加载中...
共找到 39,132 条相关资讯
Arthur Lee: Welcome, everyone, to the MPS Third Quarter 2025 Earnings Webinar. My name is Arthur Lee, and I will be the moderator for this webinar. Joining me today are Michael Hsing, CEO and Founder of MPS; Bernie Blegen, EVP and CFO, and Tony Balow, Vice President of Finance. Earlier today, along with our earnings announcement, MPS release a written commentary on the results of our operations. Both documents can be found on our website. Before we begin, I'd like to remind everyone that in the course of today's presentation, we may make forward-looking statements and projections within the meaning of the Private Securities Litigation Reform Act of 1995 that involve risks and uncertainties. The risks, uncertainties and other factors that could cause actual results to differ from these forward-looking statements are identified in the safe harbor statements contained in the Q3 2025 earnings release, our Q3 2025 earnings commentary and in our SEC filings, including our Form 10-K, which can be found on our website. Our statements are made as of today, and we assume no obligation to update this information. Now I would like to turn the call over to Bernie Blegen. Bernie Blegen: Thanks, Arthur. Good afternoon, and welcome to our Q3 2025 earnings call. In Q3, MPS achieved record quarterly revenue of $737.2 million, 10.9% higher than the second quarter of 2025 and 18.9% higher than Q3 of 2024. This performance reflected the ongoing strength of our diversified market strategy, consistent execution, continued innovation and relentless customer focus. Let me call out a few highlights from the third quarter. Our diversified market strategy drove year-over-year revenue growth in all of our end markets. We continue to expand our automotive customer base with another major Tier 1 supplier adopting MPS for its next-generation ADAS solution. Additionally, we secured our first design win for a full BMS solution on a robotics platform, which further supports our transformation for being a chip-only semiconductor supplier to a full-service silicon-based solutions provider. Overall, we continue to demonstrate our ability to grow and swiftly adapt to all aspects -- all aspects of our business to the fluid geopolitical and macroeconomic environment. Our proven long-term growth strategy remains intact as MPS focuses on innovation and solving our customers' most challenging problems. We continue to invest in new technology, expand into new markets and to diversify both our end-market applications and global supply chain. This will allow us to capture future growth opportunities, maintain supply chain stability and quickly adapt to market changes as they occur. I will now open the webinar up for questions. Arthur Lee: [Operator Instructions] Our first question is from Josh Buchalter of Cowen. Joshua Buchalter: Congrats on another beat and raise. I guess to start, maybe you're guiding up about 1%. Can you give us the puts and takes of which end markets you expect to grow more or less? And of note, I think earlier, you mentioned enterprise data was expected to be flat to down 20%. Any updates to the guidance for that segment in particular? Bernie Blegen: Sure, Josh. When you look at Q3, I think that we saw a little bit better than anticipated performance in both our enterprise data and industrial markets. We had pretty much every other group as we anticipated. Looking ahead, and I know that you're interested in enterprise data, we're seeing a layering of additional customers that began this layering effect in Q4 and is providing this good momentum as we look ahead into the early part of next year. Michael R. Hsing: Well, I should add all these in script readout. Bernie mentioned a list of our market segment, they started growing. And we look back in the last few quarters, all these growth come from greenfield products that were released 2, 3 years ago. And now we see the result. And so in the near future in the next few quarters, we will see these will continue to enhance our revenues. Joshua Buchalter: Maybe a follow-up on that, Michael. I think you've been pretty clear, like philosophically, you have some reservations and even frustrations with the AI market because of the concentration and visibility. Given all the massive announcements over the last quarter even in that space, maybe you could spend a couple of minutes talking to us about just big picture philosophically, how you're approaching these huge forecasts. And I'm sure competitive sockets with massive scale. How do you guys figure out which opportunities to go after and service and your thoughts on the market just given -- I think you've had frustrations about it distracting from your diversified growth. Michael R. Hsing: Yes. As you said, yes, it is kind of a distraction, okay? But business is business, good money is good money, okay? We don't want to take bad money, okay? And -- but overall, the bottom line is MPS want to demonstrate in any segment of the market, we are the best, we have possessed the best technology and best customer service. And we're solving problems, we demonstrated that we can have qualities and shipments, okay, all these categories, we are the best company. And in terms of which AI company, we don't really care. We engage with the large companies and the small companies. And we want to demonstrate that this is the best technology. When revenue comes, it comes. And given times, as we said it, given time, every -- all the true color will show. Arthur Lee: Our next question is from Ross Seymore of Deutsche Bank. Ross Seymore: I guess for my first question, the automotive side of things. You talked about getting an incremental design win in the ADAS side of things. Can -- there's a lot of choppiness in that end market across different geos and at different points in time, cyclically, geopolitically, all those sorts of things. But from a secular growth perspective, can you just talk about ADAS as a percentage of your revenues now versus user interface or USB and those sorts of things? And how ADAS penetrating more of that market changes the growth rate, the content, the diversity of it. Just kind of want to capture that ADAS theme and what it really means to you. Bernie Blegen: Sure. Why don't I take a start at this. So I think that we've demonstrated a history of establishing a strong presence in various markets with differentiated technology. You might recall going back always with USB ports for automotive. And now it's ADAS. And what this does is it has a cascading effect where we're able to get adoptions and the design wins, and we call out when these begin to ramp. And that's actually been more important to us then the -- necessarily the -- what the SAAR is for a particular end market. And in this one, in particular, we have started with a lot of ADAS opportunities, particularly in the EVs because they're faster to come to market. But what that's given us the opportunity has been is to showcase all of our other technologies and now we're starting to see those ramp, whether it's in body electronics or different applications. What we're more excited about is as we look ahead and the transformation of the end market for automotive as it moves into 48-volt and zonal electronics. Michael R. Hsing: Yes, we don't know the breakdown, okay, to answer your question exactly. I mean maybe Bernie has some ideas, okay, but I think it's less than half. And I think it's well less than half. Bernie Blegen: It's considered less than half. Michael R. Hsing: Yes, yes, yes. Okay. And I'm just looking at the number of cars and also our revenues, and it cannot be more than half. But in the ADAS side, more and more cars and including combustion engine cars, they are adopting ADAS. We will see a significant growth in the next few years. That's where we anticipated, okay. Ross Seymore: I guess as my follow-up, pivoting to another thing you talked about in your press release of moving from a silicon -- chip-based supplier to more of a solution provider, how do you think about the gross margin implications of that over time? You guys were a few points higher than you are now a couple of years ago. We've talked about what does it take to get you back to kind of the upper 50s from the mid-50s-ish where you are today. Does that system approach help? Or is that actually a headwind in the gross margin as you go forward as much as it might even be operating margin accretive? Michael R. Hsing: I don't so. I don't think there will be a headwind and a lot of the large systems that we're building, okay, we're kind of learning how to do it. And it is creating a lot of issues once the volume goes up. And so we are learning. And I think as things get a lot better since last year, I guess, okay? I mean -- and it will improve quite a bit. We actually making our own test equipment as lot of people know about it, okay. We eat our own dog food and creating all fully automated test systems. Those type of products have never existed before. And I think ultimately, we'll improve the yield and improve the gross margins. Arthur Lee: Our next question is from Joe Quatrochi of Wells Fargo. Joseph Quatrochi: Maybe first, I just wanted to ask, embedded within the 4Q guide, is there any help you can kind of provide in just thinking about the end markets? I Think there's some seasonality to maybe like a consumer in the fourth quarter. And then I think enterprise data you guys were previously thinking that would be up somewhere like high single digit sequentially in the December quarter. Is that still the case? Michael R. Hsing: Okay, to anticipating a market, that's a very difficult call. And you guys are betting on which stocks, okay? I mean, it's difficult, okay. But we have our way of operating our business. We do the best. We do the best develop a technology, engage our customers closely and probably the same way that you pick -- how you pick the stocks, okay? And so you engage customers closely. Whatever happens happens. And you can't predict what the market is. And we don't do that actually. Bernie Blegen: And if I could just add to that, that since we last talked about the second half of this year, nothing has fundamentally changed in our positioning. Joseph Quatrochi: Okay. That's helpful. Maybe just also following up, but I think in the press release or your prepared remarks, you had a comment around the first design win for a full BMS solution for robotics platform. Can you talk about what drove that and how you think about the revenue opportunity ramping there and more wins in the future? Michael R. Hsing: We probably get too excited to talk about those. And the fact is that we got excited is because we see robotics happening. They kind of -- we kind of predicted it the BMS is going to happen, okay. And we got in and we're designing and it's our customers engage with us, okay, there's a ground-up system that we developed. And we see more and more this type of system will happen. So now this kind of system will be become a reality. So that's the reason we put out that. Tony Balow: Yes. And I'll just add on very specifically on that one. Clearly, we called it out because of the fact it was the first opportunity that we have the design win on. In terms of a revenue ramp, that's really starting in 2026 and it's not in and of itself necessarily a needle move around the model. But I do think it starts the wave of these full solution design wins that we might have going forward. Michael R. Hsing: Yes, that's kind of -- it's the same time when you're making the point that is, okay, we do start to do robotics stuff for actuators and the IC for actuators and the BMS charging, wireless charging. And these are back a few years ago. We even don't know that the robotics were taking off, okay? I've been talking about robotics since 2017 or '18. And -- but the AI assist robot more and more believes, that will really start taking off. And so that's kind of the projects that we think -- we pick the winners, okay? And we're glad to see it, that's why we're probably too excited to talk about this. Arthur Lee: Our next question is from Quinn Bolton of Needham. Quinn Bolton: Congratulations, Michael, Bernie and Tony. I just wanted to start with a big picture question, just looking through this earnings season. Intel has talked about sort of shortages of server CPUs, we've seen hyperscalers significantly increasing CapEx. NVIDIA talked about $0.5 trillion of demand in '25, '26. I guess my question is, about a year ago, I think you guys were seeing very, very short lead times in that business and dealing with some level of pricing pressure. I'm wondering as you look into second half and more importantly into next year, have you started to see any change in customer lead times? Are they giving you better forecasts across the enterprise data segment? And is the pricing on voltage regulators and vertical power, has that changed at all over the last quarter or so? Bernie Blegen: Quinn, thanks for the question. Let me start that this remains a very dynamic market. We're responding to a variety of requests when it comes to the orders and the expectations from our customers. So in some ways, we're getting improved predictability because we're adding -- we're layering, as I said, more customers into the mix. But as far as the market itself, and particularly with all the blockbuster announcements that have been coming out recently, you can see how quickly things are changing. And what our position is, is that we can't control our customers necessarily, but we can position the company to be as responsive as we can. Quinn Bolton: And is this sort of dynamic market? I mean if folks are scrambling sort of to get capacity. Has that had any lifting effect on pricing? And then I'll ask my second question. Michael R. Hsing: Any market segment started from the -- and ramp rapidly at the beginning always cause these imbalance, supply imbalance, okay? So in the AI side, clearly is like that. I mean once it goes on, things will smooth out. Bernie Blegen: Yes. And then being specific to your question, I don't think we've seen any recent or sustainable trends in pricing one way or the other. Quinn Bolton: Okay. Perfect. And then a second question for you Bernie. Gross margins have been sort of on a -- sort of ticking down over the last year or 2. Can you give us any sense, do you think they sort of stay in this mid 55%, 55.5% range. Is there some point next year that you start to see gross margins starting to move higher, either driven by mix or new products? Or should we be thinking about margins being fairly flat over the next year or 2? Bernie Blegen: Sure. As I've commented on prior calls, we've seen about 3 or 4 quarters in a row, where I'd say that we have seen a strong uptick in demand, and that continues even today. What makes this cycle different than ones that we've experienced in the past is that the orders are more short term in nature. We're not seeing a large buildup in backlog in future quarters. And so without that visibility, it limits our capacity to be able to manage the mix of business that we want to be able to have expansion in gross margins. So for the foreseeable future, until the demand profile changes to elongate the buildup of backlog, I believe that we're going to be in sort of the steady range, plus or minus 20, 30 basis points in the mid-55%. Michael R. Hsing: We have a lot of products, okay, a few thousand products, okay? And a few 40,000, 50,000 customers in to move -- and it's very stable margins. And with the transitions to more solution provided companies, okay, as I said earlier, and all this has to be automated, okay? And as time goes on the margin will improve and -- but not quickly. And that math is very big. And so we know it's operated on the low end of our margin profiles, but the longer term will improve and we stick with a gross margin range. Arthur Lee: Our next question is from Tore Svanberg of Stifel. Tore Svanberg: Yes. Michael, Bernie, Tony, congrats on another record quarter. By the way, some of that dog food you're referring to must be pretty proprietary stuff. But my first question is on the Enterprise Data segment. So that's about an $800 million business right now. And my understanding is you're on a journey here, right, and you're still selling predominantly chips. You are obviously moving into module subsystems, eventually systems. So I'm not looking for any numbers per se, but could you just sort of let us know where we are in that journey. I mean building an $800 million business with chips and where could we eventually go here with, obviously, more and more subsystem type solutions for enterprise data. Michael R. Hsing: If I understood your question correctly, okay, that I can answer that way. We're anticipating doing millions of millions, multiple millions units per month type of a shipment. And all of these integrated, highly integrated modules never existed before. So how do we test this thing, how we achieve the single -- low single-digit PPM failures, okay? That is we never encounter that kind of issues before, okay. And so we started using our own robotic systems to make that happen. So now we achieved very high volume, 100% automated, including reliability test. And that's our features. And the goal is building multiple million units a month for that, 10 million a month for that. That's the near term goal. Tore Svanberg: Yes, that's very helpful. And did you also have a response to my question on the enterprise data. Again, where are we in this journey towards delivering more system-level solutions, especially talking about rack level power and so on and so forth? Michael R. Hsing: This is at the very beginning, maybe I think it's module power still less than, way less than 1/3, okay. And less than 1/3 of our revenue and it grew in the last half year. And the -- we expected it to grow. Some got delayed and now started happening in the next years could be much more. Tony Balow: Maybe just to add on to the back of that, Tore, I think as you start talking about some of these solutions for 800 volts as we discussed, those are like '27, '28 revenue ramps. So I think it supports what Michael was saying that we're still at the front end of this opportunity in the data center for us. Michael R. Hsing: No, I think in the investment communities, okay, it's -- if you have 800 volts technology data center transformer is like a flip a switch. The light is turned on, it turns on. It's not like that, okay. The light to turn on, it takes a couple of years, okay, more than a couple of years to make -- to see the revenues, okay. These take 3, 4 years. Arthur Lee: Our next question is from Rick Schafer of Oppenheimer. Richard Schafer: And I'll add my congratulations to you guys. Just maybe if I could start with an auto question. Kind of a follow-up, but I know we talked about BMS robotics. But I know BMS becomes a bigger contributor for your auto segment next year. And you mentioned a couple of things, Michael, in an earlier question, but I'm just curious if you could give some guide rails or provide some guide rails about potential content trends for MPS as you start ramping some of those BMS opportunities? I mean again, not asking for dollar content per car, but does it double or triple those kinds of numbers? Like what does it do to your potential content per vehicle moving into that BMS space in a more meaningful way? And as part of your answer, I'm curious, where's some of the lowest-hanging fruit is for you guys? I mean, is it 48-volt, is it power isolation, that kind of thing? Michael R. Hsing: It's actually all of them, okay. BMS revenues for auto and for EVs is a bit far away, okay? And -- but our customer, it's a very -- this is a very concentrated market. There's a few players and a few, well it's not a few car makers and gradually, all of them, they have -- they want BMS. And so our customers are glad to see MPS is to develop that series, that type of a product, too. And in terms of other low-hanging fruits, okay, we see 48-volts as a trend. And we develop those products back a few years ago, like 5, 6 years ago, and we provide all these integrated solutions rather than these discrete ones, okay? And the size can be 6, 7x smaller. And the other one is the 800 volts for EV. And now all goes up from 400 volts to 800 volts, okay? And in the China market, a lot of cars already have 800 volts. So our silicon carbide solutions came in not for traction inverters and for control systems. These products will be shined. And so that's -- I pull out my hair at this moment. Tony Balow: And Rick, maybe just to shape you a little bit on timing there to make sure. I think what we said is the layering of opportunities in auto really sort of out of the end of this year and next year starts with design wins that we have, bringing new content to market per vehicle. You start to see zonal designs hit market next year then ramping through into '27. And then the BMS and traction inverter solutions they're really kind of more like '27 and beyond, just to make sure you understand sort of how those revenue opportunities are layering in. Richard Schafer: And if I could ask my follow-up just it's on HVDC. And I appreciate the timing and commentary you provided a second ago, Tony. But I'm also curious, I mean, I'm just trying to figure out the right way to think about that emerging market. I mean, like can you give a sense of how HVDA compares to sort of how you've described at your Analyst Day earlier this year. Maybe how you describe the 48-volt accelerator power opportunities or in any terms you want, just to try to give a sense of what that market represents to you guys or what you think it could. Michael R. Hsing: I think the 48-volt system is clear, there's a reason why the 48 volts, is going back to those telecom times, okay? And telecom systems, 48 volts plus/minus 48 volts? And plus/minus 45 volts. And first, it started with -- in the server side, we're talking about for years this thing. And it has to be the solutions because once your current goes up, everybody remembers the car using a 6 volt batteries and then it became 12, is ultimately moving up to 48 volts. I mean these are all for control systems, 48 volts and the data center is really happening 48 volts. I see -- that's why I predict all the building -- the building automations are going to be on 48 volts. And the building will be a DC power solutions. And the opportunity is great. And as we put out to engage our customers with the building automation systems, and we proved the point, actually, it's so welcome for that type of a product. And so that's my view at this time. Tony Balow: And rick, I think part of your question was also on the 800-volt high voltage DC for data center as well, right? Richard Schafer: Yes. Tony Balow: And I think on that one, we've been pretty careful about trying to go size the opportunity because, one, it's very far out. Two, we don't know how it will ramp in the market. I think what we have said is since we don't play in that part of the market today, the business we get is sort of all accretive to our overall SAM going forward. But I think we want to be careful about size in the market yet, given how far out it is and not knowing how it will layer into the data centers going forward. Arthur Lee: Our next question is from Gary Mobley of Loop Capital. Gary Mobley: Let me extend my congratulations on the continued strong growth and continued execution. I appreciate the fact that you still only have about 3 to 4 months of visibility given the capacity that you can support and the quick turns business you can support. But can you confirm whether bookings continue to improve sequentially and what are the seasonal considerations as we look out into the first quarter? Michael R. Hsing: It's again very difficult for us, okay, to predict that, okay, what's the booking, what's the -- where are the bookings. We build our inventories. We try to build, okay, we look at the inventory now, and we try to build up way below our models. And whatever comes we anticipate it, again, we can swiftly to adopt. Bernie Blegen: Just to add to that is that we really don't have a lot of visibility into the first half of next year. We can definitely point to the normal drivers as far as both enterprise data and automotive are very well positioned for new revenue ramps, but getting both the timing as well as getting that to balance out, we don't have a strong view on Q1 yet. Gary Mobley: Okay. Appreciate that. And if I'm not mistaken, your distribution inventory as of midyear was at the low end of your 5- to 8-week target range and it decreased in the June quarter. What was the trend sequentially for the September quarter? And when might you take that distribution inventory back up to maybe the mid- to upper part of that normal range? Bernie Blegen: Yes. Currently, the Q3 channel inventory was unchanged in terms of days from where it was in the prior quarter. So we take from that, that we're satisfying real demand at this point, which again is a reflection of the quick turns business that we're working with. Arthur Lee: Our next question is from Chris Caso of Wolfe Research. Christopher Caso: Yes. The first question is on enterprise data. And what are sort of the puts and takes as you look into next year? And of course, this year, there was some changes in market share in that, which affected that business. But I guess I'm going to assume that things are cleaner as you go from this year into next year? And I mean, one, do you expect to grow that business as you go into next year? Michael R. Hsing: Well, it's cleaner. You said that this year, the next year, this year, we are doing pretty good this year. And see, we -- and as I said earlier, the module business is growing. So all this area MPS technology shines. And the power -- the higher power, the better it is. And because we provide the highest density, power density products that fits this market perfectly. And in the next couple of years, you will see it. MPS is a major player in this market segment. And also the market is big. We -- it's not -- okay, we don't want a place, so we don't have to be MPS only, okay? We want to have multiple competitors. It's good for the industry. Bernie Blegen: Yes, I could see enterprise data growing in the range of 30% to 40% in 2026 for us. Much of that, though, would be back in the second half of the year. So while we've seen a number of new players that have been layered in, I think the material ramps are more weighted to the second half of '26. Christopher Caso: That's very helpful. If I could follow on to that since you provided a little bit of color on that, Bernie. When you look at that 30% to 40% growth, is that -- because I know that some of the vertical power of designs, for example, you have more content. What's the driver of that? Is it fairly broad-based? Is it skewed towards some of the ASIC solutions more towards vertical power, whatever kind of color you can give behind that 30% to 40% expectation? Michael R. Hsing: As a CEO, I don't know how to make a 30% to 40% cost. I don't know. And the opportunity is there, okay? If we didn't deliver 30% to 40%, the stocks I see from $900 to $400, what kind of f***** is that? And so I don't want to make them very hard, just waiting for the numbers, let the numbers show it. Arthur Lee: Our next question is from Kelsey Chia of Citi Research. Wei Chia: So my question is on the competitive landscape. And I was hoping if you could share more, especially with regards to material side of things like gallium nitride, silicon carbide, I think your biggest enterprise data customer has been signing a lot of partnerships with all these semiconductor companies and I was just wondering, MPS positioning in those. And if you actually see those materials as being important in the next generation of the power modules and chips. Michael R. Hsing: We do our own silicon carbide and we're building the modules. And also, we are seeing -- we are using again -- but that's a very, very early stage we are evaluating it. And also, don't forget about silicon, silicon power MOSFETs have evolved, we engaged a lot of new developments. And a lot of the data showed it can be very cost effective and also can compete with the silicon carbide. That's very new -- that's a very, very recent development. Wei Chia: Yes. Okay. Got it. And I would just like to have a sense of how do you guys feel today versus a quarter ago. Especially, you guys have come a long way since the start of the year when you're dealing with all these market share changes, visibility on the ASIC customers and things like that. And given the slew of announcements from all these big mega partnerships, how do you see that relative to opportunities? And also given the maturity of the supply chain, I believe, like things are probably -- the supply chain partners are getting to a good cadence. So how do you guys feel with regard to those recent announcements relative to your opportunity set? Michael R. Hsing: I don't measure quarter by quarters, I measure by multiple years. So I can't tell you that. Bernie Blegen: I guess the simplest way is we're very broadly indexed across not just the merchant vendors or large ASICs, but medium and small time opportunities. And all of these need to find their way into the marketplace. And it's right now, we're still very, very early in the process. So as Michael said, it's very hard to sort out in any particular time period. But I think that we're as well indexed amongst all the opportunities as anybody in this market. Arthur Lee: Our last question is from Jack Egan of Charter Equity Research. Jack Egan: I have one on enterprise data and then one on modules more broadly. So the shift to modules in vertical power delivery with the custom ASIC ramp should be a pretty big tailwind for MPS. I'm kind of wondering about what the main drivers have been at least so far for those customers that are switching from lateral to module to vertical power. So I'm not really sure if you have this level of granularity, but among the major benefits like higher power density, higher efficiency, smaller footprint on the top side of the board, et cetera, is there any one characteristic that's kind of being cited by your customers as the main reason that they are moving to those modules or vertical power delivery? Michael R. Hsing: Well, we don't see from a chip to module. Whoever stays with the module stays with module, starts with the module. Whoever stays with the chip, stays with the chip, okay? And so MPS provides both, okay, in both chip solutions and module solutions at this time. And so I don't know if it answered that question for you. Jack Egan: Got it. Okay. And then just kind of on the modules more broadly. I think I believe, if I understood it correctly, last quarter, you mentioned is that modules outside enterprise data could be like 10% to 15% of your total revenues. And so I was curious how much of your revenue base or I guess, addressable market outside enterprise data would be eligible for switching to modules. I mean, even if you're looking several years into the future, how high could that mix of modules outside enterprise data go? Michael R. Hsing: That's a good question, okay. And we want to -- we build those modules and again, very similar to enterprise modules, okay? And since 2017 industrial markets adoption is kind of slow, actually faster than telecom, okay. And these are 2 market segments that we focus on. And then to our surprise the auto industry also want to use it because it's easy to implement. And so -- they don't want the semi equipment. And that's a large segment, we didn't realize that, okay? I mean now we see all these revenues are happening there. So I think that in the next couple of years, it will be growing faster than 3 or 4 years ago. And so we're picking up a business -- the rate of increase is picking up. Arthur Lee: This concludes our Q&A session. I would now like to turn the webinar back over to Bernie. Bernie Blegen: I'd like to thank you for all joining us in this conference call. I look forward to talking to you again during our fourth quarter 2025 conference call, which will likely be held in early February. Thank you, and have a nice day.
