headwinds with respect to our hardware business, about a couple of million dollars. And I think the other large component was on the security business specifically, we saw lower activity with respect to net expansions and new logos, primarily net expansions as we have a large market share in our security business outside of North America. So I think EMEA and APAC have some of that, primarily EMEA. Now I think it's important to understand a couple of things. One is when we think about -- I'm getting some feedback. One is when you think about where we are with our guide, our updated guidance of, say, $240 million at the midpoint, that is modestly lower versus prior year, about 1% lower, Anja. And I think we need to take a step back in terms of understanding the position of the company is today versus what it was, say, 12 months ago. We've done a lot of good work, as Victor mentioned in his remarks, with respect to building the foundation for growth, the Nok Nok acquisition that we did, very, very good capabilities that we're adding to our product portfolio, the ThreatFabric strategic investment that we are very excited about as well. So we're looking at enhance -- we've been enhancing our product portfolio this year to deliver on that software. And it really -- when you think about what we've done is primarily on the software areas, right? So we really enhanced our software product portfolio and capabilities to really position the company for future growth in the next few years. And so more and more as the hardware secular decline continues, so that's going to be less and less impactful to us. And we mentioned this, software is about 80% of our business. Hardware is 20% and potentially lower in the next few quarters. And all of this with, obviously, the strong cash flow generation and profitability that we should expect to continue. And so I just want to -- sort of take a step back and walk you through it because what we're doing is really transforming the product capabilities for the organization. And so the decline in the guide, although partly due to hardware and also a little less activity, we're really thinking about 2025 as the foundation here, the building blocks from our product capability. I don't know, Vicky, you have any additional thoughts? Victor Limongelli: Yes. Let me just add to what Jorge said. So obviously, the specifics he gave are correct. But if I zoom out a little bit and just think about the business from when I joined, it's almost 2 years in a few months. And 2 years ago, about 1/3 of our revenue was hardware. And now it's about 20%. We ended 2023 2 years ago with ARR of $155 million and the midpoint of our guidance for the last quarter would have us ending up at $185 million, so $155 million to $185 million. And a couple of years ago, from a product standpoint, we had not introduced any new capabilities in quite some time. In fact, you saw us sunsetting products. So it was important for us to, first of all, build the foundation of profitability so that we could invest back in the business while returning capital to shareholders. And we've started to do that, not just with the acquisition and the strategic investment, but also internally with the hiring of a new CTO and internal investment. And so that's what we're working on to transform the business. And keep in mind that the Nok Nok acquisition happened in June, the ThreatFabric strategic investment was October. So we'll get some positive impact from Nok Nok, but we expect more in the future and ThreatFabric is largely a 2026 story. So -- and we're continuing to work on other things as we continue to try to improve the value proposition that we're offering our customers. Anja Soderstrom: Okay. And then in terms of the hardware, do you see that being shifted out to the right? Or is it just a sort of a decline in demand overall? Victor Limongelli: Well, if you talk to our customers, 10 to 12 years ago, customers in EMEA and in APAC, they might have had 100% of their consumers using consumer banking tokens to log on to authenticate. I was in Europe last month, and we had a meeting with 8 banks, and we were surveying them, what percentage are using hardware now, it was about 20%. So most of their customers have moved over to mobile authentication. And we see that in our business. Look at our business 10 years ago to what it is now on the hardware side, it's probably 20% of the size. We don't think that number is going to 0, by the way. There are people who prefer hardware, and we don't -- maybe that goes down to 15% of their consumers or 12%, but we don't think it's going to 0. But that's been a long-term trend. And it's important for us to manage around that, not only with our mobile authentication offerings that we entered a few years ago, but also with newer protocols like FIDO that we acquired through the Nok Nok acquisition. Anja Soderstrom: Okay. And then in terms of the margin, how should we think about that? It seems like even though we'll have more hardware in the fourth quarter this quarter compared to last year's fourth quarter, the gross margin is going to be higher, if I get it right here. But -- how should we think about the gross margin altogether? And then also on the operating expenses, do you see that now after you done all your cuts, how should we think about growth in that in the coming years? Jorge Martell: Yes, I can answer that, Anja. Thanks for the question. So from a hardware perspective, I think it's probably going to be even with last year, Anja, the hardware revenue, we mentioned that during the last call in terms of the split. And that's we have today. And then from a gross margin perspective, it's going to be, I would say, probably similar to last year's Q4, Anja. And so that will put the full year gross margin in around 73-ish percent, slightly higher than last year's, which I think was 72%. And then from an operating expense perspective, one thing to keep in mind in the year-over-year is the Nok Nok acquisition. So for the quarter, it's around -- I'm just going to do a round numbers, it's around $2 million on a run rate basis that we'll be adding year-over-year. And then obviously, we've done some also incremental investments in R&D and things like that. I don't expect it sequentially to increase dramatically compared to what you saw in Q3, but there will be maybe a modest increase because of that. Operator: Our next question comes from the line of Catharine Trebnick with Rosenblatt Securities. Catharine Trebnick: Can you just in a snapshot, your product road map where you feel that the deficiencies, these headwinds that you've been experiencing, just really what are the 2 or 3 products you think in the next 12 to 24 months are going to make up for this gap we've been having? Victor Limongelli: Yes, sure. Let me talk a little bit about that. I don't know that I would describe it as a deficiency. We have very good mobile authentication technology. But as you know, multifactor authentication has been around for a long time. Everyone is familiar with getting -- in the U.S., you get an SMS or a text message with it or you might get an e-mail and overseas onetime passcodes are widely used as well, although not via SMS. So everyone is very familiar with multifactor authentication. So that protocol or approach has been widely adopted. And as Jorge mentioned, we have good market share there. And even our NRR in security in Q3, I think, was 101% or it will be about 101% for the year. So it's very solid. But over time, technologies change, and we're seeing that with the adoption of passkeys. With FIDO2, we're going to see much broader adoption of passkeys as we move through the rest of the decade. And we think it's important for us to broaden our offering so that we have not just the mobile authentication on top of the hardware authentication that existed many years ago and still exists for a portion of their customers, but also enables passkeys at a very, very scalable level. It also has very good latency and we've proven it out at scale with many different customers. So we think that's going to be a very interesting area for growth. Catharine Trebnick: That was very helpful. And then anything you can add on digital agreements and what you're seeing there and how you expect the growth there to pan out in the next 12 months? Victor Limongelli: Yes. We've been doing pretty well there. I think if you look at the growth, it's been in the mid- to upper single digits, and we expect -- it's October 30. So you can't be too certain about how Q4 is going to go, but we feel pretty good about the Q4 pipeline. And we think we have an opportunity to not just expand with customers we already have, but also to land some new ones. And that's an area where our internal development, I mentioned internal development, and that's an area where we'll be using AI in the product more in the coming 12 months. That's an area for us -- a focus area for us in the coming months. So we think that's going to be a strong product -- continue to be a strong product. And obviously, we're always trying to do better and have better results, but I think we're making very good progress on the DA business. And the other piece, Catharine, on the DA business, Jorge mentioned this, is record operating income this quarter, I think, 25%. So when you layer that on top of the growth there, the numbers start to -- that business starts to look more and more appealing. Operator: The next question comes from the line of Erik Suppiger with B. Riley Securities. Erik Suppiger: First off, you're taking a lot of steps this year to start accelerating growth as you get into '26, and it's mostly on the software side. Can we assume that your subscription revenue growth in '26 should accelerate over '25 if we anticipate double-digit growth in '25, can it accelerate from there in '26? Victor Limongelli: Jorge, I don't know if you want to talk about the specifics, but that's absolutely our aim is to continue to improve the software business. I think software as a percentage of revenue, we're at 80% now, and it probably gets to, I don't know, 82% or 83% next year. Jorge, I don't know if you want to talk to any of the specifics on. Jorge Martell: Yes. So I think just the one thing that I would add is, Erik, is the -- I think the subscription, yes. I think when you look at the different components of revenue for security, you have to take into account maintenance and some of that -- those dynamics in terms of the professional term. So maintenance will be a little bit choppy, right? But I think if you focus on the subscription security, I think that's a fair assessment. Erik Suppiger: Okay. Good. Good. I know you don't have much exposure to federal, but any comments on federal and if the shutdown is giving you any pause? Victor Limongelli: We have a ton of exposure. Yes, go ahead, Jorge. Jorge Martell: Sorry I would say, no, I think we're lucky in that sense, Erik, that we really haven't felt it. We have a little bit of exposure in our digital agreements business, but it has not been anything material at all, luckily, knock on wood. And so I think from that standpoint, the shutdown has been a nonevent for us. Erik Suppiger: Okay. And then lastly, just a follow-up on Catharine's question. What is -- is there any change or any -- has there been any intensity of competition? Or has the market dynamics changed at all in terms of software authentication for banks? Is there any change in that market? Victor Limongelli: No, I think if you actually look at our business, we've been doing quite well in North America. We started a North American security sales effort about 15 months ago, July of '24. But that's historically a small portion of our business. So although the -- there's been good progress, it's from a small base. So we're doing well there. We've mentioned on previous calls quite a few times, I think, that the economic environment in Europe was a little bit more challenging for us. And I think that's historically been a very large part of our business. So I think that has impacted us to a certain extent, it hasn't been the strongest economy there. Erik Suppiger: Okay. But it's not -- there's no particular change from a competitive perspective? Victor Limongelli: No. No. If anything, I think we're becoming more competitive as we add new capabilities. I've mentioned S3 a few times, but it has some large customers that we're going to start rolling out. And I think it overall helps our competitive position compared to 6 months ago. Erik Suppiger: Okay. Then last question. In terms of the FIDO2 push, how -- what progress have you made with channel partners? Have you been -- what progress have you made with channel partners on that front? Victor Limongelli: Well, I want to talk in general about the FIDO2 push and the S3 product. I mentioned we got our first 2 new logos, which is good within 4 months of closing the deal. And we have others in line, some of which are from channel partners. One of those 2 actually was from a channel partner, one of those 2 new logos I mentioned. And we think that, that is obviously going to be an important method for sales heading into 2026. That product, I mean, just to -- FIDO2 is an open protocol, right? So you can stand up your own FIDO2 server if you want. But what you get from S3 is extreme scalability where you can scale it up to millions and millions and millions of users. I alluded to this earlier, you get excellent performance with respect to latency, a great management console to make it easy to administer. And also flexible deployment. This is something that we're well known for. You can deploy it in the cloud or on-prem, and there are customers with both deployment modes. So it's