Operator: Good afternoon, and welcome to First Solar's Third Quarter 2025 Earnings Call. This call is being webcast live on the Investors section of First Solar's website at investor.firstsolar.com. [Operator Instructions] And please note that today's call is being recorded. I would now like to turn the conference over to your host, Byron Jeffers, Head of Investor Relations. Please go ahead, sir. Byron Jeffers: Good afternoon and thank you for joining us on today's earnings call. Joining me are our Chief Executive Officer, Mark Widmar; and our Chief Financial Officer, Alex Bradley. During this call, we will review our quarterly results and share our outlook for the remainder of the year. After our prepared remarks, we'll open the line for questions. Before we begin, please note that some statements made today are forward-looking and involve risks and uncertainties that could cause actual results to differ materially from management's current expectations. We undertake no obligation to update these statements due to new information or future events. For a discussion of factors that could cause these results to differ materially, please refer to today's earnings press release and our most recent annual report on Form 10-K as supplemented by our other filings with the SEC, including our most recent quarterly report on Form 10-Q. You can find these documents on our website at investor.firstsolar.com. With that, I'll turn it over to Mark. Mark Widmar: All right. Good afternoon and thank you for joining us today. Beginning on Slide 3, I will share some key highlights from Q3 2025. Since our last earnings call, we secured gross bookings of approximately 2.7 gigawatts at a base ASP of $0.309 per watt, including 0.4 gigawatts of Series 7 modules impacted by previously disclosed manufacturing issues booked at an ASP of $0.29. We terminated 6.6 gigawatts of bookings under multiyear agreements defaulted on by affiliates of BP, a European oil and gas major at a base ASP of $0.294 per watt. As a result, total debookings since the last earnings call were approximately 6.9 gigawatts, and our current expected contracted backlog is approximately 54.5 gigawatts. We delivered a record 5.3 gigawatts of module sales and reported Q3 earnings of $4.24 per diluted share, both near the midpoint of our previous earnings call forecast. Gross cash increased to $2 billion, supported by improved working capital, new bookings deposits and accelerated customer payments ahead of the effective date for the new beginning of construction guidance. Alex will walk through our financial results in more detail later in the call. From a manufacturing perspective, we produced 3.6 gigawatts of modules in the third quarter, 2.5 gigawatts from our U.S. facilities and 1.1 gigawatts from our international operations. In Q3, we reduced production in Malaysia and Vietnam, primarily due to lower demand driven by the customer default previously mentioned. We continue to advance our domestic capacity expansion, notably at our Louisiana facility, where we initiated production runs and started plant qualification. We have also continued to pursue the enforcement of our intellectual property rights. During the quarter, we made 3 separate filings requesting that the U.S. Patent and Trademark Office, or PTO, deny petitions filed by affiliates of Canadian Solar, JinkoSolar and Mundra that seek to invalidate our U.S. TOPCon patents. Our filings include a reference to comments made earlier this year by the Acting Director of the PTO who stated, "the longer a patent has been enforced, the stronger and more settled the patent owners' expectations should be." We believe our ongoing vigorous enforcement of our decade-old U.S. TOPCon patents, which we consider fundamental to producing that technology is a prime example of a patent holder having settled expectations of the integrity of its IP rights. The view that module manufacturers and their customers and financing parties should strongly consider the potential hurdles of producing, selling or purchasing modules employing TOPCon cell technology is not one held just by us. For example, earlier this quarter, the CEO of ES Foundry explained that his company's decision to focus on manufacturing PERC technology was due, at least in part, to the "legal troubles that would be encountered by TOPCon producers." Lastly, we're pleased to continue building on our commitment to responsible solar, not simply by exceeding industry norms in sustainability and human rights, but by continuously improving on our own performance. Our Ohio facilities, which previously earned a silver rating in the Responsible Business Alliance's validated assessment program have progressed to a gold rating in its 2025 audit, which was completed this past quarter. Turning to Slide 4. I will now provide an update on our manufacturing operations. As it relates to our Alabama facility, 2 of our domestic glass suppliers faced manufacturing disruptions that limited our ability to operate at full capacity, which impacted Q3 production by approximately 0.2 gigawatts. The primary supply chain issue resulted from throughput limitations due to insufficient initial facility readiness at a new factory, while simultaneously a different supplier experienced unplanned downtime. Corrective actions have been implemented at both suppliers and our U.S. glass supply base is again positioned to meet our requirements. While now resolved, this resulted in a temporary shortage of cover glass supply to our Alabama facility, which led to reduced production and increased underutilization charges in the third quarter. Our Louisiana factory has initiated integrated production runs, started plant qualification and the early stage ramp is slightly ahead of expectations. We anticipate receiving required production certificates in Q4 and will begin shipment at that time. As it relates to our international capacity, we have previously indicated the implementation of the Reconciliation Act earlier this year as well as the evolving universal and reciprocal tariff environment could potentially support a business case to establish one or more lines in the U.S. to finish front-end production initiated within our international fleet. We have made the decision to establish a new production facility in the United States, allowing us to onshore the finishing of Series 6 modules initiated by the company's international factories. While the location is subject to final negotiations, we have -- with an announcement expected in the coming weeks, the planned capacity will be 3.7 gigawatts. Production will start at the end of '26 and ramp through the first half of 2027. As we previously noted, such an investment is expected to enable additional production in the U.S. market that we expect will be fully compliant with forthcoming FEOC guidance as well as improve the gross margin profile of our sales by reducing tariff charges and logistics costs associated with importing finished goods. Furthermore, we expect that the modules produced at this facility will provide domestic content points benefits for our customers and qualify for 45X module assembly tax credits. We continue to evaluate options for the remainder of our international Series 6 capacity, including options related to long-term U.S. market demand, U.S. market supply and the global tariff environment. Shifting to the current policy landscape. The U.S. policy and trade environment remains generally favorable. As we have long stated, one of First Solar's key competitive differentiators is the ability to provide certainty to our customers, both in terms of pricing certainty and the certainty of timing, producing, and delivering product. These attributes are particularly valuable in the U.S. solar market, where fiat-compliant suppliers who have domesticated their supply chains and localized their production capabilities provide the surest pathway to enable developers to realize tax benefits and to mitigate the exposure of project pro formas to both the imposition of tariffs and the risk to project schedules associated with relying on imported products. A number of trade and policy developments over the quarter amplified these competitive differentiators. In August, the U.S. Court of International Trade ruled that the Biden administration's 2-year suspension of circumvention-related antidumping and countervailing duties was unlawful, paving the way for possible retrospective duty payments on solar imports brought into the United States between June '22 and June of '24. Also during the quarter, the U.S. International Trade Commission issued a preliminary affirmative determination in an antidumping and countervailing duty case known as Solar 4, that imports of crystalline silicon cells and modules from India, Indonesia and Laos are causing material injury to the U.S. solar industry. In addition to a range of alleged illegal subsidies, the petitioners identified dumping margins of approximately 90% for Indonesia, approximately 247% for Laos and approximately 215% for India. Also during the quarter, U.S. Custom and Border Protection issued a notice of initiation of investigation and interim measures against an affiliate of Huawei Solar in response to a claim submitted by the American Alliance for Solar Manufacturing Trade Committee, of which First Solar is a member that Huawei has effectively transshipped Chinese solar cells and modules into the United States through India. In addition, we, together with the rest of the industry, are awaiting the results of the administration's 232 polysilicon and derivatives investigation including the potential for incremental tariffs impacting the crystalline silicon supply chain. From a policy perspective, the industry also awaits guidance from the administration related to project impacts from foreign entity of concern or FEOC procurement, which may be delayed as a result of the ongoing government shutdown. In short, there continues to be mounting headwinds or uncertainties for U.S. developers associated with procurement dependent on Chinese crystalline silicon supply chain, which we believe enhances the value proposition of our vertically integrated production capabilities. It also validates our approximately $4.5 billion investment strategy of expanding our U.S. manufacturing production and reshoring supply chains, which began under the first Trump administration and continues through the current Trump administration with our most recent facility currently ramping in Louisiana and the announcement of our new U.S. finishing line. This activity places us uniquely at the intersection of several of the administration's key priorities, including those related to domestic manufacturing job creation, American energy and energy affordability and serving among the generation solutions that enable the U.S. to win the artificial intelligence race against China. Turning to India. Since our last earnings call, there have been several notable policy deployments. First, significantly, the application of tariff rate for imports of finished modules into the U.S. was increased to 50%. We continue to monitor dialogue between the U.S. and Indian government related to a potential bilateral trade treaty, easing of tariffs between the 2 countries. As it relates to the country's domestic market, the Indian government continues to promote its domestic renewable energy value chain by progressively including cells in the remit of the approved list of models and manufacturers under a recently announced LIST-II. Inclusion in list becomes mandatory for solar OEMs to sell into key segments of the domestic market effective June of '26. Notably, First Solar was automatically qualified in this list, which was released in August of '25. The Indian government also released stakeholder consultation in September of '25 related to a further extension of the ALMM regulations to include domestically made wafers for potential deployment after June of 2028. Once again, First Solar's India's production is expected to automatically qualify. We anticipate that these regulations will progressively strengthen our position in the Indian market by leveling the playing field. I'll now turn the call over to Alex to discuss shipments, bookings, Q3 financials and guidance. Alexander Bradley: Thanks, Mark. Beginning on Slide 5. As of December 31, 2024, our contracted backlog totaled 68.5 gigawatts valued at $20.5 billion or approximately $0.299 per watt. Through Q3, we recognized 11.8 gigawatts in module sales and recorded gross bookings of approximately 5.1 gigawatts. This included 4 gigawatts booked between the enactment of the reconciliation bill in early July and the September 2 effective date for the new commenced construction guidance. Since our last earnings call, we had gross bookings of 2.7 gigawatts and an average selling price of $0.309 per watt. This includes approximately 0.4 gigawatts of Series 7 modules impacted by previously disclosed manufacturing issues booked at an ASP of $0.29 per watt. The remaining bookings, 2.1 gigawatts were sold into the U.S. market at a blended ASP of $0.325 per watt. As a reminder, a significant portion of our contracted backlog includes pricing adjustments that may increase the base ASP contingent upon achieving specific milestones within our technology road map by the time of delivery. Accordingly, the ASPs presented exclude potential adjustments related to module bin, freight overages, commodity price fluctuations, committed wattage, U.S. content volumes and tariff changes. Our recent bookings scheduled for delivery in periods where such milestones could be met, the potential value is reflected in our backlog as an opportunity rather than the base ASP represented. And for example, among recent bookings, we secured a 0.6 gigawatt order for 2027 delivery at an ASP of $0.316 per watt with the potential for an incremental $0.046 per watt contingent on achieving specific milestones within our technology road map. Demand in the U.S. remains strong. However, we recorded full year debookings totaling 8.1 gigawatts as of September 30, including 6.9 gigawatts in the third quarter. The majority of these were driven by contract terminations with affiliates of BP, which accounted for 6.6 gigawatts. Note, aside from the contract terminations with the BP affiliates, a number of other terminations were for project-specific reasons as opposed to reflecting customer pivots from solar project development generally. For example, our Q3 bookings include volume expected to be delivered to a customer who terminated a project in 2024, but is recommitted to solar development in 2025, continues to source its module supply with First Solar. In addition, we're currently in active negotiations for the procurement of new volume with another customer who previously terminated a contract with us for a specific project of theirs earlier this year. In both cases, these customers satisfied their termination payment obligations. In prior calls, we highlighted the emerging risk of a strategic shift concerning multinational oil and gas and power utilities companies, particularly those based in Europe, with some moving away from renewables project development and back towards fossil fuel investments. On September 30, First Solar filed a lawsuit against BP Solar Holding LLC and its affiliate Lightsource Renewable Energy Trading following their failure to cure multiple breaches of contractual obligations. According to public reports published earlier in the year, BP has been looking to divest its interest in its renewable's development arm. Despite agreements to purchase approximately $1.9 billion or 6.6 gigawatts of solar modules, these BP affiliates did not meet required payment obligations or provide required payment security. After issuing default notices and providing opportunities to cure, we terminated the contract, which entitles us to approximately $385 million in termination payments. Of this amount, we've recognized $61 million in previously collected down payments as revenue. We're seeking monetary damages, which includes approximately $324 million in remaining termination payments, along with certain other receivables for solar modules previously delivered and interest. And if realized, the $324 million we recognized as revenue. We were ready, willing and able to continue fulfilling our contractual obligations to these BP affiliates and are disappointed that we must resort to litigation. The modules that are subject to the contract breach are a mix of domestic and international product, most of which were scheduled to be produced in Q3 and future quarters with deliveries expected to extend into 2029. We're working to address the planned allocation of module inventory that could have been delivered to the BP affiliates, if not for their contract breach. With respect to such planned future module production, the market for these modules may be constrained by the U.S., Indian and European policy and market conditions discussed on the February earnings call and that has since been further exacerbated in the U.S. with our traditional utility-scale customer experiencing transmission and permitting related challenges in large part due to the constraints reflected in the July Department of Interior memo related to renewables project development, the ongoing government shutdown and the impact of tariffs. Note these same factors, which are further exacerbated by the breach of contract to these BP affiliates given our loss of contracted offtake for the product may drive further underutilization charges being realized in 2026 as it relates to our Southeast Asian production facilities for the planned module volume expected to be delivered to these BP affiliates. As a result, our quarter end contracted backlog stood at 53.7 gigawatts valued at $16.4 billion or approximately $0.305 per watt. And as of today, our total expected contracted backlog stands at 54.5 gigawatts, excluding any volumes sold after the end of the quarter. Moving to Slide 6. Our total pipeline of mid- to late-stage booking opportunities remain strong with bookings opportunities of 79.2 gigawatts and mid- to late-stage booking opportunities of 17.8 gigawatts. Our mid- to late-stage pipeline includes 4.1 gigawatts of opportunities that are contracted subject to conditions precedent. As a reminder, signed contracts in India will not be recognized as bookings until we received full security against the offer. I'll now cover our third quarter financial results on Slide 7. We recognized 5.3 gigawatts of module sales during the quarter, including 2.5 gigawatts from our U.S. manufacturing facilities. Our net sales totaled $1.6 billion, representing an increase of $0.5 billion compared to the prior quarter. This increase was primarily driven by higher shipment volumes and the anticipated back-weighted profile of deliveries over the course of the year. Our sales included $81 million in contract termination payments with $61 million related to the contract breached with the BP affiliates. This amount was recognized from existing cash deposits. Gross margin for the quarter was 38%, a decrease from 46% in the prior quarter. This decrease was primarily due to a lower mix of modules sold from our U.S. manufacturing facilities, which benefit from Section 45X tax credits. Additionally, we incurred higher underutilization costs due to continued production curtailments in Southeast Asia, the BP affiliates termination and glass supply chain disruption at our Alabama facility. As an update on warranty-related matters, we've resolved certain obligations and advanced negotiations with additional customers regarding manufacturing issues affecting select Series 7 modules produced prior to 2025. Based on our settlement experience, the estimated number of effective modules and projections of probable remediation costs, we believe a reasonable estimate of potential future losses will range from approximately $50 million to $90 million. Within this range, we've recorded a specific warranty liability of $65 million, an increase of $9 million from our prior estimate, representing our best estimate of expected future losses associated with these manufacturing issues. As of the end of the third quarter, we maintained approximately 0.6 gigawatts of potentially impacted Series 7 inventory, including 0.2 gigawatts under contract and included in our backlog. SG&A, R&D and production start-up expense totaled $145 million in the third quarter, an increase of approximately $6 million compared to the second quarter. This increase was primarily driven by start-up costs associated with the accelerated ramp-up of our Louisiana facility, aimed at providing resiliency to our U.S. production for the year. Operating income for the quarter was $466 million, which included $138 million in depreciation, amortization and accretion, $49 million in ramp and underutilization costs, $37 million in production start-up expense and $7 million in share-based compensation. Nonoperating income resulted in a net expense of $6 million in the third quarter, representing a decrease of approximately $4 million compared to the prior quarter. This was primarily driven by higher interest income as a result of an increase in investable cash, cash equivalents and marketable securities. Tax expense for the third quarter was $4 million compared to tax expense of $10 million in the second quarter. This decrease in tax expense was primarily driven by a $19 million discrete tax benefit associated with the acceptance of a filing position on an amended tax return in a foreign jurisdiction, partially offset by higher pretax income. This resulted in third quarter earnings of $4.24 per diluted share. Turning to Slide 8, I'll discuss select balance sheet items and summary cash flow information. At the end of Q3, our total cash, cash equivalents, restricted cash and marketable securities stood at $2 billion, an increase of approximately $0.8 billion from Q2, driven by improved working capital, new bookings deposits and accelerated customer payments ahead of the effective date for new beginning of construction guidance. As disclosed in our Form 8-K on October 20, 2025, we executed 2 Section 45X tax credit transfer agreements totaling up to $775 million in tax credits, a fixed agreement for the sale of $600 million in tax credits at a purchase price of $573 million payable by year-end and a variable agreement for sale of up to $175 million in tax credits with payment expected in Q1 2026. These transactions highlight the liquidity of the 45X credit market and strengthen our near-term liquidity to support our technology road map and expansion priorities. Accounts receivable decreased sequentially driven by higher cash collections. At quarter end, total overdue balances were approximately $334 million, including a deferred payment settlement of $93 million with a customer, for which interest payments remain current. In addition, we have approximately $70 million in uncollected receivables related to termination payments. We currently have $82 million in accounts receivable for delivered modules that are aged and past due with the aforementioned BP affiliates. This does not include any additional anticipated proceeds from potential recoveries associated with the breach of contract. Although termination payments remain contractually due, these balances are expected to persist pending the resolution of arbitration and litigation. In all instances of contract termination, we're actively pursuing all available remedies, including arbitration and litigation to enforce our contractual rights and recover amounts owed. Deferred revenue increased by $395 million, primarily due to accelerated customer payments ahead of the effective date for new beginning of construction guidance, partially offset by revenue recognized from delivered modules and termination payments. Capital expenditures totaled $204 million in Q3, mainly driven by investments in our Louisiana facility, where we initiated production runs and started plant qualification. As a result, our net cash position increased by approximately $0.9 billion to $1.5 billion. Before addressing our updated guidance, I'd like to revisit the policy and trade environment that shapes our operational decisions throughout the year. These evolving dynamics influenced our strategy, impacted quarterly performance and informed our adjustments to forward guidance. Our 2025 shipment profile required sustained production to fulfill contractual commitments concentrated in the second half of the year amid significant trade and tariff uncertainty. During this period, we navigated a range of potential tariff scenarios, customer negotiations and regulatory developments, including Section 232 actions, FEOC restrictions and AD/CVD investigations. At one point, we managed 2 possible tariff regimes, a continuation of a 10% universal tariff or adoption of reciprocal tariffs initially set at 26% for India, 24% for Malaysia and 46% for Vietnam, later amended to 50%, 19% and 20%, respectively. Our strategy has been to maintain sufficient capacity to fulfill international module commitments and to actively pursue tariff recoveries from customers, at the same time as temporarily curtailing or idling capacity and recording underutilization in circumstances where tariff recovery was unlikely and module sale economics would be challenged. The upper end of our prior guidance assumes sustained production with partial tariff recoveries, whereas the lower end reflected risk by termination-related impacts, including additional underutilization costs and margin erosion from terminated contracts. Three significant updates drive our revised guidance ranges today. Firstly, the decision announced today to establish a new 3.7 gigawatts U.S. production facility, enabling us to onshore finishing for Series 6 modules initiated by our international fleet will result in approximately $330 million of total program direct spend, including approximately $260 million of capital expenditures and approximately $70 million of non-capitalized expense associated with equipment de-installation, cleaning, packaging, shipping, import tariffs and reinstallation. Of this, we expect an incremental $26 million of CapEx and $2 million of production start-up expense in 2025. In addition, we forecast approximately $10 million of incremental indirect charges in 2025 associated with this decision, including severance and asset impairment expenses. As previously noted, we continue to evaluate options for our remaining Malaysia and Vietnam facilities. Today's guidance excludes any additional costs associated with potential restructuring charges or asset impairments that may impact 2025 or future operating results. Secondly, as it relates to the termination of contracts with affiliates of BP, the loss of gross margin assumed in 2025 was largely offset by the termination payment recorded in Q3. Increased underutilization expenses from reduced plant throughput as we curtail production given this termination of demand were incorporated in the low end of our guidance range. Thirdly, as previously discussed, simultaneous incidents at 2 of our glass suppliers led to a shortage of glass available at our Alabama facility in Q3. This reduced full year production by approximately 0.2 gigawatts, resulting in a reduction to gross margin and Section 45X tax credits and increased underutilization costs. Turning to Slide 9. I'll now outline the key updates to our 2025 guidance ranges, which incorporate the cascading impact of our third quarter operational and financial results. Our net sales guidance is projected at $4.95 billion to $5.20 billion, reflecting a downward revision of approximately 0.5 gigawatts from the top end of our prior guidance. This adjustment primarily reflects reduced international volumes sold due to customer terminations, partially offset by termination payments as well as 0.5 gigawatt reduction in assumed domestic India sales following the midyear redirection of India product from the U.S. market to the domestic book and bill market, driven by the high tariff for imports into the U.S. Additionally, U.S. manufactured volumes sold is expected to decrease 0.2 gigawatts at the high end of the guide as a result of Q3 glass supply constraints at our Alabama facility, partially offset by 0.1 gigawatts at the low end by expected increased supply from our Louisiana factory. Gross margin is expected to be between $2.1 billion and $2.2 billion or approximately 42%. This includes approximately $1.56 billion to $1.59 billion of Section 45X tax credits and $155 million to $165 million of ramp and underutilization costs. The bottom end of our previous guide has increased significantly due to further curtailment of our Southeast Asia manufacturing capacity following the contract terminations by affiliates of BP. SG&A and R&D combined expense is expected to total $425 million to $445 million and total operating expenses, which include $90 million of production start-up expense, are expected to be between $515 million and $535 million. Operating income is expected to range between $1.56 billion and $1.68 billion, implying an operating margin of approximately 32%. This guidance includes $245 million to $255 million in combined ramp, underutilization and production start-up expense as well as approximately $1.56 billion to $1.59 billion in Section 45X tax credits, net of the anticipated discount associated with the sale of these credits. This results in a full year 2025 earnings per diluted share guidance range of $14 to $15. In summary, the upper end of our EPS guidance range is reduced by $1.50 per diluted share. This includes approximately $0.60 per share from the supply chain impacts at our Alabama facility, which resulted in increased underutilization costs and lower volumes sold. Contract termination by BP affiliates reduces EPS by another approximately $0.60 per share due to increased underutilization costs and lower volumes sold, partially offset by termination payments. The remaining $0.30 per share is a combination of reduced India volumes sold, increased production start-up expense, finishing line costs and warranty expense, partially offset by non-BP affiliate termination payments and decreased full year tax expense. Capital expenditures for 2025 are now expected to range between $0.9 billion and $1.2 billion. Our year-end 2025 net cash balance is anticipated to be between $1.6 billion and $2.1 billion. Turning to Slide 10, I'll now summarize the key messages from today's call. Despite some near-term headwinds, we continue to believe that our integrated domestic manufacturing platform and reshored domestic supply chain position us for long-term success. We're building a new 3.7 gigawatts capacity module finishing line in the U.S., which is expected to begin production in Q4 of 2026 and ramp into the first half of 2027. We delivered a record 5.3 gigawatts of module sales, and our Q3 earnings per diluted share came in above the midpoint of our guidance range at $4.24 per share. We saw an improvement in our gross cash position to $2 billion and recently executed agreements to sell additional Section 45X tax credits, which we expect to further enhance our liquidity position. We've revised our full year guidance to reflect the impact of third-party glass supply chain disruptions as well as the termination of 6.6 gigawatts of volume by affiliates of BP which we recognize a partial termination payment and a filed a lawsuit for damages for breach of contracts. With this, we conclude our prepared remarks and open the call to questions. Operator? Operator: [Operator Instructions] The first question comes from Philip Shen, ROTH Capital Partners. Philip Shen: First one is on the 6.6 gigawatts of termination with BP. Just want to check in on whether or not in terms of rebooking this volume, it sounds like it's volume from '26 through '29. What kind of incremental pricing do you think you can get for this? Would you expect these bookings to get locked in following the Section 232 tariff announcement, which should be near term. So sometime in Q4, Q1? And then -- or do you think you might wait until things settle down post 232? And then the second question is tied into this as it relates to the 232, is there room for negotiation you think with any of your fixed price contracts that you have out there where they may not have been accounted for in terms of this new tariff. So just curious if you can share some color on that as well. Mark Widmar: Yes, Phil. Look, I mean, now with the termination, we clearly are going to be engaging, looking, given our overall pipeline of opportunities to figure out the right opportunities for this volume in the respective windows that it was anticipated to be delivered. We will continue to be very patient in that regard. Assuming we can get good prices. Like if you look at the one deal that Alex included in his prepared remarks, the base price plus the CuRe adders gets that number into a little bit north of $0.36, close to $0.365. And I think that's a number that we would continue to look to engage. But at this point in time, I think there's other catalysts that could put a little bit more momentum behind that pricing as well, especially with the 232, as you referenced, and there's still obviously FEOC guidance that's going to continue to be provided as well. So a lot of insights or information that still is valuable to us to gain. If we can get good pricing, we'll continue to layer on some volumes into the years that we currently have available supply. But I think the value of being patient here is going to only work to our benefit in that regard. As it relates to the fixed price contracts, the value of certainty, I think, is what Alex indicated in his comments, and we said that many times before. The contracts are -- do not have latitude for something like a revised tariff environment that was not assumed at the time of the committed obligations that both parties assumed. So they do not allow openers for 232s as an example, but we still have capacity in the foreseeable future, especially through our international operations that we can use to engage the market and provide supply once we know the outcome of 232. But yes, the existing contracts that are on the books right now, those are obligations for both parties, and we take that seriously. That's also why we took the position that we did with the Lightsource BP transaction and the termination and enforcing our contractual rights. We worked, as we indicated in our prepared remarks, to try to get to an outcome that would be beneficial for both parties. We couldn't get there. So we had to enforce the contract. And we hold ourselves accountable to that as well. We have contracts and obligations to deliver. Pricing is fixed for certain respective adders and would not include tariff-related outcome or any other adjustments that were a result of the 232s that are being currently under investigation. Operator: The next question today is Brian Lee from Goldman Sachs. Brian Lee: I guess, first, I just want to make sure I interpret this correctly. It sounded like, Mark, you're saying given the adders, indicative pricing, $0.36, $0.365 per watt, that's maybe kind of the level of entitlement you think you'll ultimately settle at once this game of patience evolves to, to when you really engage in pricing discussions post FEOC and 232. And then the second question, just on the 3.7 gigawatts finishing line, great to hear on that. But is the CapEx all being spent this year? And then maybe high-level thoughts around just expanding that. Why not simply do a full 7 gigawatts plus to cover both the Vietnam and Malaysia volume capacity? Mark Widmar: Yes. So Brian, I think as you summarize what I said to Phil, I think that's the objective of where we'd like to ultimately see, especially with the -- on the other side of understanding of FEOC and the 232. That's kind of the entitlement that we would expect with -- especially for the new technology and the value add that we provide through CuRe. So I think you summarized that well. I'll let Alex talk to the CapEx. But before that, as it relates to where we are right now is 3.7 gigawatts, one of the things that we do want to try to keep measured is the finishing line will bring with it domestic content, right? But it's not going to bring the entire value stack of domestic content that we capture through our production in Perrysburg. The front-end semi-finished product that comes into the U.S., obviously, by definition, will not value -- not create domestic content value. So what we're trying to do is keep that throughput pretty much balanced so we can continue to blend. So even that contract that I referenced with the adders that got into the mid-36, that was still a blend of international and domestic. And so we think that by keeping that balance, it allows us to realize the highest potential value for that finishing line. So that's where our head is right now, 3.7 gigawatts kind of balances very well with the production that we have in Perrysburg, which is north of 3 gigawatts as well. We'll continue to evaluate whether there's an opportunity to bring more into the U.S. using the front-end capacity we have internationally. We'll have opportunities to better reassess that once we understand the outcome of 232 in particular and the FEOC guidance that we're looking forward to, and we'll make that decision at that time. Alexander Bradley: And Brian, just on the spend. So what we said is about $330 million of direct spend. Of that $260 million is CapEx. And of that $260 million, we'll spend about 10% of it this year, so $26 million. The remainder will be spent in 2026. The other $70 million, so $260 million of CapEx, $330 million of total spend, the other $70 million is non-capitalizable spend. So that's going to be decommissioning of the current tools, taking them out, cleaning, packing them, the freight to get them to the U.S., some tariff on the import, reinstallation. So all of that will be expensed versus capitalized. Of that $70 million, we're only forecasting spending about $2 million this year. The rest will come in 2026. There is some incremental charge that will hit this year. We said about $10 million. That's indirect associated with what we're doing. So it's not part of $330 million. That's some severance for some associates that will be impacted in Southeast Asia. And then there'll be some equipment write-off as well. There may be more associated with that in 2026, and we'll give you more color on that when we guide for next year. Operator: Your next question comes from Moses Sutton from BNP Paribas. Moses Sutton: In the past, Alex, you delineated, I think, 85% of either gigawatts or customers were in like a true take-or-pay structure contractually and 15%, maybe it was 16%, were supported by the nonrefundable deposits or termination fees. Was BP in the latter bucket, hence, the 20% that you're going after and litigating for that. Given BP is over 10% of the backlog or was at least, I would assume that they weren't in the take-or-pay bucket. But I just want to confirm and if you can comment on which bucket they are, and can you update how firm the rest of the contracts are? I think it would be a good time to give a mark-to-market on that. Alexander Bradley: Yes. So when you say take-or-pay, I think maybe what you're referring to is termination for convenience potentially. And so correct me if I'm wrong, but if you're referring to that piece, then the BP contracts were not contracts that had an ability to terminate for convenience. So they had no ability to exit those contracts. Now if they had wanted to cancel, they could have certainly worked with us. We would have had a discussion as potentially a solution we could have come to. But as Mark said, unfortunately, despite working with them for a long period of time, they chose to default on these contracts. We did have some cash deposits from them, and that's the piece that we recognize as revenue associated with the termination. We also had some LCs. Generally, that was going against some of the accounts receivable that we had outstanding. So we have pulled those LCs as well. And then the residual is generally parent guarantees, and that's the piece that we will be litigating to recover. Operator: The next question comes from Jon Windham, UBS. Jonathan Windham: Just a quick point of clarification, and then I'll get on to my real question. Was the cancellation related to BP, was that all from international factories? Alexander Bradley: No, it was a mix of products, both international and domestic. Mark Widmar: The supply -- just clear on this, the current year supply was essentially all international. So it was a mix. But the -- again, the contract goes out multiple years with delivery anticipated to go out through '29. So think of it as the front of that is mostly international. And as you get more longer-dated, it then transitions into domestic. Jonathan Windham: And then so thinking about it sort of net-net, is it half-half? How should we think about it? Mark Widmar: Yes. I mean it's more than half of it being domestic, but a very -- a significant chunk of it being international. Operator: Up next, we'll hear from Julien Dumoulin-Smith from Jefferies. Julien Dumoulin-Smith: Just following up a little bit on the earlier commentary about the CapEx. You suggested that maybe one or more lines. Can you elaborate under what conditions you would look to seek to open multiple new lines on the finishing front? And how you would think about that in terms of the sourcing front as well internationally? Mark Widmar: So just -- yes, it's also a distinction of how do we refine it. So right now, the -- there will be 2 lines in -- that we will be bringing into the U.S. for finishing. So there'll be 2 finishing lines, okay? And that is 3.7 gigawatts of capacity. We could bring more lines in, right? It doesn't have to be another 3.7 gigawatts. It could be effectively half of that to be another line, or we could potentially bring in 2 lines if need be. It's something that we're continuing to evaluate. There's enough front-end capacity to enable more finishing here in the U.S., obviously. A number of variables, number of items that we've already referenced will inform our decisions around that. We're very excited about getting the first 2 lines, which adds up to the 3.7 gigawatts capacity up and running here as we exit next year. And as we continue to evaluate market opportunities and demand, then we will form our decisions do we make additional investments and how do we bring those lines in, in terms of timing? And do we do just only 6? Or do we also look potentially to bring in Series 7 as well. Operator: Next up is Ben Kallo from Baird. Ben Kallo: Just following up, I think, on Brian's question earlier on pricing, the 4.1 gigawatts of opportunities confirmed but not booked. Can you talk anything about pricing there? And then with your cash balance, how do you think about that? Maybe, Alex, just the priorities of cash going forward over the next 2 years? I know there's a lot of uncertainty but thank you. Mark Widmar: Yes. On that 4.1 gigawatts, Ben, that's more I would -- historical, I would say, pricing. Some of that's India, that's contracted that we don't count as a booking until we received all the security. And some of that is kind of variable pricing dynamics that we have with customers effectively, they can flex up or down from their MSA, their module sales agreement. So I wouldn't say that that's really a reflection of kind of current market pricing. All I would say is that we're happy with the market pricing that we're seeing. We believe there could be additional tailwinds that could further support a very favorable pricing environment for us, and we'll continue to engage the market and react accordingly. Alexander Bradley: Yes. Ben, as it relates to cash, clearly, cash positions increased quarter-over-quarter. We saw some activity during that safe harbor window where we saw some volume that was 100% prepaid. Some of that was taken at the same time within the quarter, some not. So you saw the deferred revenue amount increase. We also had some improvement in the working capital position, which we talked about expecting to improve as we got further into the year. So an increase in cash, no doubt, we're announcing some more CapEx for next year. As Mark said, we'll continue to look at additional finishing lines and see if there's an opportunity there. But the overall framework we use to evaluate cash is one we've talked about before, it hasn't fundamentally changed around running the business day-to-day, looking at additional capacity, looking at M&A, especially as it relates to R&D. And then if we get to a point where we can't accretively deploy that capital, we'll look at capital return. We'll give a further update as we go into next year's guidance, how we think about capital structure longer term. Operator: David Arcaro from Morgan Stanley has the next question. David Arcaro: I was just wondering if you could give a little color on your confidence level in the 54.5 gigawatts backlog now. Are there other customers that you think could be at risk that you're aware of that you're risk weighting in there? Or any other market dynamics that make you think or customer-specific dynamics that make you think this debookings pace could continue or not? Mark Widmar: Yes. So we've been saying now for, I don't know, it could be going on close to 2 years now, something along those lines. There's been indications by a number of large oil and gas multinationals, international companies that are continuing to evaluate their commitment to renewables, right? And obviously, BP falls in that bucket. There's been others as well. Just think about NatGrid. NatGrid, obviously, a large European company that made a decision to sell down its development business going back to now Geronimo, sold it over to Brookfield. You could look at Enel as another example of a commitment to the U.S. market that had been reevaluated. Now I think they've changed their perspective in that regard. And there's a couple of others, which I won't name, but it's -- EDF is, I guess, maybe another one I would throw into that bucket a little bit. I mean it's not oil and gas, but obviously, a large European company that's reevaluating its commitment to the U.S. market. So there's -- obviously, that risk profile is something we foreshadowed. It's something that has played itself out. If you go back and if you look at what's in our contracted backlog, you can go back and look at announced deals that we've done, who some of our larger partners are, you're going to find that, that profile is dramatically different with what sits in our contracted backlog. Now having said that, I mean, we all know that a number of developers and IPPs here in the U.S. I mean, they're working through a number of challenges, right, and permitting issues and project-related issues and what have you that things could evolve in such a way that at a project level, we could potentially see some movement. We said in the call today, we had a couple of customers that have project-specific terminations, one of them who terminated last year project specific, and then now they're back on our order book for more than 0.5 gigawatt of volume. And then we had another one who terminated this year that we're actively negotiating a meaningful contract with. So I don't want to give an indication of there may not be further terminations. But I also want to somewhat reflect that I don't think something as large and structural as what we saw with Lightsource is a high risk. But at any point in time, things can evolve, things could change. A number of our partners have sponsor capital behind it. If Brookfield decides to go a different direction, if KKR decides to go a different direction, if TPG decides to go, Macquarie, I mean, you name whoever sponsor you want to say is behind a portfolio business, if they decide to pivot and go a different direction. I mean there's always an inherent risk in that regard. But what I would say is that while there's still challenges and issues that are being dealt with, there's an opportunity here. The policy environment, I think, is very -- still very positive with what came out of the One Big Beautiful Bill. There is a need for more electrons on the grid. The load profile is only going to continue to grow and project economics and PPAs are still strong, right? So I think those fundamentals, I think, still I would say it's enduring and that we would have a higher level of confidence in contracted offtake agreements that we have on our books right now. But I also want to be balanced in understanding that there could be some amount of risk. But I do think that on balance, there's a lot of market opportunity for our partners and obviously, for us to continue to supply into the market. Operator: Next up is a follow-up from John Windham, UBS. Jonathan Windham: Perfect. I wanted to ask about a topic we haven't covered much on this call is how the ramp in product quality is in Louisiana and Alabama. Can you just touch on how that's running next to expectations? Mark Widmar: Look, the ramp for DRT, I would say that it has gone well. It's an aggressive ramp that we've had -- sorry, Alabama referred to it by acronyms. It actually has gone well, but it's also had its own set of challenges that we've been working through in terms of the ramp process and getting to full entitlement and throughput. And where I see the factory at right now for Alabama, I see it at a very good level. It's hitting its throughput requirements. It struggled, as we indicated in our prepared remarks, with a disruption on our glass supply chain. And obviously, that had an adverse impact on the factory. Louisiana is going extremely well. We're in the midst of going through our product qualification and that will be complete here in Q4, and we'll start shipping product. And right now, the ramp is ahead of schedule, which is all very positive for us in that regard. As you said, I think you may have mentioned product quality and the like. We are continuing to do, as always, being very diligent as we manufacture our product and to ensure that we have a high level of indication of field performance based off of not only accelerated life testing, but obviously, field deployment as well. And it's something that our level of rigor and intensity around that is only going to continue to be more heightened as a result of the initial launch of Series 7. Again, that was the launch of a new product. In this case, both Alabama and Louisiana are just replications of the factories that we launched our Series 7 technology from. And the key learnings that we captured from that launch and some of the changes that we've already communicated that we needed to make to our manufacturing process, both were implemented into Alabama and Louisiana before we started production. But it's something we know with the reputation, it's a brand issue, we got to stay on top of it, and we're going to continue to do everything we can to meet our customers' expectations in that regard. Operator: The next question comes from Vikram Bagri from Citi. Vikram Bagri: Just a quick question. Mark, can you remind us of if there is a precedent of successful litigation against a customer who is in a similar breach of contract or this case with BP will set a precedent for future? Mark Widmar: Yes. I don't have my GC in the room right now because I could ask that question. But what I can tell you is that we are using outside counsel. We have -- we believe very strong contracts that enforce the rights and obligations of both parties. And we believe that if either of those parties are in default, and there's consequences associated with that. I would also use whether there's legal precedents, and I'm sure there are, while I can't cite them to you right now, what I would go back to is if you look at the -- I believe we've had a number across the last couple of years, somewhere in the range of north of $200 million, $250 million or so of various terminations. I think we've also disclosed that about $70 million is sitting outstanding, okay? That means that the vast majority of that -- those terminations were paid because the counterparties understood the obligations and the terms and conditions of the agreements, which are essentially identical across our contracts. And they have honored that obligation in respect of that obligation, and they've remitted payment. They would not have done that unless they thought -- if they thought that there was a reason why underneath the contract that they would not have an obligation to for solar -- for their default. So I can use 2 data points. One is just look at experience and the other is the input that we're getting from outside counsel around our contracts. And we feel very good about the contracts, the way they're structured and the enforceability of the contracts. And my understanding is that, again, this will be -- the filing of the litigation is in the state of New York. I think my understanding is the state of New York has taken a very strong position around this type of condition underneath the contract for default and associated with termination payment. And generally, the courts in New York have cited with the plaintiff in the situation of similar circumstances. So that's about as much information as I have. I do believe, though, we're in a strong position. Operator: Our final question today will come from Joseph Osha, Guggenheim Partners. Joseph Osha: As we think about the timing of the finishing fab coming up in the U.S. and what the commercial environment looks like, I'm wondering what conclusion we can draw about under-absorption of Malaysia and Vietnam next year. And perhaps to put a sharper point on that is, is there any market at all for products being shipped directly out of either of those 2 fabs? Mark Widmar: Yes. So one thing to remember is that we're using the front-end capacity of our international facilities in order to fund that into the U.S., right? And when you think about the cost structure and the absorption, especially around the capital intensity of the equipment, it largely sits on the front end of the processing. So you're going to see reasonably good absorption for that front-end manufacturing that then is finished in the U.S. We also identified that we have taken some headcount reductions. So we are minimizing the back-end processing of the labor associated with that. And then those tools that are being used in the back end are being brought into the U.S. So therefore, the depreciation there will be absorbed against the finishing processes that are being done here in the U.S. So just to put that in perspective. Yes, as it relates to the balance of that production, one of the things we're continuing to work through, and we are in negotiations with a couple of counterparties to almost do a bilateral for that offtake of that volume and to structure a deal around that so we can get to terms. We'd like to find potentially a couple of large customers with large offtake requirements that we can then sort of just sole source that into those opportunities. But clearly, we believe there is an opportunity subject to the tariff environment, subject to what happens with 232, subject to FEOC guidance and everything else. So there's some more triggering events that would have to happen. I think we said in our prepared remarks; we have something like 6 gigawatts of contracted backlog or something like that for Series 6 international still. So we've got some runway in terms of volume and absorption for those production assets, and then we'll continue to evaluate them as we learn more about some of these policy decisions that will be made. Operator: Everyone, that does conclude our question-and-answer session. This also concludes our conference for today. We would like to thank you all for your participation today. You may now disconnect.
Operator: Good day, and welcome to the Western Digital First Quarter Fiscal 2026 Earnings Call. [Operator Instructions] Please note that this event is being recorded. I would now like to turn the conference over to Ambrish Srivastava, VP of Investor Relations. Thank you, and over to you. Ambrish Srivastava: Thank you, and good afternoon, everyone. Joining me today are Irving Tan, Western Digital's Chief Executive Officer; and Kris Sennesael, Western Digital's Chief Financial Officer. Before we begin, please note that today's discussion will contain forward-looking statements based on management's current assumptions and expectations which are subject to various risks and uncertainties. These forward-looking statements include expectations for our product portfolio, our business plans and performance, ongoing market trends and our future financial results. We assume no obligation to update these statements. Please refer to our most recent annual report on Form 10-K and our other filings with the SEC for more information on the risks and uncertainties that could cause actual results to differ materially from expectations. In our prepared remarks, our comments will be related to non-GAAP results on the continuing operations basis, unless stated otherwise. Reconciliations between the non-GAAP and comparable GAAP financial measures are included in the press release and other materials that are being posted in the Investor Relations section of our website at investor.wdc.com. Lastly, I want to note that when we refer to we, us, our, or similar terms, we are referring only to Western Digital as a company and not speaking on behalf of the industry. With that, I will now turn the call over to Irving for introductory remarks. Irving? Tiang Yew Tan: Thanks, Ambrish. Good afternoon, everyone, and thank you for joining us today. Across industries, adoption of AI is expanding, fueling innovation, reshaping business models and ushering in a new wave of digital transformation marked by higher productivity and richer user experiences. As agentic AI begins to scale at several industries and multimodal LLM become the norm, we are seeing a steady acceleration of AI use cases and applications, driving robust ongoing demand for the data infrastructure that enables this growth. AI is not only a consumer of data, but a prolific creator of data as well, both synthetic and real world. It is reshaping how data is being generated, scaled, stored and monetized. Data is the fuel that powers AI and it is HDDs that provide the most reliable, scalable and cost-effective data storage solution, playing a vital role in storing the ever-increasing zettabytes of data created by the AI-driven economy. To cite an example of how AI is transforming various industries, one of the world's leading medical institutions is using an AI workflow that analyzes over 7 billion images derived from 14 million deidentified patient records. This process enables predictive analysis, improves the speed and accuracy of diagnostics to deliver enhanced patient outcomes. Such applications are generating massive volumes of new data that is being stored. At Western Digital, we are also leveraging AI internally to enhance productivity and accelerate innovation across our organization. For example, in engineering, AI is helping to modernize our firmware, enabling us to deliver new features quickly to our customers and in a more cost-effective manner. In our factories, we are seeing productivity gains of up to 10% in select AI use cases. AI tools are improving yield, detecting defect patterns through intelligent diagnostics and optimizing our test processes. In parallel, they are also being used to up-level our technician capabilities, enabling them to perform higher skilled tasks, accelerating issue diagnostics and troubleshooting. Across corporate functions, AI is streamlining workflows, making the organization more efficient every day. The rapid adoption of AI and data-driven workloads at hyperscalers is driving robust demand for our products and solutions. To fulfill the demand of more exabytes of storage, our customers are increasingly transitioning to higher capacity drives. Shipments of our latest ePMR products offering up to 26 terabytes CMR and 32-terabyte UltraSMR capacities continue to grow at an impressive pace, surpassing 2.2 million units in the September quarter. Our ability to reliably scale our ePMR technology and transition customers to higher capacity drives is one of several ways we support the growing demand for exabytes. We are also investing in head wafer and media technology and capacity to drive areal density higher. In addition, we're increasing our manufacturing throughput by leveraging automation, AI tools and enhancing our test capabilities. We recently inaugurated our system integration and test lab, 25,600 square foot state-of-the-art facility in Rochester, Minnesota, to enable rapid adoption of our next-generation high-capacity drives. This lab provides dedicated test capabilities that mirror our hyperscale customers' production environments, enabling collaborative integrated product development with our customers, accelerating qualification cycles. Thereby ultimately shortening time to market for our products and time to value for our customers. The AI-driven growth in data storage is accelerating demand for higher capacity drives, which comes with greater manufacturing complexity and longer production lead times. As a result, our customers are providing greater visibility into their long-term needs, which in turn strengthens our partnership and helps us to support their future growth requirements. Our top 7 customers have now provided purchase orders extending throughout the first half of calendar year 2026. And 5 of them have provided purchase orders covering all of calendar year 2026. I'm also pleased to share that 1 of our largest hyperscale customers has signed an agreement covering all of calendar year 2027. These commitments underscore both essential role of our products in the AI data economy and our customers' strong confidence in our product road map, including the transition to HAMR technology. We are making rapid progress in our HAMR development and are on track to start HAMR qualification for 1 hyperscale customer in the first half of calendar year 2026. And to expand the qualification process to up to 3 hyperscale customers through calendar year 2026. The key focus of our qualification efforts is to ensure the highest level of reliability, quality and scalable performance so that once qualification is complete, our customers have strong confidence in our HAMR products and can rapidly deploy them at scale. This positions us well for the ramp-up of volume production in the first half of calendar year 2027. In parallel, we will begin qualification of our next-generation ePMR drives in the first quarter of calendar year 2026, building on our industry-leading ePMR technology, a trusted, scalable and proven solution that our customers are very familiar with and that has been used reliably in their data centers. Together, our ePMR and HAMR technologies will enable high-capacity drives that meet the growing demand for exabytes from cloud and AI workloads. Our platforms business is also sharing in the upward momentum, driven by overall growth of on-prem and cloud storage, including AI and social media applications. We will continue to invest in this business as more opportunities unfold and continue to scale up. Innovation lies at the heart of what we do. We continue to expand our proven ePMR road map even further while bringing new technologies, including HAMR to market. In parallel, our engineering teams are focused on improving data, throughput speed and bandwidth of our drives as well as power efficiency. Major progress is being made on all fronts. And we will keep all stakeholders, including customers and investors updated on any new developments. Let me now turn to our quarterly results and capital allocation updates. For the fiscal first quarter, Western Digital delivered revenue of $2.8 billion, non-GAAP gross margin of 43.9% and non-GAAP earnings per share of $1.78. Free cash flow for the quarter was $599 million. This quarter, yet again underscores our business' strong free cash flow generation. We remain confident in the long-term strength of the business and our balance sheet. As a result, this quarter, we significantly increased our share repurchases, and I'm pleased to announce that we will increase our dividend per share by 25% to $0.125 per share. Kris will discuss our capital allocation in more detail later. Looking ahead, we're excited about the opportunities AI continues to unlock for our business even as we navigate macroeconomic uncertainties. For the fiscal second quarter of 2026, we expect continued revenue growth driven by data center demand and improved profitability led by the adoption of higher capacity drives. Let me now turn the call over to Kris, who will discuss our fiscal first quarter results and the outlook for the second fiscal quarter in more detail. Kris Sennesael: Thank you, Irving, and good afternoon, everyone. As a strategically focused hard disk drive company, Western Digital plays a critical role in enabling the data-driven AI economy. The company is executing well, fulfilling customers' rapidly growing exabyte demand while delivering strong financial performance. During the first quarter of fiscal 2026, revenue was $2.8 billion, up 27% year-over-year, driven by strong demand for our nearline drives. Earnings per share was $1.78. Both revenue and EPS were above the high end of the guidance range. We delivered 204 exabytes to our customers, up 23% year-over-year. This includes 2.2 million drives of our latest generation ePMR with capacity points up to 26 terabytes CMR and 32 terabyte UltraSMR. Cloud represented 89% of total revenue at $2.5 billion, up 31% year-over-year, driven by strong demand for our higher capacity nearline product portfolio. Client represented 5% of total revenue at $146 million, up 5% year-over-year. Consumer represented 6% of revenue at $162 million, down 1% year-over-year. Gross margin for the fiscal first quarter was 43.9%. Gross margin improved 660 basis points year-over-year and 260 basis points sequentially. The improved gross margin performance reflects continuous mix shift towards higher capacity drives and tight cost control in our manufacturing sites and throughout the supply chain. Operating expenses were $381 million, slightly exceeding our guidance range driven by higher variable compensation on stronger-than-expected results. Operating income was $856 million, translating into an operating margin of 30.4%. Interest and other expenses were $44 million, and taking into account an effective tax rate of 17% and a diluted share count of 369 million shares, EPS was $1.78. Turning to the balance sheet. At the end of our fiscal first quarter, cash and cash equivalents were $2 billion, and total liquidity was $3.3 billion, including the undrawn revolver capacity. Debt outstanding was $4.7 billion, translating into a net debt position of $2.7 billion and a net leverage EBITDA ratio of just below 1 turn. Operating cash flow for the fiscal first quarter was $672 million, and capital expenditures were $73 million, resulting in strong free cash flow generation of $599 million for the quarter despite the fact that we made our final repatriation tax payment during the quarter of $331 million. During the quarter, we increased our share repurchases to approximately 6.4 million shares of common stock for a total of $553 million and made $39 million of dividend payments. Since the launch of our capital return program in the fourth quarter of fiscal 2025, we have returned a total of $785 million to our shareholders by way of share repurchases and dividend payments. Also, today we announced that our Board has approved a quarterly cash dividend of $0.125 per share of the company's common stock, payable on December 18, 2025, to shareholders of record as of December 4, 2025. This marks a 25% increase over the dividend announced in April and speaks to the long-term confidence we have in our business. I will now turn to the outlook for the second quarter of fiscal 2026. This outlook includes our current estimate of all anticipated or known tariff-related impacts on our business in this period. We anticipate revenue to be $2.9 billion, plus/minus $100 million. At midpoint, this reflects a growth of approximately 20% year-over-year. Gross margin is expected to be between 44% and 45%. We expect operating expenses to decrease on a sequential basis to a range of $365 million to $375 million. Interest and other expenses are anticipated to be approximately $50 million. The tax rate is expected to be approximately 17%. As a result, we expect diluted earnings per share to be $1.88 plus/minus $0.15 based on a non-GAAP diluted share count of approximately 375 million shares. In closing, this was another strong quarter for Western Digital with results exceeding expectations. The guidance for next quarter reflects continued tailwinds in our business as we remain focused on strong free cash flow generation and demonstrating our commitment to creating long-term value for our shareholders. With that, I will now turn the call back to Irving. Tiang Yew Tan: Thanks, Kris. Our leading technology road map, combined with our scalable, reliable and strong product portfolio is highly recognized by our customers. This is demonstrated by the longer duration agreements we've signed with our major customers. Western Digital's consistent execution, combined with powerful AI-driven tailwinds, position us to deliver strong results and robust cash flow over the long term. As data creation continues to accelerate, our innovation and operational and fiscal discipline enables us to capture these opportunities efficiently and drive sustained shareholder value. With that, let's now begin the Q&A. Ambrish? Ambrish Srivastava: Thanks, Irving. Operator, you can now open the line to questions, please. To ensure that we hear from as many analysts as possible, please ask one question at a time. After we respond, we will give you an opportunity to ask one follow-up question. Operator? Operator: [Operator Instructions] We have the first question from the line of C.J. Muse from Cantor Fitzgerald. Christopher Muse: Storage demand is off the charts. And part of the great narrative for the HDD industry is an oligopoly acting very rational with supply. On the other hand, we're seeing SSD adoption rise for certain AI workloads given the tight overall storage supply. So my question, how do you plan to meet rising customer demand while keeping supply/demand in balance? Tiang Yew Tan: C.J., thank you for the question. I hope all is well. Our focus is really to -- on a couple of things. One, ensuring that we continue to quickly and reliably deliver increasing higher capacity drives. A good example is the current PMR product that we have that's -- where we shipped over 2.2 million units last quarter that equates to roughly about 70 exabytes of data in total. And that product is expected to ship well north of 3 million units this quarter. So it's a real demonstration of our ability to deliver exabytes to customers at scale. The second thing is that, as we've highlighted in the past, our unique innovation around UltraSMR. This quarter, our UltraSMR and CMR mix is roughly 50-50. As you recall, UltraSMR gives us a 20% capacity uplift over CMR and a 10% capacity uplift over standard SMR. Those capabilities, plus the fact that we'll be launching our next-generation ePMR drive very soon. It starts qualification in Q1 of calendar '26, and we anticipate it will go into ramp in the second half of calendar year '26, will give customers an ability to take advantage of higher capacity drives. Second, we've been working very closely with customers to mix them up in terms of capacity points as well. So if you go back a year, the average capacity for our top 7 hyperscale customers has increased 21% year-on-year. So that's a very strong testimony to how capacity points in our drives have scaled up. We also continue to invest into areal density technology improvements and capacity as well as we stated from the very onset of us spinning out as the stand-alone hard drive company. Those investments will continue to be able to deliver greater areal density improvements without the need for any additional unit capacity. We're also looking at increasing our manufacturing throughput by leveraging more automation, AI tools that we highlighted in the script and also enhancing our test capabilities. This increase in productivity of our existing footprint will enable us to deliver more exabytes to our customers as well. And last but not least, as we highlighted in the script as well, the investments that we've made into our [ test ] labs to accelerate qualification is a key part of our ability to bring higher capacity drives faster to customers and therefore, fulfill the need for exabytes as well. And maybe just let me end my comments by being very clear about one statement, we are not adding any unit capacity to our portfolio right now. Ambrish Srivastava: C.J., do you have a follow-up? Christopher Muse: Yes, Ambrish. I guess on gross margins, great, 660 bps uplift year-on-year. But obviously, we're always looking forward. So how should we think about incremental gross margins from here? Is there a framework that we should use? Kris Sennesael: Yes, C.J. So I'm really pleased with the gross margin in Q1, delivering 43.9% gross margin, which, as you pointed out, was up 660 basis points year-over-year and 260 basis points on a sequential basis. Even when you look at the incremental gross margin in the quarter on a sequential basis was approximately 75%. As you've seen in the prepared remarks, we've also guided for Q2 fiscal '26 with further gross margin improvement in the range of 44% to 45%. So that gives you to 44.5% at the midpoint, which gives you on or about 65% of incremental gross margin on a sequential basis. Looking forward, obviously, as a company, we're going to continue to focus on further gross margin improvements. And I'm comfortable to have incremental gross margins on a sequential basis of approximately 50%, and that will drive some further gross margin improvement. Operator: We have the next question from the line of Aaron Rakers from Wells Fargo. Aaron Rakers: I think in the prepared remarks, you alluded to even further extending out UltraSMR. It's good to hear kind of a reaffirmation of the HAMR road map. But I'm curious if you could unpack that a little bit more if there's further room above and beyond the 36 terabytes that you see for UltraSMR, is there a 12-platter stack? I know one of your smaller competitors recently made some announcements around that. I'm just curious of how far before we can get to HAMR if there's further potential upward expansion on average capacities? Tiang Yew Tan: Yes, Aaron. So as we've highlighted in the prepared remarks, we've pulled in the qualification process of our next-generation ePMR product to the first quarter of calendar year 2026. Initially, in our road map, it was in the first half of calendar year 2026. In the current road map, the capacity points are scheduled to be at 28 terabytes CMR and 36 terabytes UltraSMR, but I'll say we have very innovative and creative engineers. So they will obviously continue to push the capacity points, and we'll see where we get to by time we actually get to production ramp and qualification completeness. On HAMR, as you mentioned, we also pulled forward the qualification process by half year. As we've highlighted in our road map in the past, the plan was to start HAMR qualification in the second half of calendar year 2026. We've now pulled that in into the first half of calendar year 2026 with one customer and we look to expand that to up to 3 customers by the end of the calendar year. And that's really a testimony to the comments I've made last quarter, where I said I was very pleased with the progress that we've been making in terms of areal density improvements, in terms of our capability to build a highly scalable product. Our focus now is ensuring that we are able to deliver products with the right reliability and right yields that are similar in sort of capacity and capability to our ePMR portfolio, which is what our customers expect of us. Ambrish Srivastava: Do you have a follow-up? Aaron Rakers: Yes, I do. I guess thinking about kind of sticking with C.J.'s comments, we're always kind of looking forward. Historically, there's been some attributes of seasonality to think about into the March quarter, but it sounds to me like you're pretty much stocked out from a capacity perspective through calendar '26. So curious if you have any thoughts on how we should maybe think about seasonality or whether or not that even applies for the March quarter at this point? Tiang Yew Tan: Yes. I mean, C.J. -- we guide 1 quarter at a time, but I would say the business has structurally changed. Close to 90% -- 89% of our business is data center right now. So there isn't really any seasonality associated to it. It's really driven by the deployment schedule of our large hyperscale customers. If there's any seasonality, it really applies to the 10% to 15% of our business that we have in the channel and our client and consumer portfolio. But I think your comment is a fair one. There really isn't, by and large, any material seasonality to our business going forward. Operator: We have the next question from the line of Erik Woodring from Morgan Stanley. Erik Woodring: Irving, your February Analyst Day feels like it was in a completely different time in the market, even though it was only 8 months ago. At the time, you talked about kind of 16% to 23% exabyte growth and something like 7% annual price per terabyte deflation. It's probably safe to say that the market has inflected since then. And just -- so I'd love to just get your updated thoughts on how we should be, maybe thinking about the growth of these 2 metrics over the next few years. Just any update you could share? Tiang Yew Tan: Yes. Thanks for the question, Erik. I think we gave a base case of 15 exabyte -- 15% CAGR exabyte growth with an AI uplift case of 23%. We're definitely seeing exabyte growth trend more towards that 23% growth rate, especially as we get into these longer-term agreements. In fact, firm POs, we have pretty much throughout all of calendar year '26, and we have agreements now for '27 and discussions with customers for durations even longer than that. We are clearly seeing demand trending more towards that 23% range. And then on the cost side, I think, the sort of mid- to high single-digit cost down is probably still a safe assumption. Ambrish Srivastava: Do you have a follow-up, Erik? Erik Woodring: Super. I do. Irving, I'd just also love to get your perspective on how short do you think demand is relative -- or excuse me, supply is relative to demand today? And just based on kind of your new product introduction time line, when do you think that supply can maybe more materially expand such that your EV growth really reflects more so demand than supply? Tiang Yew Tan: Yes. Thanks for the question, Erik. Look, I think calendar year 2026, the supply-demand balance is going to be -- continue to be very supply constrained with the ramp-up of the new capabilities. Both on the ePMR portoflio and HAMR, we expect to see more exabytes probably coming on stream in the second half of calendar year '27. Operator: We have the next question from the line of Amit D. from Evercore. Amit Daryanani: I guess maybe to start with, Irving, it sounds like you're pulling in, at least the start of the HAMR qualification a bit earlier than expected. Can you just talk about how long does it normally take for a product to go from qualification to deployment and do you see HAMR being roughly in line to that? Or could it be done quicker? Tiang Yew Tan: Yes. Thanks for the question, Amit. Yes, we are pulling in our HAMR qualification by half year, as I mentioned, from the second half of 2016 into the first half of '26. If we use our ePMR portfolio as a proxy, we typically are able to go from start of qualification to completion and ramp in roughly 2 to 3 quarters. That's the sort of target that we're working to. And that's why we talked about the ramp in the first half of calendar year '27 for our HAMR products. But again, I reiterate our focus is really on ensuring that we not only qualify a product and can ramp it, but we're delivering a reliable product to our customers as well. The last thing we want to do is qualify product, ramp it up, and then we have production level challenges with our customers. So that's what our focus is on. But in the meantime, we serve our next generation of ePMR that we are starting qualification in calendar Q1 of '26. That we anticipate to qualify in 2 quarters and ramp very quickly thereafter as per the current generation of ePMR that we've delivered as well. Ambrish Srivastava: Do you have a follow-up, Amit. Amit Daryanani: I do .You folks talked about leveraging AI internally. Can you just talk about what sort of productivity savings you think Western Digital can realize as you deploy AI internally? And does that sort of imply that as revenues keep growing, even as you keep OpEx flat in the $370 million, $375 million range. I'd love to just understand what does AI implementation internally mean? What does that mean from a productivity or savings basis for the company? Tiang Yew Tan: Yes. Thanks for the question. We have a series of AI initiatives that spread across the enterprise, as we've highlighted in the prepared remarks as well. We are clearly seeing a benefit in our manufacturing operations with -- for AI use cases where we're seeing 10% productivity gain. It's really resulting in faster -- better yields and faster throughput of our products. We've also started to use AI in helping us rewrite some of our firmware. We are seeing gains in the space of about 20% productivity gains there. So -- but it's still early days. I think there's quite a -- still fair amount of experimentation and exploration, but we see tremendous opportunity in the sort of early use cases that we've been able to apply AI into the enterprise has yielded very positive results. Operator: We have the next question from the line of Wamsi Mohan from Bank of America. Joseph Leeman: This is Joseph Leeman on for Wamsi. How should we be thinking about the mix of a $2.2 million ePMR drive you shipped in the quarter? I'm not sure if I heard correctly, I think you said it was about 70 exabytes. So that's about 31 terabytes per drive. Does the mix change from quarter-to-quarter? Or is that just going to trend higher, especially once the next qualification comes through? Tiang Yew Tan: Yes. So your numbers are right. So it was 2.2 million units sold and delivered, roughly 70 exabytes. This quarter, we are planning to ship over 3 million units. We don't anticipate the mix to really change that much. So it's pretty much, pretty consistent based on the customer profile that we have. Ambrish Srivastava: Did you have a follow-up? Joseph Leeman: No follow-up. Operator: We have the next question from the line of Karl Ackerman from BNP Paribas. Karl Ackerman: I was hoping you could discuss the breadth and stickiness of the announced price increase you disseminated in September. In particular, since much of your volume is on long-term agreements, are ASP improvements only to volume that is not on LTAs? So could you talk about that, that would be helpful. Tiang Yew Tan: Yes. The letter that we sent out, Karl was predominantly to our channel customers. So it really affects predominantly our client and consumer portfolio and probably the lower end of our nearline capacity drives. And that was -- that's really roughly only about 10% to 15% of our business. For all our hyperscale customers that are on some POs, LTAs, those are discrete commercial arrangements that we have with them that were not affected by that letter. Ambrish Srivastava: A follow-up for you, Karl. Karl Ackerman: Excuse me, yes, if I may. I was -- it seems you have several months remaining to divest the remaining stake of SanDisk without incurring a tax penalty. Having said that, that investment in SanDisk is proving quite prescient. So could you perhaps update your thoughts on whether you intend to divest remaining stake and/or if you do -- and if you do, what your cash usage plans would be, whether to pay down debt, invest in head and media, buybacks, et cetera. Kris Sennesael: Yes. So during Q1 of fiscal '26, we did not monetize the remaining stake in SanDisk. And so we still have 7.5 million shares. It is our intention to monetize that stake prior to the expiration of the 1-year anniversary of the separation, which is February 21. Last time when we did the monetization, we did a debt for equity exchange and we haven't made up our mind how we are going to do it, but it could potentially be a similar transaction like we did the first time. Operator: We have the next question from the line of Tom O'Malley from Barclays. Thomas O'Malley: I wanted to go into the long-term agreements. Irving, during the pandemic, we've been conditioned with kind of the DRAM and NAND suppliers to think about long-term agreements to something that is really good while things are moving up and to the right and kind of get torn up when things correct. Could you talk about the hooks that are in these agreements? Are these take-or-pay? How are they structured so that you feel confident around your ability to get value for the length of agreements that you're signing? Tiang Yew Tan: Sure. As I highlighted for 5 of our hyperscale customers, we actually have firm POs. So these are not LTAs. These are firm POs that have been placed on us. And for 1 of our largest hyperscale customers, we have an agreement for all of calendar year '27 with quite significant amount of commercial teeth in them. So it's quite a different environment where I would say we are moving to a world where we have firm purchase orders. And even with longer-term agreements, there are appropriate commercial terms in there to protect ourselves in the case of any adjustments in their forecast. Ambrish Srivastava: Do you have a follow-up, Tom? Thomas O'Malley: Yes. I've been asking this question throughout earnings here. We heard from Lam about their impact to AI spend. I asked Seagate just on what they think on $100 billion of AI spend you would see from a benefit to their business. They kind of talked about a high single-digit percentage of CapEx traditionally has gone there. Do you guys have any different view or would you be more nuanced in the way you looked at that? Kris Sennesael: Yes, I would say it's a bit more nuanced. We do track it. There's not a direct correlation to it. Obviously, the big spend in AI goes to GPUs and HBMs and power. But we've seen the percentage of CapEx on HDDs go from probably low single digits to trending more towards the 4% to 5% range. Operator: We have the next question from the line of Harlan Sur from JPMorgan. Harlan Sur: Congratulations on the strong execution. This year, it looks like nearline exabyte growth is trending more towards that sort of 35% range for the full year. You drove 36% year-over-year growth in June, 30% growth during the September quarter. You've got an order book that extends out over the next, call it, 12 months, which is reflective, like you said, of your customers' exabyte demand profiles. Does the forward exabyte demand profile really suggest the normalization back to a 23% demand CAGR as you talked about, Irving, or is that more of a supply constraint-driven profile and demand is really trending above that range. My point is that given all this AI infrastructure investment in compute, networking, memory and storage, a 23% bit demand CAGR may not be too conservative, but wanted to get your views. Tiang Yew Tan: Yes, it's a good question. I would say it's still an evolving environment where the CAGRs continue to increase. As I mentioned, if you go back just less than 12 months ago, we thought mid-teens was the right number. We're now seeing trending to the 23% range. With potential as we fast forward to the '27, '28 time frame to increase even more, but that's something we're working through customers to ensure that we continue to drive areal density improvements to be able to support the CAGR growth that they're expecting going forward. So it's something we're working very closely with them. I think the big difference is that in the environment that we're facing, we're getting much deeper insight into our customers' forward-looking exabyte requirements, a much closer partnership in terms of how they want to more rapidly adopt a higher capacity drives to be able to support their data storage requirements going forward. Ambrish Srivastava: You have a follow-up, Harlan? Harlan Sur: Yes, just a quick follow-up. So on the UltraSMR mix shift, good to see the team at a 50-50 mix. I don't think you guys answered this question, but given the order book, POs, LTAs, what is the mix trend on UltraSMR into 2026? And is this mix shift towards UltraSMR a rather important part of the driver of the stronger incremental gross margin flow through? Tiang Yew Tan: Yes. We said we will see the mix of UltraSMR continue to increase over time, both as existing customers who have qualified UltraSMR, increased their UltraSMR footprint and we have another 2 customers that are going through UltraSMR qualification, as we speak right now. So we anticipate the take-up of UltraSMR to be an increasing part of our portfolio and continue to grow going forward. Kris Sennesael: Yes. And Harlan, just in general, the transition to higher capacity drives typically translate into a better gross margin profile. Ambrish Srivastava: And if I may add, Harlan, if I may add, this is Ambrish. Remember, UltraSMR is also translatable to our HAMR. So that's something to keep in mind as well. Operator: We have the next question from the line of Asiya Merchant from Citigroup. Asiya Merchant: Great results here. If I can, just trying to unpack pretty strong beat relative to the guide. Given that you guys are in these long-term agreements and there is capacity constraints, just if you could help me unpack what drove the upside? Was it some pricing that came through? Was there some extra drive that you were able to push through. I don't know if it was a mix shift. If you could just help me unpack that, that would be great. Kris Sennesael: Yes. So as it relates to the upside in revenue was mostly driven by great execution by our manufacturing operations organization, pushing really hard on the supply side and improving yields, improving throughput and that created some upside on the supply side for us from a revenue point of view. Also on the gross margin side, we had some upside there, mostly driven by a strong price environment where we have seen some modest low single-digits ASP per terabyte increases on a sequential and a year-over-year basis. In addition to that, as I just indicated, the shift to higher capacity drives is definitely benefiting the gross margin profile. And our customers, they want more exabytes, and they know they can get more exabytes as they move faster to higher capacity drives. And so that was definitely beneficial. And in addition to that, again, the operations team is executing strong on driving down cost internally as well throughout the supply chain and a combination of all of that provided some upside in the Q1 financial results. Ambrish Srivastava: Do you have a follow-up, Asiya? Asiya Merchant: Sure. And how should I think about then, given you guys have been running very well on your productivity initiatives, how should we think about that cost decline, especially given you have some calls that are ramping up faster than expected. How should we think about the cost declines here in the outer quarters. Kris Sennesael: Yes. Again, the team continues to execute really well. Again, a combination of moving to higher capacity drives, which results in a lower cost per terabyte, but then also really working on productivity, yield improvements, test time reductions and driving operational efficiencies throughout the whole supply chain. And so a combination of all of that is delivering the mid- to high single digits cost per terabyte reductions that we've indicated at the Analyst Day and that you have seen being executed in the last couple of quarters. Operator: We have the next question from the line of Steven Fox from Fox Advisors. Steven Fox: If I adjust your free cash flow for the tax payment, it's $930 million against the non-GAAP net income of $655 million. I'm assuming there's something unusually positive in that number. And I'm trying just to right size how we should think about free cash flows relative to net income going forward because that's just a tremendous performance in 1 quarter. Kris Sennesael: Yes. So very pleased with the very strong free cash flow of $599 million. This is the second quarter in a row where the free cash flow margin is well above 20%. So great execution there. As it relates to Q1 of fiscal '26, we had a major reduction in our working capital. So in part driven by a reduction in our DSOs as the billings linearity during the quarter is very strong. Days of inventory was slightly up, but also the days payable went up. And so great execution there by the team. Unfortunately, as you know, once you've obtained some major reductions in working capital, it's hard to repeat that each and every quarter. It's our goal to maintain it at this level, but you will not see the incremental benefit that we saw in Q1 of fiscal '26. Anyhow, I think going forward, I feel comfortable with a free cash flow margin in the plus 20% range. Ambrish Srivastava: Do you have a follow-up, Steve? Steven Fox: Yes. Just real quick on the prior question. So it's maybe a chicken and egg question, but you said the customers are recognizing the need to mix up to get the exabytes they need. So is it the fact that they're pushing harder on you that you're then pushing harder on your development team to get these higher mix products out? Is that sort of the dynamic that's going on? Tiang Yew Tan: I think it's a win-win scenario, Steve, that sort of both organizations are working very closely. Customers obviously want higher capacity drives to fulfill the exabyte demand. It's also beneficial for them from a TCO standpoint. Don't forget when you have high capacity drives, rack densities are much higher, and therefore, TCO is much better as well. And from our standpoint, it's a great way for us to better support the demand that our customers have on us and for us to be able to support the strong growth trajectory that we are seeing both in cloud and in AI going forward. Ambrish Srivastava: Thank you, Steve. Operator, can we have the last question, please? Operator: We have the last question from the line of Krish Sankar from TD Cowen. Hadi Orabi: Strong quarter. This is Eddy for Krish. I do have a long-term question regarding the shortages. It seems like you and your main peer are very disciplined about adding capacity, which, of course, makes sense from a financial standpoint. But I do wonder how you balance that discipline on one hand with the risk of pushing customers more towards SSDs because they have no other choice. Which in turn results in more NAND capacity in the industry, which lowers NAND prices longer term. So it's a tricky situation, and it would be great to know how your company is planning on navigating this? Tiang Yew Tan: Yes. Thanks for the question. It's something we look closely at as well. I think the good news is that AI, as we highlighted, is a prolific generator of data, and therefore, more data is getting stored as the value of data increases. So all boats are rising. The demand for NAND bits, hard drive bits and even tape bits are increasing as a result. And there are specific use case that makes sense for them to use SSDs. But fundamentally, if you look at data center architectures and the tiering between SSDs, HDDs and tape that is unlikely to change over time, right? And we anticipate that HDDs will continue to remain roughly about 80% of the bits that start within the data center. And it's also important to recognize there are some -- there are inherent TCO benefits of HDDs as there are reliability challenges in terms of the number of rights that QLC can handle as well. So given all that dynamics, we don't anticipate seeing any major change there. There may be quarter-to-quarter variations because of supply-demand dynamics. But sort of the 80% of exabytes being stored on HDD, we anticipate will be the case going forward as well. Ambrish Srivastava: Do you have a follow-up, Eddy? Hadi Orabi: Yes, sure. Thank you, Irving. Your main peer did purchase Intevac earlier this year, which sells equipment that are needed for HAMR. And you guys sounded pretty positive about the qualification. I do wonder if you have fully navigated the risk from the Intevac purchase or it's something that's still in progress today. Tiang Yew Tan: Yes. We have fully mitigated the risks related to Intevac. As we highlighted when the acquisition first happened by our peer, all our HAMR development is actually being done on a separate system called ANELVA that's provided to us by Canon. Operator: This concludes our question-and-answer session. I would like to turn the conference back over to the management for any closing remarks. Tiang Yew Tan: Thank you all again for joining us today and for your interest in Western Digital. At Western Digital, we continue to make good progress executing on our strategy. We look forward to sharing more with you on some of the exciting new innovations that we've been working on and the steps that we are taking to create long-term shareholder value. Let me close by giving a shout out to all our employees, our Western Digital drivers and our ecosystem partners who show up every day, making a difference for our customers, shareholders and each other. Thank you all very much, and have a wonderful day ahead. Operator: Thank you. The conference call has now concluded. Thank you for attending today's presentation. You may now disconnect.