a very appealing offering, I think, in the financial services world because some banks, as everyone knows, some large banks still prefer on-prem. So we give them maximum flexibility. Erik Suppiger: Are those customers buying the tokens from you as well, the FIDO 2 tokens? Victor Limongelli: So the FIDO2 tokens, this is an interesting another area, right? So we started developing those internally. That was internal development. And we feel good about that business as we move forward. We have quite a bit of pipeline. We're expecting orders. We've gotten some orders already. And we expect that to be a more meaningful revenue contribution in 2026 than it is today. So if you think about consumer banking tokens, if that continues to decline, the FIDO2 security keys could perhaps offset some of the secular consumer banking token decline. Operator: The next question comes from the line of Gray Powell with BTIG. Gray Powell: Okay. Great. Look, I only have one question, but I'm going to break it down into 27 parts. Is that okay? Victor Limongelli: Sure, Greg. Go ahead. Gray Powell: So really just 2 questions on my side. And you more or less hit on this. When a customer elects to not renew hardware tokens, I'm going to assume it creates an opportunity to upsell your mobile security suite. And then I just like is that the case like is a direct shot? Or is there more of a jump ball situation where you have to send off that customer from other competitors? Victor Limongelli: Well, it could be a jump ball situation. But in a lot of these cases, I alluded to customers saying they have 20% of their consumers using hardware. So in many cases, it's already happened. They were a dozen years ago at 100% of their consumers using hardware, and now they've moved over to mobile for the majority of their consumers, younger consumers, new accounts. And they might have been 5 years ago, 40% of their consumers using hardware. And so that number has been declining over time. It does tend, by the way, to have heavier use cases in the corporate banking market where you might see 50% of consumers -- not consumers, but companies using hardware tokens. Why is that the case? Well, corporate banking very often still happens in front of a large screen, in front of a computer, not on a mobile phone. The more you're using a mobile phone, the more mobile authentication is likely to be used. So Greg, when you see a bank go from 40% consumer banking token to 20%, it's not really a jump ball situation. Yes, there's more opportunity for mobile authentication licenses, but we're not getting as much revenue upfront from those as we are from the hardware tokens. Gray Powell: Understood. That's helpful. And I guess maybe the bigger question for me personally is just on the ARR side. Can you talk about the visibility you have on late-stage deals and pipeline, just like the overall confidence level you have in the Q4 ARR guide, just because it does imply a decent uptick in the pace of net adds from what we've seen the last 4 or 5 quarters. And look, I know it's Q4, which is some seasonality. But any color there would be greatly appreciated. Jorge Martell: Yes, I can start. Victor Limongelli: Jorge, do you want to talk about the -- you can talk about the model. I'm happy to talk about the outlook. So go ahead, I'll let you start. Jorge Martell: Well, I think -- so from a model perspective, so we obviously take into account what is going to renew, right? What is the potential expansion based on opportunities that we see in pipeline and obviously, talking to our sales leaders and all that. So we have weekly calls. We have visibility to that. And that is part of how we build our ARR forecast, okay? What is the risk? Is there any slippage going in it? Obviously, as you know, with term and something falls out of it for more than 90 days, we take it out of ARR. And so it's an active, it's an active discussion and conversation with the sales leader to understand what is the potential risk, what is the potential expansion. This applies to both business units, major agreements as well as security. And it's an active dialogue. And so it is sort of like a bottoms up, if you would, what we try to -- when we model a forecast, it is -- when it's a Q plus 1 or the same quarter, it is sort of like a bottoms up, Greg. And it's all about just execution, making sure that we can close those. And not everything is going to be perfect like everything else. Sometimes it's art, it's not a science, but we try to -- so we do have, I would say, within the quarter, some visibility, right? There are some [ bluebird ] that happen that we don't anticipate. Like we mentioned the HDFC situation last quarter. And sometimes we see some contraction, and that's because our sales leader or the client is not -- they don't know yet, right? And so those we have less visibility. But for the most part, I think within the quarter, we have a fair amount of visibility. So I'll turn it to you, Vik to talk about the other component. Victor Limongelli: Yes. I mean we feel pretty good about it. I mean it's October 30. So you -- we have pretty good visibility. You don't know for sure what's going to close. I think our sales team, if you could go back in time 12 months to now, feels a lot better about our competitive position. I mean we've introduced the FIDO security keys. We bought Nok Nok. We have the partnership with ThreatFabric. There's a lot of exciting stuff happening and a lot of good conversations happening. You can't book exciting conversations and people feeling good about things, but it's definitely an optimistic vibe. Operator: The last question comes from the line of Rudy Kessinger with D.A. Davidson. Rudy Kessinger: Kind of just a follow-up to some questions that have been asked. Just with respect to the cut for this year, specifically on revenue and ARR, is that more so related to gross churn? Is it more so related to lower than previously expected new logo or lower than expected -- lower than previously expected cross-sell and upsell? Victor Limongelli: Yes. Jorge can give you the details. Go ahead, Jorge. Jorge Martell: Yes. So it is primarily related to lower activity in net expansion. We did have, I would say, this quarter in Q3 that impacted one contraction. But I think overall, taking a step back, Rudy, it is primarily the lower activity for expansion. New logos was is to a lesser extent, but it's primarily more the net expansions, Rudy. Victor Limongelli: Well, and also hardware, right, to a certain extent, have $2 million of hardware lower than. Jorge Martell: For sure. On the revenue side, yes. Rudy Kessinger: Yes. Okay. And I guess as we think about maybe '26, I mean, do you feel like -- I guess, could you give us maybe kind of a time line maybe for when you think you might start to see some more traction with some of these newer products and maybe you might be able to reignite growth here? Victor Limongelli: Yes. So let me talk a little bit about -- I think we're going to see traction in '26 with S3. I think we've already seen traction with a couple of deals closing and more pipeline for Q4. But keep in mind that if that business grows 30% or 40% next year, that will be a vast acceleration over what they were doing prior to the acquisition. But that will have a $3 million or $4 million impact on our business in terms of bookings. So the scale of it will take a little bit while to build even if we can accelerate growth to a much faster growth rate than the business was before or than we have been as a business over the past number of years. ThreatFabric is a partnership and an investment. And that's going to -- it's a little bit harder to tell because it's only been 3 weeks. But we think that will contribute, not as meaningfully as Nok Nok. But for our business, like every bit of improvement helps. If we pick up $3 million or $4 million of ARR somewhere, I think that is a real positive for us overall. And of course, we're not -- we alluded to this on the prepared remarks, we're not just doing one thing. We're working on lots of different things, trying to get lots of -- we can score a bunch of runs by hitting a bunch of singles. It doesn't all have to be a home run. Operator: This does conclude the question-and-answer session. And I'd now like to turn it back to Joe Maxa for closing remarks. Joe Maxa: Thank you, everyone. I'm glad you could join us today. We look forward to sharing our results with you again next quarter. Have a great night. Operator: Thank you for your participation in today's conference. This does conclude the program, and you may now disconnect.
Operator: Severin White: Good morning, everyone, and welcome to DigitalBridge's Third Quarter 2025 Conference Call. Speaking on the call today from the company is Marc Ganzi, our CEO; and Tom Mayrhofer, our CFO. I'll quickly cover the safe harbor. Some of the statements that we make regarding our business operations and financial performance may be considered forward-looking, and such statements involve a number of risks and uncertainties that could cause actual results to differ materially. All information discussed on this call is as of today, October 30, 2025, and DigitalBridge does not intend and undertakes no duty to update it for future events or circumstances. For information, please refer to the risk factors discussed in our most recent Form 10-K filed with the SEC for the year ending December 31, 2024, and our Form 10-Q to be filed with the SEC for the quarter ending September 30, 2025. With that, let's get started. I'll turn the call over to Marc Ganzi, our CEO. Marc? Marc Ganzi: Thanks, Severin, and welcome, everyone, to our third quarter 2025 business update. We appreciate you joining us on the call and look forward to answering your questions. Let's get to the quarter. This quarter really exemplifies what we've been building towards at DigitalBridge from our near-term financial goals to our longer-term strategic priorities. Let's get started with the key highlights that align with our strategic road map. First, financial performance. DigitalBridge delivered another quarter of robust growth with fee revenues reaching $94 million, up 22% year-over-year. Our fee-related earnings grew 43% to $37 million in the third quarter, reflected continued margin improvement as revenue growth continues to outpace expenses. Second, capital formation. We raised $1.6 billion in new capital during the quarter, bringing our year-to-date to $4.1 billion. Look, we're well positioned thinking through the fourth quarter here as we remain on track to meet our full-year objectives. As most of you know, the fourth quarter is historically our strongest quarter. Finally, and this is the most important story of the quarter, the relevance and strategic value of our power bank was on full display. We saw record data center leasing activity across our portfolio that will build and accrue significant value for you, our investors, over time. Our portfolio company, Vantage Data Centers announced the Frontier mega campus in Texas, a $25 billion, 1.4 gigawatt development, serving the leading AI infrastructure build-out. This was followed up by a second campus, dubbed Lighthouse in Wisconsin, a $15 billion-plus development to support the expanding OpenAI and Oracle Stargate project. These landmark transactions demonstrate that our years of securing power across the portfolio are now translating into the largest leasing commitments in data center history. I talked about it last quarter, having a power bank that is ready to go for our customers is a comparative advantage. Let me put this quarter's performance in a broader context. Continued financial performance and capital formation that advances us towards exceeding our full-year objectives. What makes this quarter truly distinctive is how our strategic positioning around power is creating differentiated outcomes at the portfolio level. For years, we've talked about the importance of power as the critical constraint in the AI era. Today, we're seeing that thesis play out in real time, and DigitalBridge is leading on the front. As I referenced, year-to-date capital formation of $4.1 billion positions the firm to surpass our financial targets. We achieved our $40 billion FEEUM target 1 quarter ahead of schedule, reaching $40.7 billion as of the third quarter. This milestone that reflects both the strength of demand for digital infrastructure and the execution capabilities of the DigitalBridge global platform. The record FEEUM today translates directly into revenue and earnings growth. We're seeing particularly robust activity in co-invest, where third quarter fee rates continue to expand relative to historic levels, up to 70 basis points in Q3. I talked about this earlier this year in multiple quarters. We're very focused on expanding margins in our co-investment program, and we're getting it done. That's the key. We're executing. We're finalizing our flagship strategy capital formation, targeting over $7 billion in the next few weeks as we head into the end of the year, our focus has pivoted to the second credit strategy and our new offerings in power, stabilized data centers and private wealth that will drive our 2026 capital formation. Having a new product pipeline that sets you up for success is really what it's about in terms of being an alternative asset manager where we have a multi-strategy platform. This is the full effect of DigitalBridge as a full alternative asset manager. This is on display for all of our investors as we push forward into 2026. Next slide, please. Now I want to talk about a key component of our private wealth strategy, the partnership we announced with Franklin Templeton in the third quarter to launch our first programmatic private wealth distribution channel. At its heart, the partnership is about democratizing access to institutional quality, differentiated digital and energy infrastructure investments that were previously reserved for institutions. Franklin Templeton is a $1.6 trillion global investment leader and their CEO, Jenny Johnson, has prioritized this initiative as growing alternative investment portfolios. Importantly, Franklin Templeton are building a diversified open-ended infrastructure solution that will have the ability to invest across all infrastructure subsectors. They intend to compete head on with the mainstream supermarket asset managers. On our side, we're bringing our $100 billion-plus in assets under management and our position as the leading digital infrastructure specialist across data centers, cell towers, fiber networks, digital energy and edge infrastructure. We're partnering with our friends at Copenhagen Infrastructure Partner, the world's largest dedicated greenfield energy fund manager with $37 billion in AUM and Actis backed by our friends at General Atlantic with their deep sustainable infrastructure expertise. For their part, Franklin will focus their accredited investor product on the mass affluent segment in the market, a difficult segment to access without significant investment in sales infrastructure. They have a sales force of over 600 people, giving them strong distribution capabilities and reach. The strategic rationale here is compelling. Together, we're focused on a massive investment opportunity. There's a $94 trillion global infrastructure need by 2040. We're positioned at a pivotal inflection point as AI, electrification and connectivity megatrends accelerate infrastructure demand. Now, why does this matter for you, our DigitalBridge shareholders? Look, first, the 3 reasons: One, evergreen capital. This is an incremental source of capital and FEEUM that layers over time in a long-duration structure. Second, it's an earnings contributor. Fee revenues convert to fee-related earnings as the platform scales. Then third, earlier carrier realization. The potential private wealth carry is paid as accrued earlier than our traditional institutional structure. This partnership launches exactly at the right time, and it supports our strategy of building a multichannel approach to wealth sales. It enables us to reach multiple client segments across the broader wealth universe. There is a secular migration of wealth management allocations to private infrastructure. This is happening. The institutional quality solutions were designed are meant to provide stable, inflation-linked cash flows with resilience through economic cycles. We're capturing what we believe is a massive opportunity and Franklin Templeton gives us distribution platform and private wealth client access to do it at scale. That's the key component that we're doing this at scale. Next slide, please. Let me bring this all together with what I believe is the defining characteristic of the DigitalBridge portfolio today, our power bank. To be credible and to be honest with our customers today, if you don't have a power bank, you really can't have a conversation in terms of leasing megawatts and gigawatts. Last quarter, I highlighted this. We have over 20 gigawatts of total secured power across our data center portfolio. That's not a projection. That's actual power that we can access. That's critical to understand that, that this is not a book dividend or something that we're trying to accomplish. This is power that exists inside of existing land, existing facilities, existing campuses with our 11 existing platforms. In the third quarter, we put that power bank to work and leased a record 2.6 gigawatts across the DigitalBridge portfolio. To put that in perspective, that represents 1/3 of total record U.S. hyperscale leasing for the quarter. 1/3. That's not market share. That's market dominance in the most important segment of the data center industry today. Here's what it means in practical terms. When the world's largest technology companies need to deploy AI infrastructure at scale, they come to our portfolio companies. They come because the portfolio companies have a long track record of delivering for them and because they've got the power. In today's environment, power is everything. You cannot build a 1 gigawatt AI campus without 1 gigawatt of power. It's just that simple. Ultimately, the 2.6 gigawatts of third quarter leasing translates directly into new capital formation, fee revenues and carried interest and long-term value creation. These are decade-plus contracts with investment-grade counterparties. The revenue visibility is exceptional, and the returns are improving relative to what we underwrote when the power was originally sourced. As you think about DigitalBridge's positioning today, think about it this way. One, we have the power; two, we have the platforms; three, we have the customer relationships; and four, we are executing. That combination is creating outcomes that very few firms in the world can deliver. I would argue we are actually the only firm that can deliver it on a global basis, and we're only in the early innings of this cycle. I cannot be more excited about this development. Again, this has been set up. This has been our conversation with you, our investors, for the last 3 quarters. How would we translate this 20-plus gigawatt power bank into comparative advantage? This is as easy as you can see it for investors today. We have the capability, we have the advantage, and we're executing. Next slide, please. Now let me put the power bank into broader context of what we're building across the entire DigitalBridge portfolio. Look, across our 11 data center platforms, we're deploying significant capital to support the growth of the AI ecosystem on a truly global scale, catalyzing development from hyperscale to private cloud to the edge, spanning North America, Europe, Asia Pacific and Latin America. The key to this is it's a customer-driven investment model following the logos where the hyperscale, enterprise and cloud customers are demanding capacity. In North America, Switch, Vantage, DataBank and Expedient are each scaling to meet differentiated customer segments from the largest hyperscale AI workloads to enterprise edge computing. In Europe, Vantage EMEA and Yondr, our newest platform, is building out critical capacity across multiple markets. Vantage Asia Pac and AMES are positioning us for rapid growth in Asia Pacific, while Scala continues to lead in Latin America, and AtlasEdge is capturing the emerging opportunities at the intersection of connectivity and compute in Europe where inferencing will come into full focus in the next decade. We have the products for every type of workload. We have the products for every type of workload in every geography. This is by far the most unique and differentiated data center platform in the world. What makes this powerful is the diversity and complementary of these platforms. We're not a one-product shop. We have the right platform for hyperscale GPU compute, for private cloud workloads, for enterprise colocation, edge infrastructure, and of course, now we move to inferencing. That breadth means we can serve the full spectrum of AI infrastructure demand. It means our customer relationships deepen as their core requirements evolve. That's what I love. I love evolving with customers. Just like we did 30 years ago when we evolved the towers from analog to digital into multiple different technologies over the last few decades. We're capturing that same business model with our customers today in data centers. The capital we're deploying across these platforms is measured in tens of billions of dollars over the next several years. It's directly tied to contracted customer demand and secured power positions. This is DigitalBridge's competitive advantage at scale, a global platform with local expertise backed by institutional capital following customer demand and enabled by our market-leading power bank. With that exciting overview, let me turn over the call to Tom to walk you through the financial details, and I'll come back later to wrap it up. Tom? Thomas Mayrhofer: Thanks, Marc, and good morning, everyone. As a quick reminder, the full earnings presentation is available within the Shareholders section of our website. As Marc discussed, we had an exceptionally strong third quarter, supported by continued capital formation in our flagship fund series, which generates high-margin catch-up fees. Throughout my remarks, I'll highlight the impact of these catch-up fees in order to provide a baseline for our prospective performance once we complete the fundraise for our current flagship funds in the fourth quarter. Starting with the financial highlights. In the third quarter, we recorded $93 million of fee revenue, representing an increase of 22% over the third quarter of 2024. Our fee revenue this quarter benefited from the cumulative effect of organic growth in our flagship fund series and co-investments over the last 12 months with a $8 million contribution from catch-up fees in the third quarter. This growth in fee revenue resulted in $37 million of FRE in the quarter, an increase of 43% over Q3 of last year and putting us on track to hit or potentially exceed the top end of the range for our 2025 full-year FRE guidance. Excluding catch-up fees, FRE for the quarter would have been $29 million, an increase of 36% year-over-year. Growth in FRE resulted in distributable earnings of $22 million for the quarter, representing a double year-over-year. As of quarter end, our available corporate cash was $173 million, providing material liquidity and flexibility for us as we continue to evaluate both our capital structure and opportunities to invest in and grow our business. We also currently hold $54 million of warehouse investments on our balance sheet to support the launch of new power and private wealth strategies, which we expect to recycle over the next year as we raise third-party capital for these products. Moving to the next page. Fee-earning equity under management increased to $40.7 billion as of September 30, representing a 19% increase from last year. This growth is primarily driven by capital formation in the DBP series and co-investments as well as fees activated upon deployment of previously raised capital. We closed $1.6 billion in new fee earning commitments during the quarter, led by strong co-investment activity and new commitments to our latest DBP flagship fund. Turning to the next page, which summarizes our non-GAAP financial results. As mentioned earlier, we reported $93 million of fee revenue in the quarter, representing growth of 22% over the same quarter in the prior year. Our LTM FRE margin was 38% as of the third quarter. We expect FRE margins to remain elevated through the final close of our flagship fund in the fourth quarter of 2025, supported by the continued contribution from catch-up fees. Moving to the next page, which summarizes our carried interest and principal investment income. We reported a $20 million reversal of carried interest during the quarter. As a reminder, the company accrues carried interest based on quarterly changes in the fair value of our fund investments. As discussed previously, many of our vehicles are in the early to middle stages of their life cycle and have not fully worked their way through the J curve to be entirely clear of the preferred return. At this point in their life cycle, small changes in the fair value of the fund assets can have an outsized impact on the quarterly accrued carried interest that we report, including causing reversals as we've seen this quarter in periods when the appreciation in the portfolio does not exceed the preferred return hurdle for the quarter. As we've discussed in prior quarters, carried interest compensation expense tracks these changes, and therefore, there was a commensurate reversal of a portion of the unrealized carried interest compensation this quarter. Principal investment income, which represents the mark-to-market on the company's GP investments in our various funds was $25 million. Turning to the next page. This chart continues to highlight the stability and consistency in growth, both in revenues and margin that we've experienced over the last 2 years. We've included this quarter FRE metrics, both gross and net of catch-up fees, given the more meaningful contribution from catch-up fees this year as we close out the fundraising period for our most recent DBP fund. LTM margin, excluding catch-up fees, has grown to 33% as of September 30. This quarter, we saw $1.1 billion of FEEUM inflows, a significant portion of which was related to the activation of fees on previously raised co-investment capital. These inflows were partially offset by approximately $100 million of outflows. Finally, the company continues to maintain a strong balance sheet with approximately $1.7 billion of corporate assets, largely reflecting our material investments alongside our limited partners and available corporate cash. We're pleased with our results through the first 3 quarters of the year, and we're very excited about the opportunity set that we see ahead of us, both in our core business and some of the new initiatives that we're working on. With that, I'll turn the call back over to Marc. Marc Ganzi: Thanks, Tom. Now I want to shift gears and talk about our investment activity and how we're creating value at our portfolio companies. As a reminder of the framework we outlined last quarter, our competitive advantage is built on a 3-decade operational framework that delivers repeatable value creation. The DigitalBridge