Operator: Greetings, and welcome to the Digimarc Corporation Q3 2025 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, George Karamanos. You may begin. George Karamanos: Thank you so much. Welcome, everyone, to our Q3 conference call. Riley McCormack, our CEO; and Charles Beck, our CFO, are with me on the call today. On this call, we'll provide a business update and discuss Q3 2025 financial results. This will be followed by a question-and-answer forum. We have posted our prepared remarks in the Investor Relations section of our website and will archive this webcast there. For those of you dialing in, this is a reminder that we are simulcasting a presentation that Riley and Charles will walk through today. If you would like to follow along with the slide, I would encourage you to join our webcast as referenced in our earnings press release shared earlier today. Before we begin, let me remind everyone that today's discussion contains forward-looking statements that have risks and uncertainties. Please refer to our press release for more information on the specific risk factors that could cause actual results to differ materially. Riley will now provide a business update. Riley McCormack: Thank you, George, and hello, everyone. On this call, we will walk through Digimarc's Q3 performance, highlight our strategic progress across product innovation and commercial execution, share updates on our financial metrics such as ARR and cash burn, and provide clarity on where we are focused heading into the last quarter of the year. In Q3, we made significant progress in advancing towards widespread adoption of our gift card solution and closed multiple upsell opportunities in the product authentication space, including our expansion to a sixth country with a global tobacco company. We quickly turned an inbound inquiry from a major pharmaceutical company into a paid pilot for a novel application of our product authentication solution that, depending on pilot results, may have wide applicability not only across other pharmaceutical companies but additional industries as well. We launched a revolutionary new digitized security label solution to help brands upgrade from analog, easy-to-replicate and low value-add holograms. And we made significant progress advancing our digital authentication offerings, while in parallel growing pipeline, setting ourselves up to take full advantage of this nascent and exciting market in 2026 and beyond. We also continue to harvest the benefits of our recently completed corporate reorganization. Operationally, it has allowed us to increase our focus on the areas most likely to deliver the scalable and repeatable business we must always focus on delivery. Financially, the reorganization has resulted in a meaningful reduction in operating expenses and cash usage, and we remain on track to deliver positive free cash flow and positive non-GAAP net income in Q4 of 2025 even with our recent decision to invest in more resources to accelerate growth in our focus areas of retail loss prevention and digital authentication. As has been shared previously, our 3 focus areas are retail loss prevention, product authentication and digital authentication. We have several significant ARR generation opportunities in front of us, such as protecting the world's gift cards that exhibit strong demand-pull characteristics with a goal of much quicker time to revenue relative to some of our identification use cases. The decision to focus our time and resources on these 3 core areas was supported by deep market research, validated by customer feedback and further confirmed independently by work we commissioned from our consulting partners. With that said, we remain firm believers in our positioning and our ability to execute on the various ecosystem-driven opportunities, as they eventually become ripe enough to actively pursue. Our greatest near-term opportunity is retail loss prevention and more specifically, our gift card solution. On this front, we made substantial progress in our march towards gaining widespread adoption, aided in large part of the industry's hyperfocus on finding a solution to the fraud that is creating an existential threat to their business. The global gift card industry is estimated to represent approximately $1 trillion of stored value, having reached this impressive milestone due to the many benefits these cards provide all stakeholders, most importantly, consumers. Unfortunately, this large market opportunity has not escaped the attention of sophisticated state-sponsored bad actors and industry growth is currently being negatively impacted by the ever more advanced attacks targeting this global currency. Digimarc's 28-year history working with the world central banks to protect the vast majority of banknotes in circulation worldwide, combined with our decade-plus experience at retail front-of-store, ideally positions us to help this industry reaccelerate its growth. In addition to reducing fraud in the many direct and indirect cost of that fraud being borne by brands, retailers and consumers, our solution also -- also allows the entire industry to improve the marketing, merchandising and giftability of gift cards. These 3 elements were critical pillars of the industry's historic growth and all 3 have been negatively impacted by existing security solutions. Along with fraud reduction, the ability for the industry to reinvest in these 3 pillars to yet against supercharge sales is becoming another selling point of our solution. Our solution also allows for reduced packaging waste and improved sustainability, a value proposition that is resonating with some iconic global brands and is compliant with the ever-increasing number of regulations being put in place, most front of mind currently in the U.S. are the Maryland and New Jersey laws. As more industry participants are exposed to our solution, additional benefits become clear, a wonderful byproduct of being the first adaptable, extensible and technology-driven security layer in this dynamic industry. We provide a solution that is more secure than the highest security solutions on the market today while allowing the industry to regain the use of the powerful growth tools they've had to abandon these past few years. Turning now to the results from our initial rollout. The first Digimarc-protected gift cards reached shelfs in August. Major brands participating included Target, Home Depot, Nordstrom and Blackhawk Network multi-retailer cards. The response has been extremely positive and all KPIs have been easily surpassed. These KPIs include multiple metrics measuring the effectiveness of our solution plus our impact on the industry's operational efficiency. As we've shared in the past, one of the most powerful facets of this opportunity is that laggards in the adoption of our gift card solution will bear the compounded cost of an increasing percentage of an ever-increasing amount of fraud. We and our partners believe this positions us for powerful demand pull dynamic. The detailed results of our initial role have been widely shared within the industry, and we expect multiple major retailers to start selling Digimarc-protected gift cards within the next 2 quarters, carrying an expanded number of closed-loop brands as well as initial open-loop cards. As a reminder, closed-loop cards are gift cards that can only be redeemed at specific retailers. Open-loop cards are issued by the credit card companies and can be redeemed at any location where that credit card is accepted. As a reminder, we intend to predominantly sell our solution to gift card manufacturers who will apply our technology during their normal printing process before delivering the cards as they currently do today. We have built our go-to-market strategy around trying to solve for 2 often conflicting goals, providing a revolutionary new solution and minimizing impact on the ecosystem's existing workflow. I think the team has done an incredible job of doing just that. We are currently in commercial discussions with 8 gift card manufacturers as well as 1 additional direct customer. These discussions are being shaped, as they always are, by our desire to be an excellent partner to the industry and thus balance, a, the dynamic that laggards in adoption will bear compounding cost of fraud and b, the immediacy of a much broader rollout. Our plan is to ensure we contract for enough 2026 committed annual capacity so we can incredibly address burgeoning industry concerns about whether there will be adequate capacity to avoid the potential for involuntary laggards and then quickly move from commercial discussions to working with our initial partner or partners to flawlessly execute on the expected impending ramp of Digimarc-protected gift card production. The time lines to deliver this large ramp are very tight, and therefore, our goal is to quickly move to the contracting stage and to only contract with a small subset of these 8 printers right now, as we believe with the right partners, we can strike the optimal balance between our 2 goals. Turning now to our product authentication solutions. We closed multiple upsell deals with existing Digimarc Validate customers, reflecting both increased contract value and the expansion of our solution to new geographies and new brands, including the expansion of our solution in the sixth country with a global tobacco company with operations in approximately 175 more. As we've repeatedly stated, when we solve our customers' most challenging problems, we expect to be an upsell and cross-sell company for a very long time. We also closed a paid pilot with a major pharmaceutical company that approached us with a pressing problem they've been unable to solve using other means. I am proud of how quickly and how deeply the team diligenced the problem, allowing them to find a potential solution using existing Validate capabilities. I'm equally as excited for us to successfully execute on the pilot because if we can indeed solve this problem, our solution should be widely applicable across the entire pharma vertical and other verticals as well. Finally, we also launched a revolutionary new digitized security label solution to help brands upgrade from analog, easy-to-replicate and low value-add holograms. This label can be authenticated by consumers and field agents with mobile phones and other devices, providing deterministic B2B or B2C authentication with analytics all in one place. Touching now on our digital authentication solutions. As mentioned on our last 3 calls, we chose to be conservative about this area's contribution to 2025 ARR. We made this decision to help ensure we remain focused on optimizing our work in this area for the long term as opposed to making decisions that might lead to short-term revenue but would come at the cost of our ultimate potential scale. Not only did we exceed our annual target in the first 6 months of the year as we shared last year, but we are now in a position to harvest the fruits of this decision in 2026 and beyond. The twin catalyst of the relentless advance of AI models and agents and the rapid progression of content credentials have created a wave of awareness and urgency for a robust, scalable, secure and imperceptible perpetual and deterministic solution to address the many trust and authenticity problems growing in the digital world. We expect this space to continue its recent noteworthy growth and evolution. While some of the nascent digital use cases might be served, at least in the interim with good enough offerings, what has become apparent to us in the last few months is that the aforementioned twin catalysts are opening the market for use cases where good enough just simply will not do. Our technology, our history, our credibility, our expertise, our experience and our first-to-market with and co-leadership of the digital watermarking component of the C2PA standard are all coalescing to ensure we are well positioned to serve this ever-growing wave. We pioneered this space. This is quite literally what we were born to do, and the market is finally here. After deep analysis across 3 vectors, market demand, our technological differentiation and buyer synergy, we have narrowed our focus in the digital authentication space to 4 use cases, multiple flavors of leak detection, internal compliance, piracy prevention and royalty monitoring. Our pipelines of both opportunities and partners are growing prior to widespread marketing efforts and we are now resourcing this area with the expectation it will be a significant contributor to our 2026 growth and beyond. We are confident in the opportunities provided in our 3 key focus areas and are excited by the results our increased focus are already beginning to deliver. Ecosystem-based sales are great because of their size, but the sales cycles can be slow, expensive and multiple constituencies must adopt before meaningful ROI is unlocked. Our strategic shift allows for the building of a scalable and repeatable business where we could fail fast, iterate and win often and allow these massive but not yet quite ripe for the picking opportunities to provide the potential for another layer of tomorrow's growth. I will now turn the call over to Charles to discuss our financial results. Charles Beck: Thank you, Riley, and hello, everyone. Ending ARR for Q3 was $15.8 million compared to $18.7 million for Q3 last year. The decrease reflects $3.5 million from the DRS contract that lapsed in Q2 this year. Excluding this headwind, ARR grew $600,000 year-over-year. That growth, however, was largely muted by higher other customer churn and are choosing to be strategically price aggressive on products outside of our focus areas. As I've stated previously, we expected these impacts as we sharpened our go-to-market focus. We believe the churn is now largely behind us, except for the renegotiation of the retailer contract we mentioned last quarter, which will reduce ARR by $3.1 million in the fourth quarter. Despite this headwind, we expect ARR to trough in Q4 and to reaccelerate thereafter into 2026, largely from increasing penetration of our gift card solution and growth in digital authentication. Total revenue was $7.6 million, a decrease of $1.8 million or 19% from $9.4 million in Q3 last year. Subscription revenue, which accounted for 60% of total revenue for the quarter, decreased 13% from $5.3 million to $4.6 million. The decrease largely reflects the impact of the expired DRS contract I referenced on the prior slide. Service revenue decreased 27% from $4.2 million to $3.1 million, reflecting lower government service revenue from the central banks as expected, given the lower 2025 program budget we have discussed on prior earnings calls, and no revenue from HolyGrail recycling products in Q3 of this year as those projects concluded earlier this year. Subscription gross profit margin was 86% for the quarter, flat with Q3 last year. On the last earnings call, I shared that we expected to see a downward blip in our subscription margins for anticipated costs we would incur to migrate our customers from legacy platforms to Digimarc Illuminate. Due to some incredible work from our team, we actually saw an immediate reduction in our costs, with subscription costs decreasing 13% year-over-year. We expect to generate additional savings as we continue our work. Service gross profit margin was 57% for the quarter, down 4 points from 61% in Q3 last year. The decrease was due to a more favorable mix of revenue and cost last year. As a reminder, we expect service gross profit margin to typically be in the mid-50s. Operating expenses were $12.8 million for the quarter, down $4.5 million or 26% from $17.3 million in Q3 last year. The large reduction in costs reflects lower compensation costs due to the reorganization in Q1 this year and lower other cash costs from our streamlining efforts. We still expect even more cost savings in Q4 from our streamlining efforts as not all the benefits were fully realized in Q3. Non-GAAP expenses, which exclude noncash and nonrecurring items were $8.6 million for the quarter, down $5.5 million or 39% from $14.1 million in Q3 last year. Again, the decrease is due to the impact of the reorganization and streamlining efforts. Net loss per share for the quarter was $0.38 versus $0.50 in Q3 last year. Non-GAAP net loss per share for the quarter was $0.10 versus $0.28 in Q3 last year. We remain on track to generate positive non-GAAP net income in Q4 even with our recent decision to invest in more resources to accelerate growth in our focus areas of retail loss prevention and digital authentication. Regarding cash flow, we ended the quarter with $12.6 million in cash and short-term investments. Free cash flow usage was down considerably from $7.3 million in Q3 last year to $3.1 million in Q3 this year, a decrease of $4.2 million or 58%. The decrease largely reflects a significant reduction in our total expenses. Looking forward, we remain on track to deliver positive free cash flow in Q4 despite our recent decision to invest in more resources to accelerate growth in our focus areas, again, of retail loss prevention and digital authentication. Looking further ahead, we expect to rebuild our cash balance via operating cash flow throughout 2026. For further discussion of our financial results and risks and prospects for our business, please see our Form 10-Q that will be filed with the SEC. I'll now turn the call back over to Riley for final remarks. Riley McCormack: Thank you, Charles. In the wake of the relentless acceleration of AI models and agents, a vacuum of trust and authenticity is being created. Trust is fast becoming the only currency that matters and the future will belong to companies that make that currency scalable. We believe Digimarc is ideally positioned to lead that charge. We are focused on delivering a future where humans and intelligent systems alike can verify what's real, protect what matters and move forward with confidence. We are focused on filling the ever-expanding vacuum by positioning ourselves to deliver trust in every interaction, spanning both the physical and digital worlds. We are building the trust layer for the modern world, a layer that is needed now more than ever and is forming a massive opportunity we were created to deliver. Operator, we'll now open the call for questions. Operator: [Operator Instructions] Our first question comes from the line of Jeff Bernstein with Silverberg Bernstein. Jeffrey Milton Bernstein: Just a couple of unrelated questions. One, can you just give an update now on HolyGrail? What's happening there now? Riley McCormack: Yes. So Jeff, it's in our slide. We gave an update on what we're doing and not just HolyGrail, right, across all recycling opportunities. So as we announced a couple of quarters ago, Belgium is getting going and there's conversations in Germany. And actually, we included a link in our deck. You can click on some more details on both of these. Jeffrey Milton Bernstein: Okay. And so these are still -- Belgium is a full country pilot essentially, right? Riley McCormack: Yes. Jeff, if you go to the website, you can see all of this. It's on flexibles, but yes, it's across all of Belgium. Jeffrey Milton Bernstein: Yes. Got you. Okay. All right. And then you mentioned the impact in Q4 of the retailer contract renegotiation. Does that mean that there's still some revenue there or there's still something going on there or is it just that the contract lapsed and there's the impact in Q4? Riley McCormack: Yes. We still have a relationship. It's still a value customer. We're not going to talk about any customers by name or details, but I would point you, Jeff, to what I shared in the last call in my prepared remarks and an update Charlie provided today, but they're absolutely still a customer, and have wonderful opportunities with them across loss prevention specifically in the gift card space. Jeffrey Milton Bernstein: Got you. So -- but that prior particular contract is over, not being renewed? Riley McCormack: Correct. We have a contract renegotiated that led to large downturn. So yes. But we still have other contracts open with them, Jeff. Jeffrey Milton Bernstein: Right. Understand. Understand. No, that's perfect. And then just interested in your thoughts around the -- I guess, it was AB 853 in the final version or whatever, but the California AI-related law that got passed that had some digital watermarking language in it. And what, if anything, it means? Or is it sort of really a long-term kind of opportunity? Riley McCormack: Yes. Unfortunately, this one did not have digital watermarking language in it. They talked about a couple of requirements that might play on this space. Our belief is a couple of things, and this hasn't changed, is that, first of all, there is not a single system of trust and authenticity in the world that is based on, I guess, fakes or synthetic content being marked as such, right? It's always an opt-in because that's where the value comes if it is removed. So one, I would -- our belief has always been that, yes, it might be important to label certain things as AI-generated. But really what's important is giving human beings the ability to optionally to not mandate, right, respect privates to mark their items as authentic. That's how systems of trust and authenticity work. And then two, without having a permanent tether, right? So what this law is talking about is metadata. And metadata right now -- until Internet is completely re-architected, which I don't think is going to happen in the next couple of hundred years, metadata is stripped out. So excited to see governments take action in terms of a step in the right direction. I don't -- our belief is this doesn't go anywhere near far enough and the previous bill from last year would have addressed all of these concerns, and we'll see how this plays out. But I would also point you to, Jeff, when we talk about our digital space, right, you'll notice that providence and authenticity is not necessarily an area we're focused on right now. That's for a couple of reasons. This might be an area where good enough for the time being is good enough, but more importantly, regulations are not quick catalysts for revenue. So even when a regulation were to take place and -- look, we've seen this in your first question about recycling, right? PPWR passed a couple of years ago, it still takes the time. So we're not looking for regulation to drive business. I think regulation is a nice sort of cleanup, maybe to get the last 10% or 20% of the market. But we're focused on selling things that actually people are really interested to purchase themselves because of an immediate ROI, not because some government says something because some other government is going to say something else. Operator: [Operator Instructions] Your next question comes from the line of Jeff Van Rhee with Craig-Hallum Capital Group. Vijay Homan: This is Vijay Homan on for Jeff Van Rhee. Just kind of a quick one. You've got the first few retailers using Digimarc-protected cards. Just kind of curious how that's going to ramp? Is that about winning more partners, adding more of their retailers, adding geographies? Just kind of what will be the drivers of that ramp? And what are the steps that are going to take you from A to B? Riley McCormack: Yes. Great question, and the answer is all of the above, right? So our focus in the industry and our partners' focus is on lighting up more and more retailers, lighting up more and more brands for those cards to flow through those retailers both in the U.S. and other countries in North America and countries around the globe and also cards that aren't necessarily sold through these existing channels today. So the answer is all of the above. What we've talked about with our initial rollout was the results, and that's giving the confidence -- the industry the confidence to take this in a broader direction across multiple different vectors. Vijay Homan: Okay. Got it. And then just one more. You kind of -- you made some executive changes to the sales org obviously with Tom Benton leaving. If you could just walk us through some of the go-to-market changes that have come out of that and kind of some of the additional steps you foresee taking? Riley McCormack: Yes, I'm not sure what you're saying in terms of what's the go-to-market. Can you ask the question maybe more directly where you're trying to get at? Vijay Homan: No, I was just curious if there's any updates there. Just anything kind of that's changed now that the personnel is different. Riley McCormack: No, nothing has changed. We still have the full rev team and marketing team moving forward with their jobs. Operator: There are no further questions at this time. This now concludes our question-and-answer session. Ladies and gentlemen, thank you for your participation. This does conclude today's teleconference. You may disconnect your lines, and have a wonderful day.
Operator: Welcome to the Third Quarter 2025 ICF Earnings Conference Call. My name is Lauren Cannon, and I will be your operator for today's call. [Operator Instructions] Please be advised that today's conference is being recorded. I will now turn the call over to Lynn Morgen of AdvisIRy Partners. Lynn, you may begin. Lynn Morgen: Thank you, operator. Good afternoon, everyone, and thank you for joining us to review ICF's third quarter 2025 performance. With us today from ICF are John Wasson, Chair and CEO; and Barry Broadus, CFO. Joining them is James Morgan, Chief Operating Officer. During this conference call, we will make forward-looking statements to assist you in understanding ICF management's expectations about our future performance. These statements are subject to a number of risks that could cause actual events and results to differ materially, and I refer you to our October 30, 2025, press release and our SEC filings for discussions of those risks. In addition, our statements during this call are based on our views as of today. We anticipate that future developments will cause our views to change. Please consider the information presented in that light. We may, at some point, elect to update the forward-looking statements made today, but specifically disclaim any obligation to do so. I will now turn over the call to ICF's CEO, John Wasson, to discuss third quarter 2025 performance. John? John Wasson: Thank you, Lynn, and thank you all for joining us to review our third quarter 2025 results and discuss our business outlook. This was another quarter of resilient performance for ICF, demonstrating the importance of our diversified business model, our agility in managing costs within a dynamic business environment and the strength of our business development activities. Key takeaways from our third quarter results are: first, the continuing shift in our business mix with revenues from commercial clients, state and local and international government clients increasing by 13.8% and accounting for 57% of the quarter's revenues, up from 46% at the same time last year. Second, the continued robust performance in commercial energy, where revenues increased 24%, reflecting the sustained strong demand for ICF's advisory and implementation services. Third is the strong growth in our higher-margin commercial revenues, which together with our careful cost management resulted in a 10 basis point improvement in adjusted EBITDA margin, in line with our plan to maintain margins despite reduced revenue. And lastly, the value of our contract awards, which surpassed year ago levels, resulted in a book-to-bill ratio of 1.53 for the third quarter. Our year-to-date contract awards of $1.8 billion, together with our $8.4 billion pipeline supports our outlook for a return to growth in 2026. We had expected third quarter revenues to be approximately $15 million higher than reported. This variance was primarily due to delays in the ramp-up of our recently won international government contracts, although that situation is getting progressively better. And another factor was the slowdown in federal government procurement and project activities, particularly in our programmatic public health and human services areas in the latter half of Q3, leading up to the government shutdown. With the federal government on everyone's mind, I will begin my business review with our results in that area and how the government shutdown has affected ICF to date. In the third quarter, our federal government revenues declined 3% sequentially, representing a 29.8% decline from last year's third quarter. The dollar amount of our total 2025 federal revenues impacted by contract cancellations did not change in Q3 as we have not experienced any material new cancellations since our last report on July 31. However, expectations for Q3 federal revenues, as I just mentioned, were affected by the slower pace of program and procurement activity this quarter as things slowed down considerably in advance of the shutdown. There are several good news items to report in our federal government work for Q3. Approximately 1/2 of our third quarter contract awards represented work for federal government clients and about 1/2 of these wins represented new business, including broadening of scope on current contracts. This new award activity, combined with our high recompete win rates is a good indication of how well ICF's capabilities are aligned with the needs of our federal agency clients. In particular, you can see from today's release that we are winning both our recompete and new work in IT modernization. Our differentiated approach to building agile, flexible and lean engineering and product teams is allowing us to deliver value quicker and more efficiently than competitors. Approximately 80% of the work we currently perform in this area is in agile scrums and sprints and more than half is under fixed price or outcome-based contracts, which is aligned with the shift in federal contract procurement parameters. And we're also seeing growing client interest in ICF Fathom, a new suite of tailored artificial intelligence solutions and services designed specifically for federal agencies. This is a production-ready solution that can integrate seamlessly into existing systems at scale to unlock the full potential of AI to support mission outcomes. We have won a few initial contracts and have seen very positive response to this launch from several of our federal agency clients interested in areas such as citizen engagement, technical assistance, program evaluation and policy modeling. Now to the financial impact of the government shutdown. In the month of October, we estimate that ICF's revenue will be reduced by approximately $8 million and gross profit by approximately $2.5 million as a result of the current government shutdown. Our IT modernization practice has seen relatively few stop work orders. The majority of stop work orders have been related to our public health and human services work. Also, proposal activities have continued in IT modernization, although there has been some slowdown. All in all, the impact on ICF to date has been painful, but manageable, and we view this as a temporary situation. While we have taken steps to reduce costs associated with work that has been curtailed, we currently plan to retain key staff, which will position us to quickly recoup the majority of these revenues in future periods. You will see that we filed an 8-K this afternoon, noting that our named executive officers will take a 20% salary reduction for the length of the shutdown in consideration of the impact of the shutdown and in support of our employees and clients. Now I'll move on to our nonfederal government work, which accounted for 57% of our third quarter revenues and is making a positive difference for us as we navigate dynamic market conditions in the federal space. Revenues from our commercial, state and local and international government clients increased 13.8% year-on-year in the third quarter, led by a 24% increase in revenues from commercial energy clients. Our consolidated third quarter margins benefited from the increased contributions from our fast-growing commercial energy work, which represented 30% of our third quarter revenues, up from 22% in last year's third quarter. Additionally, our long-standing work for commercial clients has given ICF the experience and infrastructure to effectively work in this [indiscernible] a competitive advantage in today's federal market as federal agencies are being encouraged to adopt a more commercial business model. Third quarter revenue growth from commercial energy clients was led by strong demand from our utility clients for ICF's industry-leading energy efficiency programs and expertise in flexible load management, electrification, grid resilience and affordability, expertise that is closely aligned with the needs of our utility clients as they respond to increased demand for electricity. We are executing on new and expanded programs as well as gaining market share in both residential and commercial energy efficiency program development and implementation. Additionally, in energy advisory, we saw higher demand for our grid engineering, renewable development and transaction services. And in environment and planning, we benefited from increased renewable and transmission permitting, construction monitoring and wildfire restoration projects. We continue to see evidence that our commercial energy business will sustain its strong growth. Despite the lack of support for renewables by the new administration, we believe that renewable and storage development by the private sector on nonfederal lands will continue due to the advanced economics of these technologies and the need to meet the demands of rapid load growth. Additionally, we work across a full suite of resources supported by this administration, including natural gas, nuclear and coal that will also be important in optimally serving emerging needs for power and we have seen an uptick in development and M&A activities in these areas. We continue to benefit from the rapid increase in electricity demand associated with AI, data centers and other large loads by providing a broad range of services necessary to plan, site, permit, connect and manage such facilities. ICF is currently working with utility clients, hyperscalers and independent power and renewable energy firms, providing services ranging from location analysis, transmission planning, distribution engineering and construction permitting through community engagement and workforce development. The major growth challenge, the range of complex technical issues involved and the diversity of stakeholders make ICF well positioned for continued growth in this area. Moving on to state and local government clients. Our revenues increased 3.8% in the third quarter, primarily reflecting year-on-year growth in our technology work in the disaster recovery arena. ICF is currently supporting 95 active disaster recovery projects in 22 states and territories. This includes new contracts in California, Oregon, Virginia and Michigan, which were awarded during Q3. We continue to see HUD-funded procurement opportunities resulting from the nearly $12 billion appropriation to enable long-term recovery from disaster declarations in 2023 and 2024 and are actively positioning to compete for these procurements. Additionally, in response to uncertainty with respect to the future role of FEMA, state governments are showing additional interest in disaster case management, individual assistance as they consider the potential implications of taking on additional responsibility for initial disaster response and recovery efforts. ICF is actively engaged with state emergency management agencies, and we are broadening our partnerships in emergency response, disaster survivor assistance arena as the states prepare for the possibility of additional responsibilities. Our climate, environment and infrastructure services represent the other major component of our work for state and local government clients and revenues in this market have remained relatively stable. As federal emphasis on environmental protection declines, we are seeing many states increase their efforts to fill the gap, creating opportunities for ICF and state planning, rulemaking, stakeholder engagement, permitting and compliance. We're also experiencing increased demand for sectors with strong economic activity, including data centers, fiber networks, minerals