development model has 3 phases. Phase 1, we establish platforms. We back great CEOs. We build great companies. We identify and acquire the right platform and the team to capitalize on unique digital infrastructure opportunities. This is about pairing capital and operating expertise with the right strategic business plan around both greenfield development and strategic M&A. You've heard me call it before, this is the build and buy. We move to the second phase, which is about transforming and scaling. Once we have that platform, we have the right team, we execute operational transformation to improve margins, grow the business and scale it efficiently. Then Phase 3, follow the logos. This is our customer-driven investment framework. We allocate capital and resources to support network growth where our customers are demanding that capacity. We don't build data centers or cell towers or fiber networks on spec, never have. Haven't done it in 32 years, we wouldn't start now. We follow the logos. We go to where Microsoft or Oracle, any of the hyperscalers are telling us they need capacity, and we show up for them with strong intention and execution. This framework has delivered repeatable value creation for 3 decades, and it's what's driving the results you're seeing at Vantage, DataBank Switch and our other platforms today. We've been applying this playbook consistently, and it works. It's worked for a long time now. Let me take you through several new initiatives and transactions that demonstrate this model in action. Next slide, please. In September, we announced that GIC and ADIA, both existing Vantage partners are investing $1.6 billion to scale Vantage Asia Pacific platform to 1 gigawatt of capacity. This investment supports the Johor Campus acquisition and broader regional expansion across 5 markets. Let me unpack that for you and why it really matters. Singapore used to be a traditional data center hub in Southeast Asia, but land, power and regulatory constraints have led to a moratorium at one point. That leads to limited growth. Now, along comes Johor, just across the border in Malaysia has emerged as a natural overflow market, much like we executed that strategy in Reno, Nevada when it became clear to us that Santa Clara had the same type of issues. It offers lower cost, proximity to Singapore, less than 1 millisecond and dark fiber connectivity to the Singapore hub. From a customer's perspective, it functions almost like an extension of Singapore, but with better economics and available power. This sounds really familiar, doesn't it? This is exactly what we did with Switch and Reno, where we have today over 1.8 gigawatts of compute available for our customers in Reno. We're running that same playbook here in Johor. The APAC data center market is growing at double-digit growth rates and is expected to reach $77 billion by 2030. 72% of organizations tie their data strategy directly to AI initiatives, which means the demand for data center capacity in the region is only going to accelerate. Again, using the same playbook, we brought in new leadership last year to position the region for growth. Jeremy Deutsch joined as the President of APAC in October 2024. He previously served as the President of APAC at Equinix, an organization that we have a lot of respect for with over 20 years of operating experience. He expanded Equinix into 5 countries during his tenure and was the inaugural Chair of the Asia Pacific Data Center Association. Jeremy is exactly the kind of world-class operator I love partnering with, and I'm looking forward to building this platform with him. He's doing a great job for us. The strategic growth drivers here are clear. Singapore spillover demand creates a natural customer base. AI fuel demand is accelerating across the region. We're positioned with the right platform, the right leadership, the right capital partners in GIC and ADIA. The investment is expected to close in the fourth quarter of 2025, and it represents another example of how we're following the logos in the key markets, not only in Johor, but of course, Kuala Lumpur, Melbourne, Sydney, Osaka. These are the growth markets for AI in Asia. Our hyperscale customers are telling us they need capacity in the region, and we're getting ready to set to deliver to that at scale. Next slide, please. Let me talk about 2 landmark developments that demonstrate the power of our strategic positioning, Vantage's Frontier and Lighthouse mega campuses representing a combined $40 billion investment and over 2.4 gigawatts of GPU compute capacity. What you're seeing here in DigitalBridge backing the build-out of an entirely new generation of compute infrastructure. The AI revolution requires fundamentally different infrastructure than what the cloud demanded. Higher power density, different cooling technologies and most importantly, access to power at giga scale. These campuses represent our response to that transformation. Both are long-term contracted, pre-leased facilities, not speculative development. We have long-term commitments from Oracle, OpenAI and leading cloud providers. The revenue visibility is exceptional. The returns are attractive, and the strategic importance to our customers is undeniable. This is DigitalBridge enabling the infrastructure backbone for the most advanced AI workloads in the world. Frontier is in Texas, $25 billion across 1,200 acres in Shackelford County, delivering 1.4 gigawatts of ultra-high-density racks supporting 250 kilowatts and above. Lighthouse up North in Wisconsin represents $15 billion delivering 1 gigawatt with potential for more with the Stargate program distinguished by the development of new renewable capacity, the largest behind-the-meter renewable commitment in the United States today. Together, these projects create over 9,000 jobs, represents billions in regional economic impact, but more importantly, to our investors, they demonstrate that DigitalBridge has the capital, the expertise, the customer relationships and the power positions to support infrastructure development at scale that very few platforms in the world can match. Construction is underway with the first deliverables beginning in the second half of 2026. These are mission-critical facilities for some of the most important AI initiatives in the world. They validate our thesis that controlling power and backing world-class operators creates differentiation and creates value in the AI area. We're very excited about these 2 developments, and it really catalyzes a lot of hard work. Congratulations to Sureel and the team at Vantage. Next slide, please. What do Frontier and Lighthouse mean for DigitalBridge shareholders? Well, let me spell it out because this is where the value creation happens. First, higher fee co-invest. The attractive development economics of these projects enabled us to raise additional co-invest capital at advantaged fee rates. We're deploying and activating that co-invest capital as FEEUM over the next 2-plus years, which means growing fee streams for the projects and for you, our shareholders. Second, carried interest generation. We're expected to create significant value through carried interest as these developments stabilize over the next 3 to 5 years. Think about the math. We're investing in these projects at development yields. They're going to stabilize at much higher valuation and appreciation flows as carried interest to DBRG and our shareholders over the next few years. Third, developing our LP base. These projects position our platform to attract institutional capital, specifically targeting AI infrastructure exposure. This broadens our LP base beyond traditional infrastructure allocators to include technology-focused investors, sovereign wealth funds focused on AI and other pools of capital that are specifically interested in the sector that have not yet entered. Now let me talk about the key strategic considerations because that's what creates our competitive advantage. First, scale advantage. Operating at gigawatt scale generates structural advantages, superior unit economics, access to constrained power and exclusive positioning for multi-gigawatt hyperscale requirements. Our customers cannot get this kind of scale from anybody else. Second, premium workloads. These campuses are built for the most advanced AI applications. That means higher average pricing in investment-grade hyperscale counterparties. This is the best risk-adjusted business you can do in real estate today. Third, power differentiation. Distributed power delivery at scale is our critical advantage. Frontier represents the largest behind-the-meter power development in the United States today. That didn't happen by accident. That happened because we've been working on power for years. We talked about in our last earnings call, the power of our partnership with ArcLight, our digital power strategy and what we're doing to ultimately put power back into the grid and baseload. Together, these $40 billion developments represent watershed investments for Vantage and for DigitalBridge. They deliver unprecedented scale for the build-out of cornerstone AI hubs, serving hyperscale demand, and they demonstrate better than anything I could say in a prepared remark about our power bank strategy is working. I don't need to talk about it. This is the evidence. This is on display. Next slide, please. Let me close by putting it all together. In terms of our context for our 2025 priorities and where we stand heading into the final quarter of the year. What we delivered year-to-date, we're achieving organic growth with management revenue and fee-related earnings both up 20% year-over-year, even excluding the impact of catch-up fees. We achieved our FEEUM target 1 quarter early, exceeding our 2025 target in the third quarter, and we're tracking to meet or exceed our 2025 metrics on FRE and margins. We launched new investment strategies and channels, specifically our programmatic private wealth strategy, Franklin Templeton. We've continued to maintain a strong balance sheet and liquidity with over $170 million in corporate cash and a growing asset base. We've delivered breakthrough record leasing across our global data center portfolio with 2.6 gigawatts in the third quarter and $40 billion in new development contracted. Looking ahead to our year-end priorities for the fourth quarter. Again, we're focused on delivering and exceeding our 2025 financial metrics with FRE achieving or exceeding our guidance. We're formally launching our new digital Energy and stabilized data center strategies, and we're working to secure initial anchor commitments for one or both. We're building on our early private wealth momentum with targeted asset-specific investment opportunities, and we continue to evaluate strategic accretive M&A opportunities centered on adjacent asset managers. Let me wrap it up with the final thoughts before we go into Q&A. This has been an exceptional quarter for DigitalBridge. What a change a year makes from where we were a year ago in terms of our inability to meet our guidance to where we are today, which is, to be honest, a little bit on the front foot versus our back foot. Yes, we delivered the strong financial results, but this is beyond the numbers. You have to look through what we're doing here. The quarter really proves out my strategic positioning around power and AI infrastructure and what it's doing is it's creating real substantial differentiated value for our portfolio, their customers and our investor base. Advantage announcements, Frontier and Lighthouse represent over $40 billion of committed developments. These are not speculative projects. These are contracted pre-lease facilities with the world's leading technology companies. They're generating fee streams today. They'll generate carried interest tomorrow, and they will demonstrate that we are having and we've created capabilities that cannot be replicated. The Franklin Templeton partnership opens up a new distribution channel to Evergreen Capital. The APAC investment positions us to be one of the fastest-growing global data center markets where we can grow in Asia Pacific with our key customers. Look, I've been in this business for 3 decades, and I've seen -- and I've never seen a more compelling structural advantage than controlling power in the AI era. The demand is massive. The supply is constrained, and we're positioned better than anyone in the world to capitalize on this dynamic. The value that will accrue to our shareholders from this positioning over the next 5 to 10 years will be substantial. I want to preface this by saying, we're literally in the early innings. Let's wrap it up. Super simple quarter, strong financial performance, record leasing driven by our power bank advantage, continued capital formation momentum, strategic expansion of our distribution channels and a clear path to delivering on our long-term value objectives. We're executing our plan. I'm excited about what's ahead, and I look forward to updating you on our continued progress. With that, let's open up the line for questions. Thank you very much. Operator: [Operator Instructions] Our first question comes from Michael Elias with TD Cowen. Michael Elias: Congrats to you and the team, including Surrel on the massive leasing in the quarter. Great job. In the past, Marc, you've talked about $1.55 a share in carried interest for every gigawatt of data center leasing. Can you just help us understand when in the life cycle of the data center, that unrealized carried interest is recognized? Is it when it's leased? Or is it when it's delivered? Then also, I'm seeing more of these gigawatt scale deals on the market. I'm curious, as you think of your power bank, how would you describe your ability to take on more of these massive projects? Marc Ganzi: Yes. Michael, thank you. Let's start with the last part of your question, then we'll come around to the front part. These gigawatt projects are really tough, Michael. I don't think you're going to see tons and tons of them going forward. I think you're going to see more workloads kind of in that 350 to 800 megawatt more bespoke, a bit more tailored. I think building these 1-plus gigawatt campuses are really, really tough. I think it's tough from a capital formation perspective. I think it's tough from a resource perspective. I think a lot of the big gigawatt campuses for LLMs are being delivered now and will be delivered over the next 3 to 5 years. Because remember, these things take about 24 to 48 months to fully build them. What we are seeing an uptake in is in across all of our portfolio is this what I would call kind of 250-megawatt to sort of 500-megawatt workloads. Our sales funnel has gotten a lot bigger in this quarter. We have over a 7 gigawatt sales funnel right now. When you deliver -- when you lease 2.6 gigawatts in a quarter and your sales funnel grows by 7, you obviously -- you can start putting that math together that there's a lot of big chunky deals sitting in the pipeline. Our pipeline has gotten bigger. We delivered over 1/3 of the leasing for the industry in terms of actual power delivered against our power bank, what was actually delivered by the industry, we probably delivered about 50% of actual delivered capacity in the quarter. These metrics are important because we keep talking about the power bank and that 21 gigawatts of power. Leasing another 2.6 gig, delivering another 2, I mean, this is hard to do. Again, when you start -- we started over 10 years ago doing this. We've been able to really keep our pipeline moving and keep our delivery schedules moving, and that's what's giving us massive comparative advantage. I think you'll see other really good quarters from us from a leasing perspective. I just think you're going to see more distributed compute. As we move to inferencing, I think you're going to see -- then you're going to see a whole generation of deals that are going to get done in that kind of 20 to 200-megawatt range, which will be in the sort of secondary markets, which follows what happened in public cloud. Inferencing will really kick in, in kind of '27 through 2032 as we're still building kind of big LLMs. Nothing kind of slows down. Actually, this quarter, we saw acceleration. Kind of the third time I've told you this year, just when everyone thinks maybe there's a bit of a breather, we're not getting a breather, largely because we have this enormous power bank at these 11 portfolio companies that allows us to keep going. For example, later last year, earlier this year, we were talking about some of the big deals that Switch was doing. Now we're talking about some of the big deals that Vantage is doing. Next quarter, maybe we're talking about DataBank or Yondr or Scholops. We don't rely on one platform. I think that's what makes us pretty unique and why investors need to own our stock is really simple because you don't have to hang your hat on one story. There's a great -- look, we have enormous respect for DLR and Equinix. They are great businesses, but those are -- you're relying on one management team and you're relying on one pipeline. When you buy our shares, you got 11 teams Chris crossing the globe, focused on different types of workloads, different types of customer requirements and most importantly, different designs in different locations. I like our bets when you play it with 11 guys on the field versus 1, it kind of gives you a really big leg up. That's why when you're looking at this 21 gigawatts and the 2.6 that we delivered, there's nobody even close in AI data centers to DigitalBridge right now. We're playing the game at just a very different speed and at a very different scale. This quarter really manifested that, and it will continue. I think you'll continue to see that out of us. Now to your question around carried interest around the $1.55 per gigawatt, how do you realize that carry? To fully realize that carry takes anywhere from 3 years to 5 years. Some of that carry is accrued when you get the entitlements and you get the power. Some of that carry gets accrued when you sign the lease. Some of that carry gets accrued when you deliver the first data hall. Some of that carry gets accrued when you deliver the final data hall. Then some of that carry -- well, all that carry gets realized if it ends up -- if the data center ends up getting purchased, put into a continuation fund, gets acquired as part of a portfolio deal. Generally speaking, our monetization and our DPI track record in data centers goes back over 4 years ago. We started returning capital back to investors 4, 5 years ago, whether it was our DataBank continuation fund with Swiss Life, whether it was the North American Stabilized Data Center Co, or Valkyrie, the European Stabilized Data Center Co. We've been a consistent returner of capital to our investors, which then triggers carried interest. Now the problem with DataBank and Vantage was those vehicles were outside of our funds and predated the Colony merger. Now as we get these other companies growing up, whether it's Gala, whether it's Switch, whether it's Vantage Asia Pac, these are now vehicles that sit in our funds. As you know, Michael, roughly about 28% of the carry across our fund products sits with public investors. That episodic nature of carried interest as we deliver these new facilities don't accrue just to the management teams, it now starts accruing to public shareholders. All this hard work that we're doing now, we're accruing that carry, we're building it, but ultimately, we anticipate in the next 24 to 36 months to start delivering that carried interest out to our shareholders. In the meantime, the math is holding up. I think that's one of the key things that you could say with a straight face today is the arithmetic that we put in front of investors a year ago in terms of what a megawatt means, what a gigawatt means, that flow-through to investors now is really quite clear. Operator: Our next question comes from Jade Rahmani with KBW. Jade Rahmani: What's your overarching view on how the new data center projects achieve a stabilized capitalization given their size? Do you envision they will be owned long term by a combination perhaps of large REITs, infrastructure funds and hyperscalers themselves? It seems like the digital bridge structuring expertise could provide solutions to that eventuality. Marc Ganzi: Yes. Thanks. Jade, great to hear from you. Look, we announced last quarter the formation of a strategy called the Data Center Income Fund. Now that strategy is in flight, and we're having a lot of great dialogue with a new set of investors, Jade, that are different from our investors that we had before. Remember, in our flagship funds, we're talking to infrastructure allocators. When we're sitting down on the DCIF product, Jade, we're talking to real estate allocators. For example, last week was the PREA conference in Boston, our new Head of Capital formation for the DCIF product, winning Price is up there with Ramel Marseille. We had over 60 meetings with real estate investors. Real estate investors are really eager to get allocation, Jade, to these amazing stabilized data centers that we have a deep pipeline in. We're excited about that because for us, it's an entirely new swim lane of capital. Every year, there's about $3 trillion of capital that's allocated to real estate Jade. That's bigger than the $1.7 trillion that's allocated to infrastructure. If you think about swimming pools, that's actually a bigger swimming pool than we swim in today in terms of general infrastructure. We get kind of excited about that. Real estate allocators today are looking at industrial properties. They're looking at shopping centers. They're looking at downtown office buildings, which, as you know, are kind of -- is a tough asset class. Along comes these 15-year investment-grade data centers, low incremental CapEx going forward. The tenants rarely call you. It's a pretty hands-off real estate product. Most importantly, 95% of the cash flows that we're seeing are investment grade. This is a really hot new development for us. As we've launched that strategy, and we're really delighted to bring Wendy on the team. We've got [ John Diev ] and Jon Mauck help running the strategy. We've got a big team working on it. It's an entirely new opportunity for us, and it's a new set of investors. It's another way that we're growing our FEEUM, that we're growing our FRE and we're growing our AUM at the same time in a discipline that we know incredibly well. We have the advantage. We know all the developers out there. We know all the other GPs that need liquidity, and we're pretty excited about it. I think the key to that is we do have the solution. We do have the team. We have the right pipeline of ideas and product, and we've already identified the right set of investors. Everything is lining up to be really successful, similar to kind of what we've done in digital power, Jade, a very similar type of approach, very focused, very surgical and not competing with what we're doing. As we look to the future, 2026 will be driven by this real estate product, our digital power strategy and private wealth. We've lined up 3 new products for next year. At the same time, as you can see, we'll always be in the market with some sort of co-invest vehicle. Everything is setting up quite well for next year, and we love the product set. Jade Rahmani: Can you, as a follow-up, give some insight into what fund outflows look like for DBP I, II and InfraBridge perhaps in 2026? Marc Ganzi: I'm sorry, repeat the question again. Jade Rahmani: What do fund outflows look like for DBP I, II and InfraBridge? In other words, how much legacy fund runoff should we expect in 2026? Marc Ganzi: Yes. Thanks, Jade. We don't get into that exactly. We don't give guidance specifically on how we're realizing or monetizing assets. I think as we monetize those assets, we'll report them in our normal cadence. I think, obviously, Fund 1 is starting to near its natural turning point where you begin to think about monetization. We're thinking through that pretty carefully. At the right time and the right speed, we'll do that. Credit is constantly turning over. That turnover is -- loans typically have a 24- to 36-month lifespan. As we're turning over loans and returning capital, we're booking new loans in the second fund and our SMA strategy. InfraBridge continues to do exactly what we think it should do. In due course, we will continue to monetize assets in InfraBridge I. then as we look forward in the coming years, we'll look at InfraBridge II, but again, as we monetize stuff, we'll share that with you in the quarter. All of those fund products are moving at the speed at which you'd expect them to move. We feel good about the speed and the cadence at which we're delivering DPI. Operator: Our next question comes from Timothy D'Agostino with B. Riley Securities. Timothy D'Agostino: On the Franklin Templeton strategic partnership, in the deck, you outlined the $15 trillion opportunity through 2024 -- 2040, sorry, with wealth management allocations to private infrastructure. I was wondering if this strategic partnership is sort of a one-time partnership or if we could see more of these down the road? Marc Ganzi: Sorry, we lost the beginning of what you said. Could you repeat the beginning of your question? Timothy D'Agostino: Yes, sure. Sorry. With wealth management allocations to private infrastructure estimated at $15 trillion through 2040, I was wondering if the Franklin Templeton strategic partnership is sort of like a one-time thing or if we could see more partnerships like this down the road? Marc Ganzi: Yes. Look, I mean, for this particular product, alongside of Actis and CIP and it's a strategy that they've launched on their platform. We have other partners in private wealth. We did a fantastic product offering last year with Goldman. It was really successful. It was wildly oversubscribed. We do intend to be on other platforms and have other partnerships. That is something that we'll reveal in due course. We are not exclusive nor limited just to the Franklin Templeton platform. We are working with other allocators, and we agree with your arithmetic. It's a $15 trillion opportunity. It's really big, and there's a lot of great partnerships to be had, and we're excited about it. For right now, we love what we're doing with Jenny and her team. They're fantastic partners. So far, it's been a really successful launch. Great question, and we'll reveal more next year, but right now, my focus is supporting Franklin Templeton and making sure that, that product is wildly successful and oversubscribed. Timothy D'Agostino: Then as a quick follow-up, could you provide a little bit more color on the Evergreen capital on the long term, on the long duration and then kind of why the structure is so attractive to you all? Marc Ganzi: Well, look, I think we have both types of structures across our product set. We don't believe that you have to be all permanent capital nor do we believe you have to have 10-, 11-year closed-end funds. Commingled funds work well for certain allocators, particularly pension funds and other types of sovereign wealth funds, they like that because there's a finite end to what they're doing. I think other allocators like the open-ended structure, for example, like real estate investors. That's something