extraction and transportation. And we're working on synergies with our disaster management teams in supporting states with recovery efforts, including Florida, New Jersey and others. We continue to benefit from solid revenue growth from international clients in the third quarter. Revenues increased 8% year-on-year. We have won key recompetes and new business. As I mentioned earlier, the ramp-up of the new contracts we've won with the European Commission and the U.K. government late in 2024 and earlier this year has been slower than we originally anticipated as we expected double-digit revenue growth in the second half of this year. We have seen sequential acceleration in the number of task orders being issued under these contracts over the last 2 quarters, but we now do not expect the full benefit of these contracts until 2026. To sum up, our third quarter performance demonstrated the benefits of ICF's diversified client base, our agility in adapting to challenging market conditions in the federal government and our success in winning recompetes and new business. I'm sure that many of you have seen the release we issued today simultaneous with our earnings announcing that Barry Broadus, our CFO, is retiring, and we have named 2 of our senior [indiscernible] new roles. First, let me say that Barry has been a tremendous asset to ICF. He has strengthened our financial capabilities, built a strong finance team and positioned ICF to take advantage of future growth opportunities. We certainly wish him all the best in his retirement. We are fortunate to have a strong group of talented leaders like James Morgan and Anne Choate to help drive our future growth. We have to have James Morgan, currently COO, to take on the additional role of CFO following the publication of ICF's full year 2025 financial results. In addition, Anne Choate, currently Executive Vice President, will take on the role of President of ICF early in 2026. I look forward to working closely with both of them to drive organic growth and acquisition growth and to implement financial strategies to build our future growth and profitability. So with that, I'll now turn the call over to Barry for a financial review. Barry? Barry Broadus: Thank you, John. We say that it's been a pleasure to work at ICF over these past 40 years. ICF is truly an amazing organization with an outstanding team of dedicated and passionate professionals. Serving as the ICF's CFO has certainly been the pinnacle of my career. I could not end my career working with a better team of people. That said, I am now pleased to provide you with some additional details on our third quarter financial performance. Third quarter revenues totaled $465.4 million compared to $517 million in the third quarter of 2024 and relatively stable with the $476.2 million reported in this year's second quarter. The year-over-year revenue comparisons reflect ongoing headwinds in our federal government business, partially offset by the continued strength across our commercial, state and local and international client base. On a year-to-date basis, revenues decreased 6.2% and revenues, excluding subcontractor and other direct costs declined 4.3%. Revenues from commercial, state and local and international clients increased 13.8% in the quarter, led by the robust growth in our commercial energy business, which posted a 24.3% year-over-year increase. On a year-to-date basis, our energy business grew approximately 25% and represented 28% of our total year-to-date revenues. The strength in this client category underscores the ongoing demand from our utility clients for ICF's expertise in energy efficiency, flexible load management and grid resilience solutions, capabilities that are increasingly critical as they address our country's growing demands for electricity. The continued strong growth in revenues from our nonfederal government clients offset a significant portion of the 29.8% year-on-year decline in federal revenues in the third quarter, reflecting the continued impact of the contract funding reductions and the procurement delays that John mentioned in his remarks. On a sequential basis, federal revenues declined only 3% as the impact of contract cancellations has remained stable following our second quarter earnings call. To date, we have seen an impact on 2025 revenues of approximately $117 million and a total backlog impact of approximately $420 million from contract cancellations and stop work orders with no material increases since our last call on July 31. Third quarter subcontractor and other direct costs declined 11.8% year-over-year and represented 24.2% of total revenues, down 50 basis points from the 24.7% in the third quarter of 2024. The decline was primarily tied to lower pass-through revenues in the federal business. As a result, a higher percentage of our revenue was tied to ICF direct labor, which generates higher margins. Third quarter gross margin expanded 50 basis points to 37.6%, primarily driven by a continued shift in our business mix towards higher-margin commercial revenues, including the uptick in our energy business. Gross margin also continues to benefit from a higher proportion of ICF direct labor that I mentioned as well as a more favorable contract mix as fixed price and T&M contracts represented 93% of our third quarter revenue, up from 88% in the year ago quarter, while our cost reimbursable contracts accounted for only 7% of third quarter revenues. Indirect costs declined 7.9% to $122.3 million and represented 26.3% of total revenues. As we have discussed on recent calls, we remain focused on managing our indirect costs while continuing to invest in growth areas, expand our capabilities in AI and other technologies and implement systems and tools that increase our efficiency and will support our future growth. As we navigate the current government shutdown, we will continue to be mindful of tightly managing our costs by balancing short-term results with our plans for a return to growth in 2026. Thus, the shutdown continues, it will impact our fourth quarter margins as we need to maintain a certain level of staffing and core capabilities in order to ramp up quickly once the shutdown is lifted. Third quarter EBITDA totaled $52.8 million, down from $58.2 million in the third quarter of 2024. And adjusted EBITDA was $53.2 million compared to $58.5 million in last year's third quarter. As a percentage of total revenue, adjusted EBITDA margins expanded 10 basis points to 11.4%, reflecting our gross margin expansion as well as our success in executing cost management initiatives. Net interest expense in the third quarter amounted to $7.9 million compared to $7.2 million in last year's third quarter due to a higher average debt balance related to the AEG acquisition in December of last year as well as our repurchase of ICF stock. Our tax rate was 22.7%, above the 13.8% in the prior year quarter. In this year's third quarter, we incurred a onetime negative tax adjustment related in part to certain tax provisions and the new legislation signed into law this past July. As a reminder, last year's third quarter tax rate benefited from tax optimization strategies and several onetime tax benefits the company enjoyed at that time. Additionally, as we discussed in our last call, our full year 2025 tax rate is expected to be approximately 18.5%. And we also estimate that our tax rate for 2026 will be in the range of 21%. From a cash tax perspective, we expect to realize approximately $30 million in cash savings in 2025 and additional $40 million in 2026, resulting from provisions of the new tax legislation I mentioned. Net income totaled $23.8 million or $1.28 per diluted share compared to net income of $32.7 million or $1.73 per diluted share in the third quarter of 2024. Non-GAAP EPS was $1.67, inclusive of a $0.04 per share impact related to the negative tax adjustment I just noted. Last year's third quarter non-GAAP EPS was $2.13. Our backlog stood at $3.5 billion at quarter end, up approximately $180 million as compared to the second quarter of this year due to the robust book-to-bill total of 1.53 that John previously noted. 52% of our backlog is funded. Our third quarter new business development pipeline stood at $8.4 billion and is approximately 4.3x our trailing 12 months revenues. Third quarter operating cash flow was $47.3 million, up from $25.5 million in the comparable quarter last year. Year-to-date operating cash flow totaled $66.2 million. Days sales outstanding were 82 compared to 80 days in the prior sequential quarter, and third quarter capital expenditures were $5.5 million as compared to $5.2 million in last year's third quarter. We ended the quarter with debt of $449 million, down from $462 million at the end of the second quarter. The third quarter debt reduction was in line with the debt reduction in the same period last year. 39% of our debt carries a fixed rate, and we are tracking to have approximately 45% of our debt at a fixed rate by year-end. Our adjusted leverage ratio was 2.13x at quarter end. And absent any acquisitions, we expect our leverage position to decrease by about 0.25 of a turn by year-end. Our approach to capital allocation remains consistent and disciplined. We are focusing on investing in organic growth, pursuing strategic acquisitions in attractive markets, paying down debt, sustaining our quarterly dividend payments and executing an opportunistic share buyback. As we noted last quarter, we have been prioritizing debt repayments to position ICF for acquisition activities in 2026. Today, we announced a quarterly cash dividend of $0.14 per share payable on January 9, 2026, to shareholders of record on December 5, 2025. For modeling purposes, for the fourth quarter, we estimate the year-on-year percentage decline in revenues and non-GAAP EPS to be similar to what we experienced in the third quarter. This assumes the impact of the government shutdown remains consistent with the estimated reduction of approximately $8 million in revenue and $2.5 million of gross profit for the month of October and the government shutdown extends through the end of the year. We have also revised our cash flow guidance to a range of $125 million to $150 million from approximately $150 million to reflect the potential collection delays related to the shutdown. In addition, other full year guidance metrics include the following: Our depreciation and amortization expense is now expected to range from $20 million to $22 million, down from $21 million to $23 million. Amortization of intangibles is expected to remain between $35 million and $37 million. We anticipate interest expense to range from $30 million to $32 million. Capital expenditures are now anticipated to be between $23 million and $25 million, down from the prior range of $26 million to $28 million. As we previously noted, our full year tax rate is expected to be approximately 18.5%. And finally, we expect the fully diluted weighted average share count to be approximately $18.6 million. And with that, I will now turn the call back over to John for his closing remarks. John Wasson: Thanks, Barry. Our year-to-date results have put us squarely within the guidance framework we provided for 2025 at the beginning of this year, and we stated that a 10% decline in revenues, GAAP EPS and non-GAAP EPS from 2024 levels was the maximum downside risk we foresaw from the loss of business primarily from federal government clients during this transition year. At that time, we also noted that our guidance framework did not consider the potential impact of an extended government shutdown. As I previously mentioned, in the month of October, we estimate that the shutdown will reduce ICF's revenues and gross profit by approximately $8 million and $2.5 million, respectively. Based on this monthly impact continuing, we are pleased to be able to maintain our original guidance framework for revenues and non-GAAP EPS even if the government shutdown extends through the end of the year. Looking ahead, we continue to be confident in our ability to return to revenue and earnings growth in 2026. This outlook is supported by the continued growth from our nonfederal government clients, improvement from portions of our federal government business, recent contract wins and the large pipeline of opportunities. Also, as Barry mentioned, we are keeping our powder dry as we consider potential acquisitions in 2026 that will provide additional growth momentum, and we have substantial authorized capacity for share repurchases. Our professional staff across all markets and geographies have been instrumental in helping us navigate difficult business conditions and their ongoing commitment to ICF and our clients underpins our ability to drive long-term growth. With that, operator, I'm pleased to open the call to questions. Operator: [Operator Instructions] Our first question comes from the line of Tim Mulrooney with William Blair. Timothy Mulrooney: I wanted to start off by saying congratulations to Barry on a well-earned retirement and to Anne and James on the promotions. You bet. So sorry, I've been hopping around calls here, so apologies if I missed it. But did you give an indication for how much you expect your federal business to be down in the fourth quarter? John Wasson: I don't -- no, we did not give a Q4 estimate for what the government business would be down. And in the fourth quarter, obviously, year-to-date, we've reported those numbers, we're down about 22.7% at the end of the third quarter. Obviously, the government shutdown will be down further in the fourth quarter. Barry, I don't know if... Barry Broadus: I mean -- I would say that absent of the government shutdown, we expect that our fourth quarter federal revenues will be down more than what we had in the third quarter. But if you include the government shutdown and the impact that we mentioned, it would be more than -- substantially more than the third quarter decline. Timothy Mulrooney: Yes. That makes sense. And you did give the full -- your total revenue assumption, so we can -- trying to back into it. In your guidance assumptions, you said that you're expecting an $8 million revenue hit per month from the shutdown, which on the surface, I think, is less than what we were expecting. Is it just that many of these projects are still progressing along just without government interaction? Is there something that we're just not fully appreciating here, the dynamics around this business? John Wasson: Well, I think it's a mix. I mean, we certainly have had a set of projects that were placed in stop work. And based on the activity on those projects, that's -- and that occurred early in October. So we saw those impacts quite quickly, and that amounts to $8 million of impact for October. And I think -- so for the quarter, we would expect a $25 million impact on revenues and a $7.5 million impact on gross profit, just extrapolating on those numbers. And so we think that's a good number. And given that we saw those impacts early in the month and really haven't seen material increase since early October, and we feel pretty good about that number. It is certainly the case that a portion of our government business continues to operate and has not been impacted by the government shutdown. There's a portion that has been impacted by the shutdown. In certain cases, we can continue to work it's fixed price and we have funding and we have the appropriate technical direction. And then we've seen the processor shut down. And so I think that number, the $8 million a month, $25 million for the quarter in revenues, we think it's a good number. And there's obviously uncertainty around it. As you know, with this administration, there's been a lot of change. But I think we feel pretty good about that number and I think that is likely to be the impact we'll see from the government shutdown if it goes all the way to the end of the year. Timothy Mulrooney: Got it. That's helpful color. And just lastly, as I'm still sticking on this federal government, I wanted to ask about your commercial energy business, which is a very exciting area, but I'll leave that to others. Just sticking with the federal government or the federal business. As we think about you moving into 2026, we were all thinking about a return to growth. But I'm wondering, does this shutdown impact things that you were expecting to come in early 2026 that may be pushed out now because of the shutdown? Does it cause delays and how the contracting works or anything like that? How should we think about the impact on future work, not necessarily how it's impacting you during the shutdown, but after the shutdown is over? Is there any knock-on effects? John Wasson: No, it's a good question. I mean I would say a couple of things. One is, for the work that's been impacted by the shutdown, the $25 million -- typically, in prior shutdowns, once the work comes back, we will do that work. So it's a push to the right. If history is any guide at that foregone revenue, we would recoup it over the remaining life of the contract in future years. And so we would expect for that to happen again. And so I do see it as a shift to the right with the impacts we've seen. I would say also if the shutdown goes at the end of the year for those clients that we're seeing these impacts, it's certainly going to impact awards and potential modifications. And so it could have some impact early next year in terms of the level of business if the awards get delayed or the modification still comes quickly. But I think that's how we think about it. I think ultimately, I would expect that most of the revenue from the shutdown will be pushed to right, and we'll get it back over the life of the contracts. Operator: Our next question comes from the line of Tobey Sommer with Truist. Tobey Sommer: I wanted to start with just a follow-up on that shutdown. You had a pretty good book-to-bill in the quarter. We have been kind of expecting lower than that. I'm curious how those new wins are ramping and if the shutdown is pushing that process off to the right, in particular, of course, for new or takeaway work rather than recompete wins? John Wasson: Yes. I would say, as you know, Tobey, our federal business, we kind of break it into 2 components. One of the -- roughly half of it is kind of in the IT modernization technology arena. There, I would say that we've -- the procurement environment and the work we're doing has continued. We haven't seen as significant impact as we've seen in the portion that's programmatic. And so -- and I think some of the awards you see in Q4 certainly are in the IT modernization area and we would expect those to ramp, and we expect the modifications to continue. So I'm less concerned or would not expect a slowdown or disruption in the ramp-up of those efforts. Where we see most of the impacts of the government shutdown is in our programmatic work at Health and Human Services. Many of those agencies are impacted by the shutdown. That's also impacted the procurements there. So that portion of the business, I think, will take longer to rebound post shutdown in terms of procurements and plus that's certainly reflected in our -- in how we're thinking about Q4 and the guidance we've given. And as we think about returning to growth for next year, I think our view right now is we've clearly indicated we expect to grow in 2026, and I would think at least a low single-digit level. Obviously, 58%, 59% of our business is growing quite robustly. We expect that to continue. In terms of the federal business, I think we would expect our IT modernization business, so roughly half to return to growth next year. And then the half is programmatic, will not return to growth until 2027. We'll have tough comps there, and it will take more time. But with that mix, we're confident we can get back to growth for next year. Tobey Sommer: Okay. Let's switch gears a bit and maybe we can talk commercial and -- commercial energy. Which service lines and offerings within your portfolio are experiencing the best demand and sort of superior growth? And what, if any, areas are lagging and understand with such a rapid rate of growth for the collection of them lagging doesn't necessarily mean you're not achieving fairly good growth? John Wasson: Well, I think -- no, it's a good question, Tobey. I think as you know, our commercial energy business, through 3 quarters, 70%, 75% of that business is designing and implementing utility programs, energy efficiency, electrification, load management, doing the marketing for those programs. We're seeing tremendous growth there, tremendous opportunity. We've been winning new contracts. We've been taking away market share. We've been winning our recompetes. And I think with the increased significant demand for electricity, those programs will continue to be a key component. And so certainly the utility program implementation is extraordinarily strong. I would say our kind of the energy advisory business, so where we really do more front-end advisory work for utilities on a range of issues from generation to transmission to demand forecasting, demand load management, grid modernization, many aspects of that business are enjoying very robust growth given, again, the strong demand for energy. We do expect our energy advisory business to have double-digit growth next year. I think the only area that's been challenging is in the renewables area, certain components of the work we do around certainly offshore wind or implementation of renewals on federal lands. This administration is not supportive of that. So there has been some impacts on projects in that area. But I have to tell you that in the scheme of our overall energy business, it's pretty de minimis. I think on an annualized basis, the entirety of that business might be up to $10 million a year. We certainly are losing a significant portion of it, but that is the one area where this administration is not as supportive. Having said that, as I said in my remarks, we also do have capabilities around key generation assets that this administration does support natural gas, nuclear and coal. And so we're seeing opportunities there. Tobey Sommer: And then specifically within energy, and this is probably somewhere in between commercial and your government energy business. But when the shutdown began, there was news around Department of Energy canceling some clean energy and infrastructure awards. Is ICF impacted at all by those kinds of actions that have been happening more recently? John Wasson: No, we haven't -- I don't believe we -- I'm not aware of any material -- I'm not actually aware of any shutdowns on our DOE contracts. Honestly, Tobey, I think the extent that we saw impacts in DOE was due to contract cancellations around DOGE and GSA earlier in the year. And so the work that remains, I think, is generally continuing, and we haven't seen impacts from a stop work perspective. Operator: [Operator Instructions] Our next question comes from the line of Marc Riddick with Sidoti. Marc Riddick: So I just wanted to add my congratulations to Barry and James. And certainly, Barry, it's been a pleasure working with you and all the best for your retirement and certainly looking forward to continue to working with the team going forward. So I just wanted to express my gratitude there. Barry Broadus: Thanks, Marc. Marc Riddick: I wanted to touch a little bit on -- so the growth areas that we're looking at that as we go into next year, and I know you're going into planning and the like. But I was wondering, as we look at the non-federal are the areas that are actually growing and doing really well right now, can we sort of maybe talk a little bit about how you feel about your bandwidth there, given the growth that you've seen, the growth that you could potentially see in the near term there and the type of bandwidth where you are now and maybe other investments in personnel, technology or the like to sort of be able to extract those opportunities? John Wasson: I would say that we're certainly investing materially in the key growth markets to take full advantage of that includes recruiting new talent to help us win and develop the work and bring new skills, investing in technology, software and leveraging AI to grow those businesses. And so we're certainly making some appropriate investments, and that's where the investment focus is right now. The primary focus of the investments in ICF are in those markets. In terms of recruiting the talent, I think that we're investing a lot in recruiting, and we're able to recruit the talent to be able to stay in front of that. I think as we look to next year, we certainly expect double-digit growth across commercial -- the combination of commercial, state and local and international. We can do it quite robustly in commercial energy. We have a strong recruiting engine there. We're a market leader in these markets, and -- and the talent inside the firm helps us find the best talent outside the firm. And so I think we'll -- so I think we can -- we'll be able to retain and recruit the talent. I do think we expect as these international projects ramp -- continue to ramp up for next year, we'd expect very strong double-digit growth in our international business. And again, we've been working the recruiting for that quite well. And I would say the same in the state and local. So I think we're making the appropriate investments. We'll ensure we have the talent. We have a pipeline of candidates. And so as the work comes in, we will not have backlog that we're not able to translate into revenue quickly, we will let that happen. So I think we feel quite good about our ability to translate contract wins into revenue quickly. Marc Riddick: Okay. Okay. That's helpful. And then there were on a couple of occasions, I guess, within prepared remarks, some commentary around potential for inorganic investments and cash usage prioritization and the like. And I know certainly, you're going to be addressing that and looking that over again as we go through your planning process. But I was wondering maybe if you could take us through what you're seeing out there right now from the acquisition pipeline potential front. I mean, are you seeing much in the way of -- like what does the pipeline look like as far as volume? We're seeing more and more M&A activity generally, but maybe you can sort of share your thoughts of what you're seeing as to attractive opportunities and valuation levels currently? John Wasson: [indiscernible] I'll speak to M&A and Barry can speak to cash flow. I think in terms of our M&A strategy, I think M&A remains an important component of our overall strategy. As you know, if you look at the history of ICF, we've certainly been acquisitive and it's been an important part of our overall growth story. I think right now, we're quite focused on looking at opportunities in the energy arena that could add scale or add geography or add key capabilities in the core markets we serve across both the advisory business and the program implementation business. And so we're certainly out in the market looking at those and -- and I think that would be -- if we could find the appropriate opportunity with the right strategic fit and the right cultural fit, we would certainly take a hard look at that. I mean I think with everything going on in the energy arena, the valuations are certainly fulsome, but we're looking there. I think we've also looked at opportunities around fast recovery and infrastructure-related work in state and local markets. And I think there are opportunities out there in those markets. In the federal market, we've -- I think we're less likely to do something. I mean I think it remains a challenging market. The valuations are challenging. I think we certainly are looking at opportunities in IT. And so I wouldn't rule that out, but I think the federal market brings obviously, challenges given the state of that market and the uncertainty in it. And so I think our primary focus is around energy and around asset management and infrastructure. And I guess, Barry, I'll let you -- do you want to talk about the broader investment. Barry Broadus: I would say, as I noted in my remarks that we continue to focus on paying down debt. Expectations is that from a leverage position, we'll be below 2x levered at year end. And that would provide us with capacity to go after various assets that we think are appropriate. So we'll continue to stay focused on that and pay down the debt as we've done in the past and be looking at [indiscernible] to see we can put some of that dry powder to use. Operator: Our next question comes from the line of Kevin Steinke with Barrington Research Associates. Kevin Steinke: So you mentioned when talking about the commercial energy business, obviously, you're winning new business there and you're taking market share. I was wondering if there's any way you could kind of frame the size or the extent of the market opportunity there, maybe in terms of the continued opportunity to win new business and take market share, maybe just either in terms of the utilities you might not be working with or states you haven't penetrated or the opportunity to continue penetrating and winning additional business with existing clients? John Wasson: I think that -- I think we still think there's material opportunities for us to -- there will be new opportunities. There will be opportunities for takeaways and takeaway businesses from competitors. And obviously, as we win recompetes, we hope we can expand the scope of those. I think it's -- I mean, in terms of the size of the market, then this market is north of $2 billion. I don't think we're constrained by the size of the market. I think we're strongest in residential and commercial energy efficiency. I think our market share is perhaps in the 15% -- 10% to 15% range. I don't think we're constrained by that. And so -- and I think our track record is quite strong on being able to compete effectively for this work and deliver integrated solutions. And so I don't think we're -- I don't think we're constrained by the size of the market or our market share. I think there's certainly a material additional opportunity for us. Kevin Steinke: Okay. Great. And on your second quarter call, you had also -- when talking about the guidance framework for 2025, you had mentioned given the slowdown now in the pace of contract cancellations with the federal government that you probably wouldn't be at the low end of that guidance framework. Is that still the case given that you haven't seen any more cancellations in the federal arena? Or kind of does the shutdown make that kind of full range still within the realm of possibility? John Wasson: I would say that -- obviously, when we gave -- as I said in my remarks, when we gave that range at the beginning of the year, it did not assume a federal government shutdown. And I think -- and certainly in our second quarter call, we indicated the [indiscernible] 10% on revenues. I think -- let me say it this way. I think prior to the government shutting down and -- prior to the government shutdown, I think our expectation and our expectation was, and I think we had confidence that from a revenue perspective, we'd be down 6% on the year in that range without a government shutdown. And we were progressing on that and felt that confidence through a good part of Q3 until we hit the point where it became clear that the government shutdown was quite likely, and we began to see impacts prior to the shutdown in terms of the level of procurement and certainly in our Health and Human services arena. I think -- with the shutdown now, I think we will be towards the lower end of the range. And we've given you -- I think Barry gave you guidance on how to do that. But certainly, the federal government shutdown and the magnitude of the revenue and profit impacts will move us towards the lower end of the range. I just do want to say we are quite proud of the fact that we -- with our kind of range we gave, which was without a government shutdown, we've been able to manage the business through the first 9 months of the year, stay firmly within that range, maintain our profitability at levels prior to this administration. And then now with the government shutdown, we can maintain that range. Obviously, we'll move -- it will have an impact, but we'll stay in that range. And I think that's quite -- something that I feel quite good about and quite proud of. I mean I think it's -- when we gave that, we gave that range, our initial range very early in February. There's a lot of interest in people for us to kind of quantify what was the maximum downside risk of the new administration of those activities, GSA activities, changes in procurement, federal employees leaving the government. So we gave that guidance very early, and it stood the test of time, and we've managed to it. And so I think that -- so I'm proud of that. And then I think now we have this government shutdown. We're managing that very carefully. We have a playbook to do it. And we'll deliver results and we'll stay in the range -- that range will hold with a government shutdown. And we'll manage our profitability and part of the business outside of federal will continue to grow double digit. And so -- so I know that's a long-winded answer to your question, Kevin, but we'll certainly be in the range now with this government shutdown. It will have some impact, temporary impact. I do think that the revenues will come back in over the life of the contracts, whether that's in the next year or 18 months. And we -- so that's -- I guess that's kind of how I see the guidance. And we do feel good about how we've managed through all this. Kevin Steinke: Yes. I appreciate that. Very helpful. And yes, a nice job on forecasting that out with so much uncertainty. But I guess just my last question. With James taking on the CFO role, is that how you see that going forward as kind of a more a permanent arrangement with both a dual COO, CFO role? Or would you eventually... John Wasson: I would say that -- I'd say a couple of things. One is, I mean, I think as you know, James was CFO for 8 or 9 years in his first 8 or 9 years at ICF. He then transitioned into the COO role for the last 5 years -- 5 or 6 years. And so he's done both those roles. I think he is, in some ways, uniquely qualified to do both those roles. And I think given where we are and the size and scale of the firm and the maturity of the firm and the strength of the team behind Barry, I think it makes sense to combine this. So James' new title will be Chief Operating and Financial Officer. And whether that remains or we change it down the road, I haven't got that far. I'm just pleased James can take on this role. At the same time, we're also asking Anne Choate, who's done a phenomenal job growing our energy business, has been at ICF for 30 years. She's going to take on the role of managing our operating groups and our business development function, who has been reporting to me. But I think she'll bring a tremendous focus on translating our strategy into growth, driving growth managing -- making sure we -- our clients are delighted with our work and driving business development. And so I think it's great opportunities for both of them, and it will allow me to focus on strategy in a time of significant change, M&A, developing the next generation of leaders and representing ICF externally. And so I think that's how I see it. I think we're -- I think it's -- I'm just pleased we have the bench here to do this. And I think one of the things we've done really well over here is to provide opportunities for folks to grow their career at ICF. I think this is another indication. And Anne's promotion has a ripple effect in our energy business, which will give a number of key leaders there additional responsibilities, which I'm really pleased to do, and we'll certainly continue to do that as we go forward as... Kevin Steinke: I just wanted to add, it's been a pleasure working with you, Barry, and best wishes for your retirement. Barry Broadus: Thank you, Kevin. Likewise. Operator: I'm showing no further questions at this time. I would now like to turn it back to John Wasson for closing remarks. John Wasson: Okay. Well, thanks, everybody, for participating in today's call, and we look forward to connecting at upcoming conferences with you. Thank you. Operator: Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.
Operator: Good afternoon, ladies and gentlemen, and welcome to the Alexander & Baldwin Third Quarter 2025 Earnings Conference Call. [Operator Instructions] This call is being recorded on Thursday, October 30, 2025. I would now like to turn the conference over to Tran Chinery. Please go ahead. Tran Chinery: Thank you, operator. Aloha, and welcome to Alexander & Baldwin's Third Quarter 2025 Earnings Conference Call. With me today are A&B's Chief Executive Officer, Lance Parker; and Chief Financial Officer, Clayton Chun. We are also joined by Kit Millan, Senior Vice President of Asset Management, who is available to participate in the Q&A portion of the call. During our call, please refer to our third quarter 2025 financial presentation available on our website at investors.alexanderbaldwin.com. Before we commence, please note that statements in this presentation that are not historical facts are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and involve a number of risks and uncertainties that could cause actual results to differ materially from those contemplated by the relevant forward-looking statements. These forward-looking statements include, but are not limited to, statements regarding possible or assumed future results of operations, business strategies, growth opportunities and competitive positions. In addition, words such as believes, expects, anticipates, intends, plans, estimates, projects, forecasts and future or conditional verbs such as will, may, could, should and would as well as any other statement that necessarily depends on future events are intended to identify forward-looking statements. Such forward-looking statements speak only as of the date the statements were made and are not guarantees of future performance. Forward-looking statements are subject to a number of risks, uncertainties, assumptions and other factors that could cause actual results and the timing of certain events to differ materially from those expressed in or implied by the forward-looking statements. These factors include, but are not limited to, prevailing market conditions and other factors related to the company's REIT status and the company's business and the risk factors discussed in Part 1, Item 1A of the company's most recent Form 10-K under the heading Risk Factors, Form 10-Q and other filings with the Securities and Exchange Commission. The information in this presentation should be evaluated in light of these important risk factors. We do not undertake any obligation to update the company's forward-looking statements. Management will be referring to non-GAAP financial measures during our call today. Please refer to our statement regarding the use of these non-GAAP measures and reconciliations included in our third quarter 2025 supplemental information and presentation materials. Lance will start today's presentation highlighting Alexander & Baldwin's third quarter highlights and CRE results and then hand it over to Clayton for a discussion on financial matters. To close, Lance will return for final remarks and open it up for your questions. With that, let me turn the call over to Lance. Lance Parker: Thank you, Trent. That was a lot. Great job. Aloha, and thanks to everyone joining us on the call today. Overall, our third quarter results exceeded expectations, and I am pleased by the progress we've made throughout the year. Our full year outlook remains positive. And as a result, we are raising our FFO guidance. Turning to quarter highlights. Our CRE portfolio performed in line with expectations and experienced same-store NOI growth of 0.6% for the quarter. Subsequent to quarter end, we executed a renewal with an anchor tenant in Kailua Town at an 11% lease spread, reflecting continued leasing strength. On the internal growth front, we continue to build momentum. At Komohana Industrial Park in West Oahu, we broke ground on two new buildings, a 91,000 square foot warehouse pre-leased to Lowe's and a 30,000 square foot one on spec. We've already seen early interest in Building 2, underscoring demand for newly constructed industrial product in the market. We expect both buildings to be placed into service in the fourth quarter of 2026 and generate $2.8 million in annual NOI when they are stabilized in the first quarter of 2027. On Maui, vertical construction at our build-to-suit project at Maui Business Park remains on schedule, with completion anticipated in the first quarter of 2026. This project is expected to add approximately $1 million in annual NOI when it is complete. Earlier this year, we executed a strategic backfill at Kaka'ako Commerce Center, successfully leasing two challenging vacant floors to a single tenant, bringing occupancy to 96.3%. During the third quarter, the company completed all required contingencies and the tenant exercised their option to purchase 3 floors. This transaction provides an additional source of capital for future acquisition opportunities. On the external growth side, we're seeing increased momentum in the Hawaii investment market, including three large portfolios being marketed for sale, and we are actively pursuing acquisition opportunities aligned with our long-term growth strategy. Turning to our third quarter CRE highlights. We executed 49 leases in our improved-property portfolio, representing approximately 164,000 square feet of GLA, and $3.3 million of ABR. Our blended leasing spreads increased 4.4% on a comparable basis. Our leased occupancy was 95.6%, 160 basis points higher compared to the third quarter of last year and 20 basis points lower sequentially. Economic occupancy at quarter end was 94.3%, 130 basis points higher than the same period last year and 50 basis points lower than last quarter. SNO at quarter end was $6.4 million, including $3.1 million related to our two build-to-suit projects and $700,000 for our ground lease at Maui Business Park. We remain confident in our full year outlook. Our CRE portfolio continues to perform well, and I'm encouraged by the progress across our internal and external growth initiatives. With that, I'll turn the call over to Clayton to discuss financial results and our full year outlook. Clayton? Clayton Chun: Thanks, Lance, and Aloha, everyone. Our portfolio generated $32.8 million of NOI in the third quarter, representing an increase of 1.2% over the same period last year. This growth was primarily driven by higher base rent year-over-year. Same-store NOI was $31.9 million for the quarter, a 60 basis point increase year-over-year. Consistent with our prior guidance, we experienced modest growth in the third quarter. This was due primarily to the impact of tenant move-outs that occurred earlier this year, and have since been backfilled and onetime recoveries in Q3 of 2024. Additionally, higher bad debt expense related to a few isolated tenants further tempered growth in the quarter. Third quarter CRE and Corporate-related FFO per share of $0.30 grew $0.02 or 7.1% from the same quarter last year. This improvement was attributed to lower G&A and higher portfolio NOI. Total company FFO for the quarter was $0.29 per share. In addition to the $0.30 from CRE and Corporate previously mentioned, FFO for the third quarter included an operating loss of $298,000 from Land Operations as there were no land parcel sales in the quarter. Annual carrying costs in Land Operations continues to be in the range of $3.75 million to $4.5 million. G&A was $6.1 million for the quarter, approximately $1.4 million lower than the same period last year, primarily reflecting certain nonrecurring and transaction-related items as well as the timing of recurring expenses. In line with prior guidance, we expect full year G&A to range from flat to $0.01 per share lower as compared to 2024. As Lance mentioned earlier, a tenant at Kaka'ako Commerce Center has exercised its purchase option of three floors, two of which they currently lease. The sale is expected to close in the first quarter of 2026 and will generate $24.1 million of proceeds that we expect to recycle into an acquisition property via a 10/31 exchange. Turning to our balance sheet and liquidity. At quarter end, we had total liquidity of $284.3 million, and our net debt to adjusted EBITDA ratio stood at 3.5x. Approximately 89% of our debt was at fixed rates, and our weighted average interest rate was 4.7%. Consistent with historical practice, the company's Board of Directors plans to declare a fourth quarter 2025 dividend in December with payment in January. Given our year-to-date performance, we are pleased to update our 2025 guidance as follows. We are reaffirming our guidance of full year same-store NOI growth of 3.4% to 3.8%. Implied in this guidance is our estimate for the fourth quarter, where we expect a 4.4% same-store NOI growth at the midpoint. We are raising our guidance for CRE and Corporate FFO and expect our full year results to be within a range of $1.13 to $1.17 per share due primarily to the lower-than-expected interest expense in the third quarter. Total FFO is now expected to be $1.36 to $1.41 per share, up $0.01 from our previous guidance. We feel confident about our portfolio, and we've positioned ourselves to close out the 2025 year strong. With that, I will turn the call over to Lance for his closing remarks. Lance Parker: Thank you, Clayton. To wrap up, I'm pleased with our overall performance. This is the third consecutive quarter we've raised guidance, reflecting our continued confidence in the full year outlook. Our CRE FFO for the year has outperformed initial expectations, driven by strong portfolio performance, better-than-expected expense management and steady progress across our growth initiatives. As we look ahead, we remain optimistic about how the year is shaping up and focus on executing our strategy to drive long-term value for shareholders. With that, I'd like to turn the call over to questions. Operator: [Operator Instructions] Your first question comes from Rob Stevenson of Janney. Robert Stevenson: Either Lance or Clayton, can you talk about when the $6.4 million of ABR from the SNO leases start to impact earnings or the bulk of that as we start thinking about 2026 in our model? Is that like halfway through the year? Is that towards the end of the year? How should we be thinking about when that $6.4 million comes online? Clayton Chun: Rob, this is Clayton. So I'll start off and then either Lance or Kit can chime in and elaborate. But with respect to the SNO, we typically anticipate normal SNO to become economic over like 9 to 12 months. What's embedded in the SNO importantly is a couple of our development projects that are currently ongoing. And so one of those is a build-to-suit on Maui, and that's about $1 million, and that's expected to come economic in Q1 of next year. We also have Komohana, which is a build-to-suit for Lowe's. And that one is going to be really more in the fourth quarter or Q1 of 2027 time frame, and that was about a couple of million. Robert Stevenson: Okay. That's helpful. The -- you said that the $24 million that you're getting on the purchase option that you're going to 10/31 that. Has the asset that that's going to be rolled into been identified yet? Or is that still to be determined? Lance Parker: Rob, it's Lance. No, it has not yet been determined. I've spoken in the past just about the fact that our market is starting to open up from an investment standpoint. There's a few active portfolios being marketed. So our investment team has been really busy in underwriting opportunities. We feel confident, particularly given the timing that it won't close until Q1 of next year that we'll have sufficient time to identify and close on the uplink. Robert Stevenson: Okay. And then, Clayton, you said that you're still expecting -- despite the reduced G&A in the quarter, you're still expecting sort of flat to $0.01 a share lower versus '24. If I look at '24, you were just under $30 million. You're at, call it, $20 million year-to-date. And so is that you guys are going to be somewhere between, call it, $9 million to $10 million of G&A in the fourth quarter. That sounds right? Clayton Chun: We are expecting an uptick in G&A in the fourth quarter. I think if you do the math, it would be around 9-ish. But what that's really reflecting is just we did have some timing differences that were part of our Q3 numbers. And so there's some element to that. In addition, we've been pretty open about the fact that we've been actively pursuing opportunities in the market. And so our guidance does reflect that there would be some transaction-related costs associated with those pursuits. Now having said that, we are taking steps to mitigate these items and control costs to the extent that we're able to, but that's really what our G&A guidance currently reflects. Robert Stevenson: Okay. And then last one for me. Did you guys -- did the entirety of the Sam's Club TI hit in the third quarter? And if so, what was that? Clayton Chun: It did. We paid that out, and it was about $19.6 million. Operator: Your next question comes from Alexander Goldfarb of Piper Sandler. Alexander Goldfarb: So just a few questions. First, and forgive me, my Hawaiian is not good, so if I butched the name. Kaka'ako, the two floor sale in that asset. Is that something common that you have in other properties? And do you have it in the rest of this building? Just we normally don't see tenants sort of buying out their floors. Yes, we see that overseas in various foreign markets, but in the U.S., a little less common. So just curious if there are other buildings or other parts of this building that have that same structure and if that's something that we may see more of as a way for you guys to extract value. Lance Parker: Alex, it's Lance. I'm going to give you a solid sea on the Hawaiian because you nailed the first half. The second half of the pronunciation was a little rough, but I appreciate the effort. So Kaka'ako Commerce Center, if you may recall, that is a 6-story industrial building that we own in urban Honolulu. We had one floor that was vacant in all of 2024. It was the sixth floor. It was pretty challenging. So first, I just want to kind of commend the team for coming up with a really creative solution that allowed us to backfill not just that floor, but a second floor to the same tenant. And one of the ways that we attracted this tenant is we actually put a CPR or a condo map on the building so that we could divide each of the 6 floors into individual units. And we provided an option to that tenant to purchase, which they have now exercised. So it is unique to the space. It's a unique building. We don't have anything else like it in the portfolio. But again, it was a really creative solution, one, to take the overall leased occupancy in the space to over 96% and then allow us to extract some capital and recycle it into other strategic investments. Alexander Goldfarb: Okay. The next question is, I appreciate the commentary on the land overhead, the $0.01 loss just because there are no land sales. Is that something that we should think about for next year, like as we're modeling '26, just think about that there's a negative $0.01 per quarter if there aren't any land sales? Clayton Chun: So Alex, it's Clayton. So with respect to next year, as you know, we haven't guided for 2026 at this point. Now having said that, what we have provided guidance on is the run rate for Land Operations. And so in that, we have indicated that there's $3.75 million to $4.5 million, which is the annualized run rate. We are very conscious and taking steps to manage those costs as best as possible. As we're able to further monetize and streamline, we're going to be bringing that cost down further. But at this point, this is what we have for our run rate, and we'll give you more information in the fourth quarter as we guide to 2026. Alexander Goldfarb: Right. But basically, absent land sales, it's $0.01 a quarter is the drag. Lance Parker: We do also have some offsetting revenue. We've got some land leases in some of the non-core assets that we still own in Land Operations. But to Clayton's point, in the absence of any activity, which we have typically not guiding to because we acknowledge it's episodic, you should or could expect a modest loss in the Land Operations division. Alexander Goldfarb: Okay. And then just finally, on the rent spreads, first of all, great to see you guys raising guidance. So I don't want to take away from that. But on the new rents, recently, they've been slightly negative. And the renewals have been positive, which is great. But just sort of curious, why would -- I usually would see like new rent spreads would be much higher than renewals, and here, you guys seem to be trending the reverse. So is there something peculiar about the past number of quarters, the types of deals that have been rolling? Or what else is sort of driving this dynamic? Lance Parker: Well, I'll start first with just what happened in Q3, Alex. And I think it's sort of a similar dynamic for prior quarters where in some cases, and it certainly was this past quarter, we have one tenant that sort of disproportionately impacted our numbers. Alexander Goldfarb: Yes. Yes. You guys have talked about... Lance Parker: Yes. So in this case, it was one tenant in Kailua, and we had basically moved the use from a residential brokerage operation to a PoleArity Studio. That deal, it was more about the fact that the prior tenant was above market than it was that the new tenant was below market. But just for context, I mean, we're talking about a 2,000 square foot space and the absolute dollar impact was about $33,000 of ABR. So at least from our perspective, it's more just -- it was a deal as opposed to anything that's reflective of the portfolio as a whole. Alexander Goldfarb: Okay. Yes. I mean when you look at the volume, it's pretty clear the new deals are very -- it's a very small sample set versus the renewals more robust, which is why I asked if it was just the peculiarities of what it was. So that's helpful. Operator: Our next question is from Mitch Germain of Citizens Bank. Mitch Germain: Do you guys have the same-store number if you remove that onetime item in the prior, I think you had onetime reimbursement. If you remove that, where would your same-store have been for the quarter? Clayton Chun: Mitch, it's Clayton. So I'll take that one and Kit can chime in to the extent needs more elaboration. But our same-store NOI growth, it was impacted by a couple of key factors there, one of which was the onetime item related to bad debt. We also had a couple of nonrecurring items related to real property tax that really was pertaining to Q3 of last year. And so if you were to take those into account as well as some move-outs, we actually quantified that to be about 370 basis points collectively. And so that would have got you more in line with what we were experiencing same-store NOI growth for the first half of the year. So three main factors, just to recap, it's the bad debt, there were the RPT onetime items that related to last year, and then we had known move-outs that happened. And so that was economic in Q3 of last year, but not this year. Kit Millan: I just wanted to add also, I think it's important to note that those no move-outs, all of them have been backfilled. They're not all economic yet, but they will all be economic in Q1. And the final one is the Komohana ground lease that we are now converting to a new build and space lease property. Mitch Germain: Perfect. Lance, you seem pretty bullish about acquisition prospects. It seems like that tone has continued. I'm curious about the competitive landscape. And are you seeing a lot of that private capital back now that the lending markets appear to be a little bit more efficient currently? Lance Parker: So we've talked in the past, Mitch, just about the typical construct of the competitive market that we play in where typically lower-priced assets from a -- just a dollar standpoint. We're usually competing with local buyers, sometimes smaller family offices here. And then when we get into larger assets, typically $100 million plus, you'll start to see Mainland capital, whether it's on the private side. Rarely, we'll see any public. We don't have too many REITs in our asset classes. And kind of that middle space is where we tend to see less competition from the extremes. So specifically to what we're seeing in the market, look, we're just really sort of seeing it open up. I referenced a few portfolios. So there's two retail portfolios that are currently being marketed. There's an industrial portfolio that's currently being marketed. Portfolios and scale typically are larger and more expensive. And so we are seeing some Mainland capital explore the marketplace sort of typical in terms of the types of people that we compete with. And then usually, where we have the competitive edge against buyers like that is the fact that we're here, we're local, and we know the assets typically better than Mainland buyers. And so we're optimistic that we'll be able to make some of these or other opportunities that we're looking at work. Obviously, at the end of the day, it's going to be subject to pricing. But hopefully, that gives you just some color in terms of what we're seeing in real time. Operator: Your next question comes from Brendan McCarthy from Sidoti. Brendan Michael McCarthy: Just wanted to start off looking at the ground lease portfolio, the 36-acre industrial space. I know that, that was up for renewal, I think, this year. Just curious if you can provide color on how we can think about the renewal process there? Or I think I noticed in some marketing materials that you're considering developing that internally. I think it's the HART yard. Just curious as to how we can think about that asset. Lance Parker: Brent, it's Lance. So we've talked about the likelihood of that ground lease renewing. We still have that perspective. I think it's highly likely that we end up renewing the tenant there. We are in early discussions despite the fact that it does naturally expire at the end of this year. So premature to provide any color in terms of where we think that ends up. And then longer term, we have been articulating just the internal growth path that we have as a result of our land inventory. Some of it is currently ready to build in Maui Business Park. Others in Kahului, like this 36 acres is currently under covered ground leases. So we're getting active income while we can plan. But that's really more sort of longer-term value creation once we get through the renewal process, and that probably takes us out a few more years before we go active on that. Brendan Michael McCarthy: That makes sense. And any detail on the potential ABR step-up opportunity there with the renewal? Lance Parker: Again, just because this is sort of live, probably inappropriate and premature for us to discuss. But hopefully, by our next call, we'll have more insight in how that kind of played out. Brendan Michael McCarthy: That makes sense. Understood. And then looking at capital allocation, I know you discussed a favorable outlook, improving outlook on the deal market and then you have these internal development opportunities. How can we kind of think about share buybacks? I know we discussed this on a previous call, but considering where the share price is, is that -- are share buybacks something that you're increasingly looking into? Clayton Chun: I'll take that. Brendan, it's Clayton. So yes, with respect to the share repurchases, we do have a program that is in effect, and that is one of the tools that we have in our capital allocation toolkit. So obviously, as the stock price fluctuates, that does weigh into our consideration. But at the end of the day, we kind of look at capital allocation just from a risk-adjusted return perspective. And so that would entail whether it's placing capital for acquisitions, for internal development opportunities as well as share repurchases. And so we are considering that, and we'll make decisions according to the opportunities that are in front of us. Operator: [Operator Instructions] Your next question comes from Gaurav Mehta of Alliance Global Partners. Gaurav Mehta: I wanted to ask you on the portfolios that you discussed. I think you said two retail and one industrial. Can you provide some color on what kind of pricing and cap rates are you seeing on those portfolios? And just to clarify, are those portfolios you're looking at for your own acquisition or they are being marketed for sale in the transaction market? Lance Parker: Gaurav, it's Lance. Just because these are live deals, I'm not sure it would be appropriate for me to talk about our perspective on cap rates. And just to the second part of your question before I just provide a little bit more detail, I would say, look, we look at every opportunity that comes into the market. We typically don't talk about deals that we're actively pursuing or actively considering until we get further along in the process, typically after we close. But that all said, our perspective on the market in general is sort of holding from where we were last quarter. I would say, expected pricing in the market, call it, 5 to 6 cap type deals in general. And you may see flex on either side of that depending on the type of asset we're looking at, depending on the quality of the property that it may be. So value-add type deals, for example, you would expect to see some expansion on that cap rate. Ground leases, you would expect to see some compression on those cap rates. But in general, that's sort of our perspective of where the market is today. Gaurav Mehta: Okay. Second question I wanted to ask you on your office portfolio. The office property, Lono Center, I noticed the occupancy on that property is 37%. I just want to get some color on that property and generally, what you're thinking about your office portfolio? Is that something you want to hold? Or is that something you want to recycle at some point? Lance Parker: So Lono Center is actually one of two office buildings that sits on a 19-acre block that we own in Kahului on Maui. We purposefully were driving occupancy away from that building into our Kahului office building. And the thinking was that could have been an individual disposition, maybe even an owner-user type sale. But we do have that 19-acre block currently on the market. We have it listed for sale. We've been in discussions with a buyer. I think we may have disclosed that last quarter. So we are actively looking to dispose of what we've talked about in the past, again, is nonstrategic asset class for us, recycling that capital into more strategic investments. And so as we sort of head into the end of the year, we can probably provide a little bit more color in terms of where that process stands. Operator: There are no further questions at this time. I will now turn the call over to Clayton Chun. Please continue. Clayton Chun: Thank you, operator, and thank you all for joining us today. If you have any follow-up questions, please feel free to call us at (808) 525-8475 or e-mail us at investorrelations@abhi.com. Aloha, and have a great day. Operator: Ladies and gentlemen, that concludes today's conference call. Thank you for your participation. You may now disconnect.