they're quite familiar with and private wealth clients. They're very familiar with that structure as well. Our continuation funds, the things that we're doing around the real estate asset class, the stuff we're doing around private wealth tend to be open-ended and be permanent in nature. Then our flagship vehicles tend to be closed-end in nature, along with our digital power strategy. That tends to be a strategy that you would lend itself to being closed end. I think that the great thing about DigitalBridge today is that we're a multi-strat platform. We have multiple strategies really focused on allocators very specifically and then pairing that allocation with the right products, the products that investors want, whether it's a data center platform, a tower platform, a stabilized asset, an energy project that's tethered to the AI economy. These are the things that investors really want today. We have the right products and the right structures, so having that multi-strategy capability is really what differentiates DigitalBridge today. Operator: Our next question comes from Rick Prentiss with Raymond James. Ric Prentiss: First, to follow-up on Michael's question a little bit. I mean, Marc, you guys as an all asset manager, but focused on digital infrastructure AI. Good to see you communicate numbers, hit numbers, achieve numbers, maybe exceed numbers. The piece that seems to be missing from the stock price is really recognition of carried interest. You touched on it a little bit to Michael's question, but help us understand the pacing as your portfolio companies now ballpark 50 companies or so, I guess, how should we think about a stable, consistent kind of monetization path into the future to try and get some of this value realized because clearly, AI is hot. power banks are hot, data centers are hot. You're not getting the credit for that. Just trying to think through how do we see that monetization path play out to help the realization of that. I'll come back with a question for Tom on that the bookend impact. Marc Ganzi: Yes. I'll let Tom handle the bookend piece. I'll just stick the 50,000 feet and then flip it over to him. He gets the hard part. I get to answer the easy part. He's smiling at me right now. Look, I would say, Rick, what I said earlier with Michael, which is it's really important to note that we have certain fund products that have now turned the corner and they're entering into that phase where we begin to monetize. If you go back to a 2019 vintage fund, where we invested that fund in 2020 and 2021, it's logical to assume that realizations begin happening in '26, '27 and '28. That's really where our first flagship fund sits. Then logically, you can start thinking about how we exit some stuff in Fund II. I'm not going to, on a call, speculate which companies are going to have those realizations, but what I can tell you is we're now in a steady cadence where we have certain portfolio companies going through strategic reviews. I think that we believe just by the time line and nature of our original legacy flagship funds, you can begin to see a steady unwinding of those funds and return of capital. Along with that return of capital comes the realization of carried interest. Now, Fund II has a little more carried interest for investors. The third flagship fund has a little more carried interest for our investors. I think as time goes on, you're going to see not only more frequency in carried interest, but you'll see more carried interest. We're going to work on that pretty hard next year. I think that will be one of the differentiators about next year versus this year is that you are going to see more realizations next year than this year. The other thing that I would say is on our data center business across the 11 platforms, we have been Rick, pretty creative around creating DPI and creating carried interest. When you've got great vehicles that are in permanent capital vehicles like DataBank or now Manage North America and some of these -- some of the growth metrics around some of these other businesses, we have to recycle capital, return capital, and when we do that, that also triggers carried interest as well. Data centers is an area where we think we can do quite well. I think stay tuned, but we do believe that Rick, it's reasonable to assume that given the age and vintage of some of these fund products that you can begin to count on carried interest instead of being episodic. I don't know, Tom, if you want to add anything to that. Thomas Mayrhofer: No. I mean, you really covered it. The only -- I guess the only thing I'd add is sort of on the margins, if you had sort of backed up 4 years ago and projected a bell curve of where we would be distribution-wise, I would say probably over the last few years, there's been a more significant and extraordinary opportunity to continue investing in some of our portfolio companies than maybe you would have thought 4 or 5 years ago. That may have pushed out exits that you -- several years ago would have thought were happening in '25. Maybe we've continued to invest in some of those companies because the opportunity there is extraordinary. I wouldn't add anything different than what Marc said in terms of the bell curve and the vintages. Ric Prentiss: The way the book works, I think you touched on that in your prepared remarks a little bit about the J curve and where you're at on it because it does confuse people. I think sometimes when they look at the book carrying value, you're not marketing it to market on transactions that are occurring or things in the marketplace. You're literally looking at your asset-by-asset. There some people, I think, look at it and go, well, how can the book doesn't show more? Maybe just elaborate a little bit more on that. Thomas Mayrhofer: Yes. Look, I think there's sort of 2 main components to the performance and how we mark things. Marc talked a bit about kind of our investment playbook, making sure we make the right investments that we are focused on the customers, deliver for the customers, drive operating performance of the companies. That is one significant contributor to the performance. You've seen some of that to date. Then I would say the second material contributor to performance and accrued carry or realized carry is the exit process and selling the companies well. That's where you capture kind of the second stage of value. I would say, we're sort of in between those 2 kind of step functions right now where we've achieved real value and real performance at the company level. We will capture the second step of value as we create distributions and liquidity and realize the full value of the companies, if that makes sense. Ric Prentiss: Does. You're not marking to what transactions might be, you're not marking to comps until you actually achieve a sale basically? Thomas Mayrhofer: Look, if there's -- you think the valuations and performance are 100% quantitative and there's always a bit of qualitative to them. We do our best to mark to where we think -- what we think the asset is worth, but there's always a bit of uncertainty and how much of that will you actually realize in a sale. You're always including some sort of contingency to address that. Ric Prentiss: Marc, one of the interesting things we saw this quarter was the story that Elon Musk is now following you. Can you give us a little background color? Did that happen? How did it happen? What's your kind of relationship with Elon? Marc Ganzi: Yes. Thanks, Rick. I don't comment about social media stuff. It's just kind of, unfortunately, it becomes like water cooler banter. What I will say is, I've got a lot of respect for him. Yes, I do know him, not particularly well, but we know each other, and he's an important customer. He's a very important customer. He uses a lot of our different portfolio companies, and we serve Starlink, we serve SpaceX. We serve Tesla, we serve xAI, and we use his batteries at some of our data centers for storage. It's a really super important customer that we think can get bigger over time and that can be a lot more strategic. Anything we can do to work with him and support what he's doing, I'm very supportive of him, and I'm always happy to put capital into his businesses through infrastructure, we're side-by-side with him. A lot of deep respect there, and I think he's one of the great minds of our generation. If he chose to follow me, that's great, but I'm super focused on servicing him and trying to figure out how we can help enable his businesses to go faster. Operator: Our next question comes from Richard Choe with JPMorgan. Richard Choe: I know you spent a decent amount of time on it, but I think it's important to kind of go through it a little bit more. With Vantage in these -- the Frontier campus and Lighthouse campuses, these are 2 really big deals. Over the past few months, we've seen a lot of companies come out and say that they have a lot of power and that they have a lot of capacity deliverable, but you've actually won these leases. Can you take us through the process a little bit? What gave DigitalBridge and Vantage the, I guess, advantage over the other companies and winning this deal? Marc Ganzi: Yes. Look, I think that we continue to believe that this industry will be unfortunately marked by a lot of amateur and a lot of tourists in the next 24 to 36 months. People that do certainly know how to buy land and how to get entitlements and certainly have to reflect that they have some source of power. I think it's a different level up when you actually build a data center and you're responsible for delivering something at a Tier 3, Tier 4, Tier 5 standard and that you've done it for a decade-plus. Customers know the difference between people that are new to the sector and someone that's a trusted set of hands that has over 400 data centers and 11 different companies. Differentiation isn't about press releases. Differentiation is about execution and the ability to show up for a customer and deliver on time. Again, we don't get a lot of credit in our share price for being around for 30-plus years as executors. What we have to do is we have to go out and we have to deliver a quarter like this. We have to deliver a quarter where we clearly demonstrate leasing volumes that are differentiated, a power bank that's differentiated, but most importantly, to the metrics, Richard, that you now know that we're judged on, which is FRE, FEEUM, distributable earnings, AUM, all of the things that we're being judged on. We know who our peer set is now. We're an alternative asset manager. The most important thing that we now need to do is just like we've been executing for customers, we now need to execute for our public shareholders. The framework and the prism that Tom and I are judged on is by other alternative asset managers. When I said in the earnings call, what a difference a year makes, we had a very tough last year third quarter. Tom and I thought long and hard about it. What we tried to do this year was deliver something that is -- that we can -- investors know they can count on us and that we're credible around the numbers that really matter. I think execution is critical. Executing for our public shareholders is critical, executing for our customers like Oracle and OpenAI is important, and we're executing for hundreds of other customers this quarter. We just don't have enough time or pages in a deck, Tom, to sort of share all of those wins for all those customers, but we're delivering dark fiber routes. We're delivering towers. We're delivering small cell infrastructure. We're delivering WiFi offload. There are so many things that we're delivering right now that we don't have time to talk about. We just got to keep delivering for our logos. That's really what is differentiating about us right now. I think at the end of the day, customers not only vote with their wallet, but they vote with their -- the integrity of their network. I think one thing that we've proven to be for a long time is a very trusted set of hands. Hopefully, that will work out well. I think that a few people are actually turning on capacity right now, and we are. We're turning on capacity, and that's because we started planning this 8, 10 years ago. We didn't start -- we didn't say a year ago an investment committee because we thought it was a hot idea to get into data centers. That's not how we're built. We're built differently. We'll be here. We'll be here tomorrow. We'll be here in 10 years. We were here 20 years ago. I think it's that consistency is what customers really like. When it gets down to choosing, having great teams like Sureel, who knows how to deliver for a customer, that's what it is. We're very fortunate to have Surrel and Jeff Tench and Dana Adams, that entire team is just a bunch of pros. Adults that have been there, have been doing it for a long time, and that is, thankfully, Surrel is our partner. We're fortunate to have a great management team that was able to deliver for the customer. Richard Choe: You mentioned it a little bit, but will these projects be meaningfully contributing to FEEUM early in '26? Or is it more later in '26 and '27? Marc Ganzi: No, 100%. It will be a big contributor in 2 years. We took in a lot of new capital, co-invest capital specifically to these 2 projects. We get paid on that capital on that committed capital. There will be an immediate impact when you have really good co-invest. Look, Tom said it earlier in the year, we've got to improve our margins. Both Tom and I committed to that. Tom has been working on the cost. I've been working on making sure we get our fees up and co-invest. I think we can look at each other and say we've delivered. Tom has done a great job on the cost side. We've done a great job in improving our margins on co-invest. When you put those 2 things together, you get a result like this in the third quarter, which is improved margins, incredible year-over-year growth, as you can see. I mean, just looking at fee-related earnings, were up 43% year-over-year. I don't think there's another publicly traded alternative asset manager that's up 43% year-over-year. This has been a lot of hard work, and we're not done. I think there's a sharp focus on what we got to keep doing. The fees build as we build. As we keep leasing megawatts and we keep deploying capital, so does our FEEUM raise go up and so does our FRE go up. We're heading into a historically strong fourth quarter. I think Tom and I are excited to continue to work hard between now and the end of the year. I don't know, Tom, if you have any voice over on that. Thomas Mayrhofer: No, I think you covered it all. Operator: Our next question comes from Eric Luebchow with Wells Fargo. Eric Luebchow: Marc, I'm curious about your data center power bank that you've been highlighting in the last few quarters. Maybe you could talk about the split you're seeing between kind of behind-the-meter power solutions versus more direct grid-connected power and perhaps how that behind-the-meter opportunity, which seems to be much bigger today, kind of ties into the size and scope of the energy fund you're fundraising for. Marc Ganzi: Look, the energy strategy is super important, and it's a big part of what we're doing in the back half of this year, but more importantly, Eric, what we're doing next year. We've already closed a couple of deals in that strategy. Takanock is one of them where we provide digital power solutions for our customers and to other data center developers. We've got another project where we're tethering some -- a specific power solution to an existing DigitalBridge data center where we're adding 500 megawatts of power. What I love about what we're doing in digital power, Eric, is these aren't ideas. These are very, very focused solutions in very specific locations tethered to very specific outcomes for customers. That's what makes it so unique is that a lot like what we're doing in the data center space, we're doing in the power space. We're not taking risk. We're entering into long-term contracts with counterparties, investment-grade counterparties. We know that the offtake is in place. I think what's interesting, Eric, is as we've been doing this for about 2 years, we've also learned that the grid doesn't go away. You have to learn how to use the grid, you got to learn how to work with the grid. You've got to have battery storage capabilities inside your microgrids. You've got to be able to build up that power during the day, sell some of that into the grid, so you're basically an offtaker into the grid and putting power back into the baseload on. Then during the nighttime when baseload is more available, you can buy back from the grid. It's a very fluid relationship in a microgrid. The key to that is interconnection and being interconnected into the -- that state's Public Utility Commission grid and having an active relationship with the utility. What we're doing is not in contrast or in competition with our utility partners in each state. In fact, we are a trading partner with those utilities. A lot of like what we do in interconnection and fiber, we're doing the same thing actually in power. It's a really interesting business model, and we've had a lot of good early success so far. Someone once told me, I think it was -- I was listening to another alternative asset manager, I think it was Brookfield that said it, but there's $7 trillion in AI, there's a $7 trillion CapEx AI spend. If you think about the power that's required, the incremental power to deliver 300 gigawatts, Eric, there's another $1.3 trillion in power to be built. We look at that, again, that swimming pool is $1.3 trillion. We look at the opportunity there, investors are really excited about it. I've been on the road talking about digital power, talking about microgrids and how we're delivering these power solutions to customers. As you can probably imagine, LPs get really excited. If you look at the fundraising this year in infrastructure, Eric, infrastructure is having a record year in fundraising. I think there'll be over $200 billion of capital raised in infrastructure. -- if you take a look at that micro [Technical Difficulty]. Sorry about that. Technical glitch. Anyway, when you look at the total $200-plus billion of fundraising and infrastructure this year, over 50% of that is to energy transition, not data centers, not digital. It's really interesting to me that allocators are really focused on this issue of power. We really see that as a big opportunity because if we think about building large-scale campuses and if you're going to spend $11 million to $12 million per megawatt building a data center, you could end up spending $3 million to $5 million in grid independent power to that data center. We really look at this as a $0.30 to $0.50 incremental spend on power because we're taking that risk and building the data center. We know how to build our microgrid infrastructure. We know how to source LNG, best solar, wind, hydro and most importantly, use the grid. I think everyone gets obsessed a little bit, Eric, with, oh, you're either on the grid or you're off the grid. It's not that way actually. It's that if you're going to really build a scale and you look, for example, at the last 2 big projects that we've done, we do use the grid. At certain points of the day, we're putting power back into the grid. Then at certain points of the day, we're taking power from the grid. It's a fairly dynamic and fluid relationship between a microgrid and the actual grid itself. I think other people are finally figuring out what we're doing. It makes a lot of sense. We've got great industrial partners. We've got a big pipeline of projects that we're building. We're excited to talk more about it next year. I mean it will be a big part of what we're doing in 2026. As I said, 3 new strategies for next year, and that's -- digital power is one of those strategies. When you and I get together next time in person, Eric, we'll do a little bit of a digital power teaching whenever you're ready. Eric Luebchow: That would be great. I appreciate it. I guess just one follow-up, Marc. Some of these mega deals we've seen, including the ones that Vantage did, obviously, there's a lot of kind of newer hyperscale tech like LLMs that are directly or indirectly backing some of these new builds. How do you think about the pricing, the lease terms, the credit risk of some of these newer players that are obviously not profitable today, but growing incredibly fast. There's certainly been a lot of industry chatter about some of the LLMs, their ability to pay for some of the future commitments they've made. Just curious how you guys think about it at the infrastructure level. Marc Ganzi: Yes. Look, I think that the -- there's different types of LLMs, Eric, right? There's different types of quality of credit tenants. We look at some of the NeoCloud business models, and we've chosen not to put our equity capital to work there. We've been very selective about those types of credits. I think, again, when you've got a really substantial power bank and you've got on-demand capacity ready to go, it does allow you to be a little selective about what we can do. I think it's pretty unique, our ability to choose customers we want to work with. I do get a little worried about some of the credit profile risk around NeoCloud versus AI providers versus the hyperscalers. We've been very cautious about not overweighting one particular customer or one particular story. I think what's unique about our platform is given the scale of our platform, we're invested across all of these customers and all across these workloads so that we're not beholden to one customer or one technology or one LLM. I think that's where scale matters, Eric. We talk a lot about scale in the alternative asset management space. Well, in our specific swim lane, we have a lot of scale, and we have a lot of customers. That diversity in customers is what's really important. We've been able to demonstrate that we can lease to a lot of different logos at the same time. I think at the end of the day, having a diverse set of cash flows and a diverse set of customers and a diverse set of data centers is really where you want to put your capital today. Again, same thing we talked about, buying our stock is a proxy for that, right? You're not making one bet on one specific data center platform, you're making a bet on a global portfolio of 11 platforms, 21 gigawatts and record leasing. That, that flow-through will come through in a function of FRE, FEEUM and carried interest. Operator: There are no further questions at this time. I would now like to turn the floor back over to Marc Ganzi for closing comments. Marc Ganzi: Well, thank you. I appreciate all the thoughtful questions from the analyst community. We look forward to engaging with all of you over the next couple of days to bring more clarity to the quarter. Let me finish in thanking our team. We have an incredible team. Again, I want to bring focus back to third quarter last year against third quarter this year. Specifically, I want to thank my CFO, Tom Mayrhofer, for delivering a very clean quarter and delivering on the promises that we made to you, our public investors. Again, fee revenue up 22% FRE up 43%, distributable earnings up 102% and fee equity under management, FEEUM up 19%. This was a clean quarter. This was a quarter that we -- to be candid, we felt capable of delivering, and we owe it to our investors to deliver results like this in a quarter like this. We have strong liquidity. We're allocating capital. We're raising money. We've got a great suite of new products that will come to market with here in '26, and we're well-positioned to be the leader in digital infrastructure and the power that's required to fuel it. Really looking forward to the end of this year and looking forward to catching up with all of you on the road as we hit different investor conferences. Please follow up with Severin and our team to get access to the team. We're always happy to have a conversation with you. Thank you for your continued interest and your ownership in DigitalBridge shares. We appreciate it. Have a great day. Operator: This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.
Operator: Good day and thank you for standing by. Welcome to the Laureate Education Third Quarter 2025 Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Adam Morse, Senior Vice President of Finance. Please go ahead. Adam Morse: Good morning and thank you for joining us on today's call to discuss Laureate Education's third quarter and year-to-date 2025 results. Joining me on the call today are Eilif Serck-Hanssen, President and Chief Executive Officer; and Rick Buskirk, Chief Financial Officer. Our earnings press release is available on the Investor Relations section of our website at laureate.net. We have also posted a supplementary presentation to the website, which we'll be referring to during today's call. The call is being webcast, and a complete recording will be available after the call. I would like to remind you that some of the information we are providing today, including, but not limited to, our financial and operational guidance constitutes forward-looking statements within the meaning of applicable U.S. securities laws. Forward-looking statements are subject to risks and uncertainties that may change at any time, and therefore, our actual results may differ materially from those we expected. Important factors that could cause actual results to differ materially from our expectations are disclosed in our annual report on Form 10-K filed with the U.S. Securities and Exchange Commission, our 10-Q filed earlier this morning as well as other filings made with the SEC. In addition, all forward-looking statements are based on current expectations as of the date of this conference call, and we undertake no obligation to update any forward-looking statements. Additionally, non-GAAP measures that we discuss, including and among others, adjusted EBITDA and its related margin, adjusted net income and adjusted earnings per share, total cash and equivalents, net of total debt and free cash flow are also detailed and reconciled to their GAAP counterparts in our press release or supplementary presentation. Let me now turn the call over to Eilif. Eilif Serck-Hanssen: Thank you, Adam, and good morning, everyone. Today, we are pleased to report strong operating and financial performance for the third quarter, along with the results of our recently completed intake cycles. Third quarter revenue was $400 million and adjusted EBITDA was $95 million. Both metrics were ahead of the guidance we provided in July. Favorable results for the quarter were driven by improved foreign currency rates and double-digit growth in Peru's secondary intake, led by fully online working adult programs as we continue to scale in that segment, albeit from a smaller base. The primary intake in Mexico was up 4%, excluding campus closures and in line with our expectations. The solid results during the intake were against the backdrop of a softer macroeconomic environment, reinforcing the resiliency of our business model. During the intake cycle, we also opened 2 new campuses for our value brand institutions, one in Monterrey, Mexico and one in Lima's Ate District in Peru. Both campuses opened on time, on budget and performed as expected. These campus openings were our first new campus launches since 2019. We also have 2 additional new campus projects underway, one in each market and expect these to open late next year or early in 2027. Beyond that, we have identified numerous other cities and site locations in both Mexico and Peru that are ripe for development over the next several years. The completion of the intake cycle provides us with strong visibility for the remainder of the year, and we are announcing an increase to our full year 2025 outlook, which Rick will cover in more detail later in his prepared remarks. Our balance sheet remains exceptionally strong. And today, we are also pleased to announce that our Board has authorized a $150 million increase to our stock repurchase program, underscoring our disciplined approach to capital allocation and focus on long-term value creation for our shareholders. From a macro perspective, Peru's economy continues to perform well, driven by robust domestic demand, new mining projects, strong commodity prices, rising wages and low inflation. GDP growth for this year is projected at approximately 3% with a similar pace expected to continue through 2026, reinforcing the country's path towards sustainable growth. In Mexico, President Sheinbaum's administration marked its first year in office with a public approval rating above 70%. The government has maintained fiscal discipline, advanced industrial modernization and promoted infrastructure investments through stronger public-private collaboration. U.S. trade policy uncertainties have caused the current macroeconomic environment to be a bit sluggish. However, Sheinbaum's pragmatic approach to managing the U.S.-Mexico relationship has helped maintain a constructive tone ahead of the upcoming U.S. MCA review. Most economists anticipate an increase in economic activity in the second half of 2026 and into 2027 following completion of these trade negotiations. That concludes my prepared remarks, and I'm now handing the call over to Rick for the financial overview of the third quarter as well as guidance for the fourth quarter and the full year 2025. Rick? Richard Buskirk: Thank you, Eilif. Before I discuss our financial performance for the quarter, let me provide a few important reminders on seasonality. Campus-based higher education is a seasonal business. Although the third quarter is a large intake period, from a P&L perspective, it is seasonally low as classes are out of session for much of the quarter. In addition, the timing of the start of our classes can shift year-over-year depending on various factors such as when public universities begin classes or when holidays occur. This, in turn, affects the timing of enrollments and revenue recognition and quarter-over-quarter comparability. In 2025, the beginning of classes, particularly in Peru, started later versus 2024, extending the enrollment cycle into mid-April and beyond the first quarter cutoff. As a result, we expect approximately $26 million of revenue and $23 million in adjusted EBITDA will shift from the first quarter to the second half of the year, primarily to the fourth quarter. As we review our operating results, I will provide additional color on these timing-related impacts. Let's start with Page 10 and 11 of the supplementary presentation, which highlight our operating and financial performance for the third quarter and year-to-date. For the quarter, new and total enrollment volumes increased 7% and 6%, respectively, versus the third quarter of the prior year. Third quarter revenue was $400 million and adjusted EBITDA was $95 million. Both metrics were ahead of the guidance we provided 3 months ago, aided by the favorable secondary intake in Peru, favorable price/mix and improved currency rates. On an organic constant currency basis and adjusted for the academic calendar shift discussed earlier, revenue for the seasonally low third quarter was up 6% year-over-year and adjusted EBITDA increased by 3%. Third quarter net income was $34 million, resulting in earnings per share of $0.23 per share on a reported basis. Third quarter adjusted net income was $37 million and adjusted earnings per share was $0.25 per share, an increase of 14% as compared to Q3 of the prior year. Now turning to year-to-date performance. On an organic constant currency basis and adjusted for academic calendar timing, results for the 9 months of 2025 were strong, with revenue and adjusted EBITDA growth of 8% and 13%, respectively, versus the prior year period. Let me now provide some additional color on the performance of Mexico and Peru, starting with Page 13. Please note that all comparisons versus prior year are on an organic and constant currency basis. Beginning with Mexico. Mexico's new enrollments for the third quarter increased 2% versus the prior year period on a reported basis or 4% excluding campus closures during their primary intake. Total enrollment volume for the third quarter increased 4% compared to the prior year period on a reported basis or 5% when adjusted for the impact of campus closures. As Eilif noted earlier, the macroeconomic environment in Mexico is currently a bit sluggish. The growth we delivered during this intake cycle demonstrates the resiliency of our business model and the value proposition our institutions offer to parents and students. Mexico's revenue for the third quarter increased 5% compared to the prior year period, and adjusted EBITDA was up 25%. Overall, pricing for the intake was in line with inflation for our traditional face-to-face students. On a year-to-date basis, Mexico's revenue grew 8% and adjusted EBITDA increased 21% versus the prior year period. The resulting margin increase of 240 basis points was led by productivity gains and revenue flow-through. Let's now transition to Peru on Slide 14. New enrollments in Peru increased by 21% for the third quarter compared to the previous year. Results were driven by strong growth in our fully online programs that serve working adults as we continue to scale in that segment. Total enrollments were up 8% versus the third quarter of the prior year, supported by a strengthening macroeconomic backdrop and the expansion of our fully online programs. Adjusted for timing of the academic calendar, Peru's revenue for the third quarter increased 8% year-over-year, driven by higher enrollment volumes. Overall, pricing for the secondary intake was in line with inflation for our traditional face-to-face students. Going forward, we do expect a price mix impact on average revenue per student due to the higher growth rate of our fully online programs. Adjusted for timing of the academic calendar, adjusted EBITDA declined 2% versus the comparable period in the prior year. This was due to timing of expenses, which we expect to be offset in the fourth quarter. On a year-to-date basis and adjusted for timing of the academic calendar, Peru's revenue increased 7% versus the prior year period. Adjusted EBITDA increased 5% and was impacted by the timing of certain expenses, which we are expected to normalize in the fourth quarter. Let me now transition to our balance sheet position. Laureate ended September with $241 million in cash and $102 million in gross debt for a net cash position of $139 million. Through September of this year, we repurchased $71 million of common stock under our previously announced $100 million repurchase program. Our strong balance sheet, cash accretive model and disciplined capital allocation supported our Board's decision to authorize a $150 million increase in our stock repurchase program. In total, $177 million remains available under our current upsized authorization. Upon completion of this authorization, we will have returned more than $3 billion of capital to shareholders since 2019 through a combination of share repurchases, cash distributions and cash dividends. Moving on to our outlook, starting on Page 18. Today, we are announcing an increase in our full year 2025 guidance at the midpoint by $61 million for revenue and $17 million for adjusted EBITDA. Our improved outlook for 2025 is resulting from the favorable secondary intake in Peru and better price/mix and favorable currency movements in the Mexican peso and Peruvian sol. Based on our assumed spot FX rates, we now expect full year 2025 results to be as follows: total enrollments to be approximately 494,000 students, reflecting growth of approximately 5% versus 2024. Revenues to be in the range of $1.681 billion to $1.686 billion, reflecting growth of 7% to 8% on an as-reported basis and approximately 8% on an organic constant currency basis versus 2024. Adjusted EBITDA to now be in the range of $508 million to $512 million, reflecting growth of 13% to 14% on an as-reported basis and 12% to 13% on an organic constant currency basis versus 2024. Adjusted EBITDA margin expansion of approximately 150 basis points, primarily driven by Mexico's continued margin optimization and operating leverage. Adjusted EBITDA to Unlevered Free Cash Flow Conversion of approximately 50%, reflecting our strong cash accretive business model and disciplined capital approach. Now moving to the fourth quarter guidance. For the fourth quarter of 2025, we expect revenue to be in the range of $521 million to $526 million, adjusted EBITDA to be in the range of $194 million to $198 million. Our fourth quarter outlook reflects the catch-up benefit from the intra-year academic calendar changes in Peru. That concludes my prepared remarks. Eilif, I'm handing it back to you for closing comments. Eilif Serck-Hanssen: Thank you, Rick. Our operations in both Mexico and Peru continue to perform very well, resulting in strong performance on a year-to-date basis and causing us to guide to an improved outlook for the remainder of the year. With leading brands, strong digital capabilities, disciplined capital allocation and a strong balance sheet, we are very well positioned to execute on our growth agenda and advance our mission of transforming lives across Mexico and Peru through high-quality, affordable education. Operator, that concludes our prepared remarks, and we are now happy to take any questions from the participants. Operator: [Operator Instructions] And our first question comes from Jeff Silber of BMO Capital Markets. Unknown Analyst: This is Ryan on for Jeff. On Peru, revenue for the quarter was really strong, especially in the context of the $7 million of revenue falling out from the calendar timing. I was just trying to understand some of the moving pieces with FX enrollment and pricing versus your initial forecast. Eilif Serck-Hanssen: Well, we are benefiting in Peru, of course, having the recession behind us, which means that we are seeing a little bit of a catch-up on delayed demand or deferred demand from last year. But we're also just seeing strong consumer sentiment. We have a very strong value proposition, which works well in the premium segment, in the value segment as well as a very rapid increase in demand for fully online working adult products. In terms of pricing for face-to-face, we have been pricing in line with inflation with the working adult product that's fully online. We have adjusted pricing to optimize our revenue production, but it has been from a relatively small base. It shouldn't have a material impact on the overall price dynamics in the market. But net-net, on the fully online product, we have taken a slight reduction in headline pricing. Unknown Analyst: Appreciate that. And just for the follow-up on the Mexican new enrollment growth for the quarter. I was hoping you could parse apart the plus 2% or the plus 4%, I guess, on an organic basis. I think last quarter, you had highlighted some working adult strength. So I was just wondering how that evolved. And then if you could give us anything on how the face-to-face new enrollment evolved in Mexico as well for the intake cycle. Eilif Serck-Hanssen: Yes. So the third quarter is really the main enrollment. So the focus is really young students. And what we call C1, cycle 1 and cycle 2 in first and second quarter are primarily working adult markets. So the vast majority of the volume momentum is driven by traditional 18- to 24-year-old undergraduate students in Mexico for third quarter. Operator: [Operator Instructions] And our next question comes from Lucas Nagano of Morgan Stanley. Lucas Nagano: We have a question about the intake in Mexico. If you could quantify the contribution, the percentage points from the new campus launched this quarter? In other words, how much did it grow without the new campus? Eilif Serck-Hanssen: So we had 4% growth when excluding campus closures and 1 point of that came from new campus launches. So 3% same store. Lucas Nagano: Perfect. And also, you mentioned that going forward, you expect pricing in Peru in line with inflation. How much should the average revenue per student be impacted due to the mix of [indiscernible] fully online? Eilif Serck-Hanssen: Rick, do you want to take the mix impact? Richard Buskirk: I mean overall inflation in Peru is trending very well. It's a headline around 2%. So that's as a starting point of what our target would be to match that in the market. And then mix impact could be upwards of 2% as we continue to aggressively go after the fully online working adult segment. And as a reminder, we're just getting started in Peru. We have over 100,000 students approximately in Mexico. We have a fraction of that in Peru, and we're starting to really see solid growth in that segment as we've seen posted in Q3 of this year. Operator: Thank you. This concludes our question-and-answer session and also today's conference call. Thank you for participating, and you may now disconnect.