Operator: Good day, and welcome to the Exponent, Inc. Third Quarter 2025 Earnings Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Joni Konstantelos, with Riveron Consultancy. Please go ahead. Joni Konstantelos: Thank you, operator. Good afternoon, ladies and gentlemen. Thank you for joining us on Exponent's Third Quarter 2025 Financial Results Conference Call. Please note that this call will be simultaneously webcast on the Investor Relations section of the company's corporate website at www.investor.exponent.com. This conference call is the property of Exponent, and any taping or other reproduction is expressly prohibited without prior written consent. Joining me on the call today are Dr. Catherine Corrigan, President and Chief Executive Officer; and Rich Schlenker, Executive Vice President and Chief Financial Officer. Before we start, I would like to remind you that the following discussion contains forward-looking statements, including but not limited to, Exponent's market opportunities and future financial results that involve risks and uncertainties that may cause actual results to differ materially from those discussed here. Additional information that could cause actual results to differ from forward-looking statements can be found in Exponent's periodic SEC filings, including those factors discussed under the caption Risk Factor in Exponent's most recent Form 10-Q. The forward-looking statements and risks in this conference call are based on current expectations as of today, and Exponent assumes no obligation to update or revise them, whether as a result of new developments or otherwise. And now I will turn the call over to Dr. Catherine Corrigan, Chief Executive Officer. Catherine? Catherine Corrigan: Thank you, Joni, and thank you, everyone, for joining us today. I will start off by reviewing our third quarter 2025 business performance. Rich will then provide a more detailed review of our financial results and outlook, and we will then open the call for questions. Exponent delivered a strong third quarter with double-digit net revenue growth, demonstrating the strength of our diversified portfolio and our ability to deliver value across industries increasing demand for dispute-related work drove robust growth in reactive engagements across the energy, transportation, life sciences and construction sectors. Proactive engagements were led by risk management and asset integrity projects in the utility sector and regulatory consulting in the chemicals sector. While these were offset by lower activity in consumer electronics, we are encouraged by improving demand trends in this space as we enter the fourth quarter. Turning to our engagements in more detail, reactive engagements in the quarter were driven by increasing dispute-related activity across a broad range of industries. In the energy sector, we saw increased activity across generation, delivery and storage as clients seek failure analysis expertise for legacy systems as well as challenges with new technologies. The convergence of energy transition initiatives, extreme weather events and rapid growth of data centers is accelerating opportunities for Exponent's specialized expertise around the globe. In transportation, disputes regarding the design and performance of advanced vehicle technologies are becoming more prevalent and increasingly complex and the consequences of failure continue to grow. In life sciences, we saw increased reactive engagements involving complex medical devices with particular scrutiny of product safety, quality and performance. We also saw increased demand from domestic and international clients related to complex construction challenges and disputes. Our diversified portfolio and deep technical capabilities position us well to capture this demand and deliver meaningful value for our clients. Proactive engagements in the quarter were led by risk management and asset integrity projects in the utility sector, where we evaluate the resilience of critical infrastructure and help mitigate safety risks for consumers and communities. In the chemical sector, we saw strong demand for regulatory consulting, supporting clients on issues related to the impact of chemicals on human health and the environment. These gains in the third quarter were offset by lower activity in consumer electronics. However, we are encouraged by improving demand trends in this sector as we enter the fourth quarter, particularly with our human machine interaction studies. The pace of innovation is creating new opportunities for Exponent as companies seek trusted partners to help them ensure safety, reliability and performance. We are actively engaged in early-stage initiatives tied to transformative technologies that will define the next generation of products and systems. As artificial intelligence becomes increasingly delivered by a specialized hardware and integrated into safety-critical systems, complexity and risk rise just as rapidly. With that acceleration comes a greater potential for new high-consequence failure modes. Our deep roots and failure analysis are driving growth as technical challenges become more novel and complex and clients increasingly turn to Exponent for specialized expertise when the stakes are highest. We continue to advance and diversify our work evaluating human machine interaction and safety-critical systems from advanced medical devices and robotics to autonomous vehicles. The more complex the challenge, the greater the need for our expertise. Our multidisciplinary team is uniquely positioned to help clients navigate this transformation by turning technological disruption into opportunity and driving sustained growth for our business. I'll now turn the call over to Rich to provide more detail on our third quarter results as well as discuss our outlook for the fourth quarter and the full year. Richard Schlenker: Thank you, Catherine, and good afternoon, everyone. Let me start by saying all comparisons will be on a year-over-year basis unless otherwise noted. For the third quarter of 2025, total revenues increased 8% to $147.1 million and revenues before reimbursements or net revenues, as I will refer to them from here on, increased 10% and to $137.1 million as compared to the same period of 2024. Net income for the third quarter increased to $28 million or $0.55 per diluted share as compared to $26 million or $0.50 per diluted share in the prior year period. The realized tax benefit associated with accounting for share-based awards in the third quarter of 2025 was $141,000 as compared to $533,000 in the third quarter of 2024. Inclusive of the tax benefit for share-based awards, Exponent's consolidated tax rate was 27.4% in the third quarter of 2025 as compared to 27.5% for the same period in 2024. EBITDA for the quarter increased 9% to $38.8 million, producing a margin of 28.3% of net revenues as compared to $35.8 million or 28.6% of net revenues in the same period of 2024. This year-over-year decrease in margins was primarily due to the costs associated with our managers meeting in September, which was partially offset by better utilization and a strong realized rate increase. Billable hours in the third quarter were approximately $376,000 an increase of 4% year-over-year. The average number of technical full-time equivalent employees in the third quarter was 976, up 3% as compared to 1 year ago. This increase was due to our recruiting and retention efforts. Utilization in the third quarter was 74.1%, up from 73.4% in the same period of 2024. The realized rate increase was approximately 6% for the third quarter as compared to the same period a year ago. This is a result of our premium position in the marketplace, unparalleled talent and differentiated intradisciplinary expertise. In the quarter, compensation expense after adjusting for gains and losses in deferred compensation, increased 8%. Included in total compensation expense is a gain in deferred compensation of $7 million as compared to a gain of $7.2 million in the third quarter of 2024. As a reminder, gains and losses in deferred compensation are offset to miscellaneous income and have no impact on the bottom line. Stock-based compensation expense in the third quarter was $5.3 million as compared to $5.5 million in the prior year period. Other operating expenses in the third quarter were up 6% to $12.7 million. Included in other operating expenses is depreciation and amortization expense of $2.5 million for the third quarter. G&A expenses increased 44% to $7.7 million in the third quarter. The increase was primarily due to an increase in travel and meals associated with our in-person managers meeting, we did not have a firm-wide meeting during the third quarter of 2024. Interest income decreased to $2.3 million for the third quarter, driven by lower interest rates. Miscellaneous income, excluding the deferred comp gain, was approximately $263,000 in the third quarter. During the quarter, capital expenditures were $2.7 million. We distributed $15.1 million to shareholders through dividend payments and repurchased $40 million of common stock at an average price of $70.45. Additionally, our Board approved a $100 million increase in our current stock repurchase program. This is in addition to the $21.6 million available for repurchases as of October 3, 2025, and reflects our conviction in Exponent's long-term growth trajectory. Turning to our segments. Exponent's engineering and other scientific segment represented 84% of net revenues in the third quarter. Net revenues in this segment increased 10%, driven by demand for Exponent's risk management and asset integrity management services in the utility industry and disputes related to services in the energy, automotive and medical device sectors. Exponent's environmental and health segment represented 16% of net revenues in the third quarter. Net revenues in this segment increased 9% due to an increase in regulatory consulting engagements in the chemicals industry. Turning to our outlook. For the fourth quarter of 2025 as compared to 1 year prior, we expect revenues before reimbursements to grow in the low to mid-single digits, EBITDA to be 26% to 27% of revenues before reimbursements. We are maintaining our revenue guidance and raising our margin expectation for the full year 2025. We expect revenue before reimbursements to grow in the low single digits. EBITDA to be 27.4% to 27.65% of revenues before reimbursements. As a reminder, the 13-week fourth quarter of this year will compare to a 14-week fourth quarter in fiscal year 2024. As a result, we will experience a year-over-year revenue headwind of approximately 7% due to the decrease in workdays in the fourth quarter of 2025. Our guidance represents a high single- to low double-digit growth rate when adjusted for the extra week during the fourth quarter of 2024. We expect year-over-year average technical full-time equivalent employees to be up approximately 4% in the fourth quarter. This growth in head count is a result of our recruiting activities and normalized turnover rate. We expect utilization in the fourth quarter to be 68% to 70% as compared to 68% in the same quarter last year. As a reminder, utilization is seasonally lower in the fourth quarter due to more holidays and vacations compared to other quarters. For the full year, we expect utilization to be approximately 72.5% as compared to 73% in 2024. We expect the 2025 year-over-year realized rate increase to be 4% to 5% for the fourth quarter and full year. For the fourth quarter, we expect stock-based compensation expense to be $4.9 million to $5.2 million. For the full year, we expect them to be $23.7 million to $24 million. For the fourth quarter, we expect other operating expenses to be $12.7 million to $13.2 million. For the full year, we expect other operating expenses to be $49.5 million to $50 million. As noted in prior quarters, the year-over-year increase in the full year, other operating expenses is largely driven by the extension of our Phoenix lease. For the fourth quarter, we expect G&A expenses to be $6.1 million to $6.6 million. For the full year, we expect them to be $25 million to $25.5 million. The increase in G&A for the full year is primarily due to an expense of approximately $1.8 million for our firm-wide managers meeting held in September. The meeting is an important investment in people development that brings together our multidisciplinary teams, develops our key talent and fosters the next generation of leaders and business generators. We expect interest income to be $1.5 million to $1.8 million in the fourth quarter. In addition, we anticipate miscellaneous income to be approximately $200,000 in the fourth quarter. For the remainder of 2025, we do not anticipate any additional tax benefit associated with share-based awards. For the fourth quarter of 2025, we expect the tax rate to be approximately 28% as compared to 24.7% in the same quarter a year ago. For the full year 2025, the tax rate is expected to be 28.5% as compared to 26% in 2024. The increase in the tax rate is due to a decrease in the tax benefit for share-based awards. Capital expenditures for the full year 2025 are expected to be $10 million to $12 million. In closing, we are pleased with the growth we delivered in this quarter and look forward to closing out the year strong. I will now turn the call back to Catherine for closing remarks. Catherine Corrigan: Thank you, Rich. Exponent is thriving as innovation accelerates across industries. New products, connected systems and critical infrastructure are transforming how people live and work, and expectations for safety, health and the environment have never been higher. We help clients navigate this transformation and bring advancements to market responsibly, applying scientific rigor to ensure reliability, performance and trust. And when problems inevitably arise, our industry-leading expertise is increasingly sought to investigate failures, identify root causes and support litigation and regulatory matters with clear independent analysis. Artificial intelligence is one of the most powerful forces reshaping this landscape, and we are helping clients integrate it thoughtfully and rigorously while managing the new dimensions of risk that it introduces. Looking ahead, we will continue to invest in talent to keep Exponent at the forefront of science and engineering. With strong momentum moving into the final quarter of 2025 and beyond, we remain focused on helping clients meet rising expectations while delivering sustainable growth and long-term value for our shareholders. Operator, we are now ready for questions. Operator: [Operator Instructions] First question comes from Andrew Nicholas with William Blair. Andrew Nicholas: I appreciate you taking my questions. I guess, first, I wanted to ask, any early thoughts on 2026 in terms of hiring specifically? It sounds like demand has picked up some. Sequentially, utilization was good in the quarter. I know you're targeting 4% growth in headcount exiting the year, which is relatively consistent with how you've talked about the medium-term or long-term target. Just curious if there are any plans to go at the top end or exceed that normal range given the demand backdrop? Catherine Corrigan: Yes. Thanks, Andrew. I can at least start in on that. I mean, we have strong momentum in recruiting right now, right? I mean we have to be recruiting now really for adding talent in the first half of 2026. And so it's a fantastic time of year. We have lots of events at our university recruiting program and things like that. And so -- look, our philosophy remains the same in terms of targeting the recruiting toward the areas where we are seeing the growth. So places like digital health, places like automated vehicles, places related to energy, whether that be legacy systems or new technologies. And look, we are still in the planning process, of course, for 2026. But I think we will be back in a more historical range, right? We've been trailing on that over the last year or 2. But this year, to get into that 4 plus, maybe it's 4% to 6%, it's something like that. I think, is a reasonable place for us to be. Andrew Nicholas: Great. For my second question, I wanted to just touch on the AI topic. A lot of good detail in terms of the ways that it's starting to kind of make its way throughout your business. Is there any way to size it today? Any thoughts on just how fast it could grow over time? And then somewhat relatedly, should we think about AI-related projects as coming first via the reactive business or would you expect it to be more balanced across proactive and reactive? Catherine Corrigan: Yes. Yes. Thanks for that. So look, let me sort of give a little tour around the business and focus on the kinds of things that we are doing. I think that really helps to lay the groundwork for them seeing how much it's really penetrated into the business. Major ways that we're helping clients with AI is the way they are implementing AI into their systems and them wanting to do that successfully. And that's a big part of what we're doing. They're running into challenges. They're running into failures. They're running into disputes, right? So that's 1 category. There's another category where we are really building tools, techniques and offerings that we're delivering to clients, right? These are like hybrid models and our utility risk work and things like that. If you kind of go by industry, you can see electronics, that how AI is being delivered through specialized hardware, right? So this is a key area, new form factors, new technologies on the hardware side. They're getting into regulated medical devices in terms of digital health, right? There's benchmarking of the algorithms, what is the ground truth that they really need to compare with. What are the human-machine interface issues. The strategy is around collecting the data that are going to train the algorithm and getting that right, right? You've got intellectual property issues, failure analysis. I mean over in energy, it's quantitative risk modeling. It's data center performance, driving performance critical issues on the generation side. Automotive, transportation, we're seeing continued increases in the litigation profiles for advanced driver assistance technologies and the allegations are getting more complicated. So you can kind of -- as you march down, I mean, those are our 3 biggest industries, right, consumer products, energy and transportation. And you can see how it touches in different ways. And so, to say exactly what the percentage is, is a little bit difficult, but it's clearly integrating its way into our work significantly, and it's around the product life cycle. We continue to have opportunities to expand that, of course, especially as the technology continues to accelerate, but I really do think we are seeing it on both the reactive and proactive sides of our business. We're seeing the disputes in automotive. We're seeing some of those disputes on the medical device front, for example, in consumer products, but we're also using it proactively as we help our electronics clients get their algorithms right and get their training right. So I think it's pretty balanced. Difficult to quantify, but touching the business in a lot of different dimensions. Andrew Nicholas: Very helpful. And if I might just squeeze one more in here for Rich. Year-to-date, just curious if there's anything you can do to quantify kind of growth between proactive and reactive, just want to kind of have our bearings for thinking about the comps next year. Richard Schlenker: Yes. So we've clearly seen the reactive side of the business play as the real growth drivers at least through the first 3 quarters here. We ended up really seeing the peak of that here in the third quarter where we ended up with around 18% growth in the proactive -- I mean, in the reactive business and we were approximately flat in proactive. Now that proactive part saw growth in both the regulatory consulting and the risk management work that was offset by a decrease year-over-year in the proactive work that we do in consumer electronics, primarily on the hardware side. We are seeing -- we are optimistic about the activities in consumer electronics and life sciences around our work in human machine studies in the fourth quarter. So that is actually a real area of strength as we left the third quarter. So we're seeing that improving as well. So overall, I think that we are continuing to see strong demand on the disputes and reactive side and we've seen here in the third quarter already, the regulatory work year-over-year start to grow on that chemical side. And we're expecting to see growth as we get into the fourth quarter on the study side. So those are the positive trends that we have going as we start to look towards 2026. Operator: The next question comes from Tobey Sommer with Truist. Tyler Barishaw: This is Tyler Barishaw on for Toby. Just wanted to start with on the regulators. 9 months into the Trump administration. Can you just discuss the data play with regulators? How has the nature of this work changed so far? And any trends you can extrapolate over the next 3 years? Catherine Corrigan: Yes. Thanks for that question. We all know that there's a lot of dynamics going on around the regulatory environment and even within the regulators themselves, and as we look across the business, look, most of our regulatory work is in the chemical sector, it's in the medical device sector. So you're looking at EPA, you're looking at FDA, you're looking at automotive, which is going to be NHTSA and also Consumer Product Safety Commission. And we have some scattered instances with clients on maybe particular projects where they might have some delays or a little bit of pause as they're waiting longer for, let's say, the FDA or EPA to get back to them with feedback around their submissions and things like that. But that has really been more around the edges. I mean, you can see that our chemical regulatory work, for example, was a good -- was a strong grower in the quarter. And that is a business that is global. It has some of it in the U.S., but probably about 2/3 of it is represented by those global regulatory frameworks, which continue to raise the bar on issues related to safety and health. And so we're seeing it around the edges. But generally speaking, when it comes to things like regulatory enforcement, we continue to see that. And in some ways, seeing that be even stronger. I mean there have been notices coming out of, for example, Consumer Product Safety Commission about how they are cracking down on various allegedly defective products and so forth. And so we see some of that in both consumer products. We're seeing that environment in FDA and medical device work. So all in all, we're watching it very closely, but the business continues to be driven by these health and safety and environmental issues. Another one thing I'll add is that we have had an opportunity in a handful of cases to recruit some additional talent, because of some of the shakeups that have happened in some of those regulatory agencies. And so we've been able to bring over in a few instances, some folks who maybe thought they had lifetime careers at one of the regulators that are now really looking around and can really convert over into good consultants. Tyler Barishaw: Just on the government shutdown, any impact so far from that or expected in guidance? Richard Schlenker: Yes. So our work, just to size it, we've got 2%, 3% of our work that is federal government contracts that we perform. We are fortunate that most of the work that we have ongoing are things that were under contract already. And we're in the form and areas that they were not paused in what we did, if anything, our clients wanted to ensure that our work continued even if some of them were furloughed. So in the short term, we think that our revenues in the fourth quarter out of government will be similar to what they were in the third quarter. But obviously, if that continued or there were -- and as they work through the 2026 budget and such, we will have to see where all that falls out. But again, it's 2% to 3% of our business. Tyler Barishaw: And then just one final one for me. I appreciate the commentary about headcount growth for next year, but any preliminary thoughts on revenue growth for next year that we can be thinking about at this time? Richard Schlenker: Yes. We are -- we'll be providing our 2026 guidance on revenues and margins on our call at the end of January, beginning of February. We're not in a position as we're still going through planning to give those numbers. But I think the -- we are very encouraged by the fact that we do have headcount growth going that's coming with sustained utilization here or solid utilization and such. So we think we're in a positive position to -- for growth in 2026 and beyond. Operator: The next question comes from Josh Chan with UBS. Karandeep Singhania: This is Karan Singhania on for Josh. So can you unpack for us how FTE growth trended in the quarter between proactive and reactive practices? You're just curious if there are like any notable differences in hiring behavior between the 2 of them? Richard Schlenker: Yes. So our hiring -- our practices are not organized really by proactive, reactive. We organized the firm, recruit our people and develop them in disciplines or what we call practice areas, but when you can think about environmental scientists or electrical engineers or mechanical engineers and such. Clearly, the market drivers for hiring in the areas help determine that. And that can be driven by proactive or reactive work as we stated earlier, we're seeing good demand in the reactive work and ability to really engage our staff pretty quickly as they're coming into the organization in that. So I would say that the -- in the short term, the reactive work as far as demand and filling that, sure, there -- that is part that is pushing our teams along and feeling comfortable in the hiring. In the long term, which is what our, really, hiring horizon is, it's about looking out over the next several years and longer to see where we see technologies heading, where we see risk issues developing and doing that. And clearly, those lead themselves into focuses in hiring in electrical engineering and computer science and controls in that human -- both in our human factors, people with the psychology degrees, people and biomechanics and that human machine interaction. All of those areas we're hiring during the quarter. Karandeep Singhania: Got it. That's helpful. So just as a follow-up to that. I think you highlighted some of the end markets that you're starting to hire in. So I'm just curious if the mix of your hiring of the end markets is having an impact on the rate increases? And is there any reason why the current rate increase of like 6% couldn't carry on going forward? Richard Schlenker: Yes. So a couple of factors contribute to the rate increase that we did. One, over the last several years, the overall rate that we've been being able to drive through has been benefited from really the demand environment and the sort of inflationary environment for engineers and scientists in particular, in the marketplace. So one, I think we've had a very strong market driver for that. As we look to, in particular, to what's going on here in the third quarter and 2025, we've seen a strong demand in this reactive business. Our reactive business does draw upon our most seasoned people. It is about -- having a expert, a testifier, an experienced person who can go through deposition trial and all that with a strong support team along with them. But what we see is that, that, if anything, where do you see some of that utilization improvement coming. It comes at a little bit more senior level not dramatically, but just a little bit enough to make a difference in the billing rate. The other thing that contributes is when hiring is at a more modest rate, which has been even this last year, that is a lower rate of new young people coming in at the bottom, which is also an impact to dilution or blend the mix that you have. So we've had all of those things working in a positive way that has allowed us to see the rate increase at 5%, 6% here in the first 3 quarters. As we move into the fourth quarter, where I've just mentioned that we're seeing good momentum with improvement in the proactive services that can draw upon. And the good thing is really leverage our more junior entry-level consultants and as hiring continues to increase, that will bring in more entry-level people into the org. So those factors will weigh on what the realized rate is as we move forward and is why we have previously said, look, at this point in time, we're still working through each of the individual rates. But if I was to guess, I think we're going to be looking at a rate realization that's more in the historical normal range of 3%, 3.5% rate realization than we are, something that's 5% or 6% as we look at it because of all those factors. Operator: Thank you. This concludes our question-and-answer session. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Heather Lawson: " Anthony Malkin: " Thomas Durels: " Ryan Kass: " Stephen Horn: " Christina Chiu: " Manus Ibekwe: " Evercore ISI Institutional Equities, Research Division Seth Bergey: " Citigroup Inc., Research Division Blaine Heck: " Wells Fargo Securities, LLC, Research Division Dylan Burzinski: " Green Street Advisors, LLC, Research Division Regan Sweeney: " BMO Capital Markets Equity Research[ id="-1" name="Operator" /> Greetings, and welcome to the Empire State Realty Trust Third Quarter 2025 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce Heather Houston, Senior Vice President, Chief Counsel, Corporate and Secretary. Thank you. You may begin. Heather Lawson: Good afternoon. Welcome to Empire State Realty Trust third quarter 2025 earnings conference call. In addition to the press release distributed yesterday, a quarterly supplemental package with further detail on our results and our latest investor presentation were posted in the Investors section of the company's website at gsrtreit.com. On today's call, management's prepared remarks and answers to your questions may contain forward-looking statements as defined in applicable securities laws, including those related to market conditions, property operations, capital expenditures, income expense, financial results and proposed transactions and events. As a reminder, forward-looking statements represent management's current estimates. They are subject to risks and uncertainties, which may cause actual results to differ from those discussed today. Empire State Realty Trust assumes no obligation to update any forward-looking statement in the future. We encourage listeners to review the more detailed discussions related to these forward-looking statements in the company's filings with the SEC. During today's call, we will discuss certain non-GAAP financial measures, such as FFO, modified and core FFO, NOI, same-store property cash NOI, EBITDA and adjusted EBITDA, which we believe are meaningful in evaluating the company's performance. The definitions and reconciliations of these measures to the most directly comparable GAAP measures are included in the earnings release and supplemental package, each available on the company's website. Now I will turn the call over to Tony Malkin, our Chairman and Chief Executive Officer. Anthony Malkin: Thanks, Heather. Good afternoon, everyone. Yesterday, we reported ESRT's third quarter and year-to-date results. We delivered FFO above consensus and reaffirmed our 2025 guidance. Our highly leased portfolio has benefited from strong lease-up executed over the last several years, and 3Q was a slightly lighter quarter for office leasing. Post 3Q closed, we signed another 50,000 square feet of leases and we presently have approximately 150,000 square feet of leases in negotiation. We also delivered our 17th consecutive quarter of positive marks-to-market. We will discuss our healthy pipeline of leasing activity and completed leasing in October in this call. Observatory results were consistent with our guidance. ESRT is purpose-built for strength and agility across all cycles. Our long-term leases, high occupancy, diversified income streams and flexible balance sheet provide a solid foundation for consistent performance and strategic growth. In New York City, office leasing market remains strong. Availability is low at top-tier buildings like ours and rents continue to rise. There is no new supply at our price point and many older buildings properties, which are not like our portfolio, modernized, amenitized, well located, supported by sustainability leadership and a strong financial position, continue to be taken off the market for conversion to residential. We continue to outperform. Our focus right now is on our little over 500,000 square feet of availability in our Manhattan office portfolio. Some is held off the market for assembly of large contiguous blocks at several properties. We remain focused on our ability to drive occupancy and maximize lease economics. At the Observatory, revenue per capita continued to increase in the third quarter in the face of reduced budget traveler visitation. More than half of our visitation is domestic. Slide 16 of our latest investor presentation shows that the Observatory remains resilient. Our strong balance sheet gives ESRT the flexibility to act on opportunity, maintain our portfolio at the highest standards and create durable long-term value for our shareholders. We continue to be leaders in environmental stewardship and healthy building performance, focus on business outcomes and partner with our tenants to help them achieve their own sustainability goals. Earlier this month, ESRT achieved the highest possible GRESB 5-star rating for the sixth consecutive year. Hats off to the team for their continued leadership and excellence. Our entire organization remains laser-focused on the company's 5 priorities: lease space, sell tickets to the Observatory, manage our balance sheet, identify growth opportunities and achieve our sustainability goals. Last month, we announced that Tom Durels, my partner for more than 35 years and our Head of Real Estate, began to transition his role to 2 senior leaders at ESRT. We are deeply grateful to Tom and his impact on our company's success and culture, strategy and post-IPO transformation into a modernized amenitized, sustainable portfolio are all indelible. We have an experienced and capable team to build on the strong foundation that Tom helped to establish. I will now turn the call over to Tom, who has a few remarks. Then Ryan, Steve and Christina will provide more detail on our progress and outlook for the balance of 2025. Tom? Thomas Durels: Thanks, Tony, and thank you for those remarks, and good afternoon, everyone. I'd like to touch on our recent leadership succession update. We announced in mid-September that after more than 35 years, we began the transition of my role at ESRT to Ryan Kass as Chief Revenue Officer; and Jackie Renton as Chief Operating Officer, the new Co-Heads of Real Estate. I'm here in the room today as Ryan covers our leasing update, and I continue to work with Christina and Tony and assist Ryan and Jackie in our work to deliver strong results and long-term value for our shareholders. And with that, I will hand it off to Ryan to discuss our third quarter leasing results and outlook for the balance of the year. Ryan? Ryan Kass: Thanks, Tom, and good afternoon, everyone. In the third quarter, we signed 88,000 square feet of new and renewal leases. Subsequent to quarter end, we signed approximately 50,000 square feet of additional leases and have approximately 150,000 square feet of leases in negotiation. We are excited to announce since quarter end, we signed 3 new leases within our North Sixth Street collection. Tourneau leased over 3,700 square feet to open a Rolex store at 86-90 North Sixth, an asset we purchased last quarter as a strategic redevelopment opportunity on one of New York City's most dynamic retail corridors. Our partnership with a global luxury brand like Rolex prior to commencement of our redevelopment work underscores both the quality and success of this location, which anchors Williamsburg as the premier destination for high-end retail and institutional investment. We also signed new leases with Tocovus and HOKA. Beyond that, we have one space left to lease on North Sixth Street, and that is adjacent to Rolex in our 86-90 redevelopment property, and we are confident in more good news when existing leases roll. Manhattan office occupancy increased 80 basis points sequentially to 90.3%, and we remain on track to achieve our year-end commercial occupancy guidance of 89% to 91%. As mentioned, we have 150,000 square feet of leases in negotiation. Tenant demand continues to be diversified, and we are in discussions with prospects from various industries such as finance, professional services, TAMI, consumer products and others. New York City's office leasing market is the strongest it has been since 2019, which creates a favorable backdrop for us to execute. Our Manhattan office portfolio is over 93% leased, our 11th consecutive quarter above 90%, which is a testament to the strength of our leasing platform and strong execution over the last few years. We have slightly over 500,000 square feet of Manhattan office vacancy. As Tony mentioned, in a market with limited supply, we will create large contiguous blocks at several properties to accommodate demand. We remain focused on improved occupancy and rent growth as the market continues to strengthen. In today's bifurcated market of haves and have-nots, ESRT remains a clear have. Demand is concentrated among top quality, amenitized, transit-oriented buildings owned by financially strong landlords with proven operational performance. Our best-in-class portfolio has enabled us to push rents, reduce concessions and extend lease terms. The third quarter marked our 17th consecutive quarter of positive mark-to-market lease spreads in our Manhattan office portfolio and underscores the consistent pricing power of our portfolio. We have $46 million in incremental cash revenue from signed leases not commenced and free rent burnoff as shown on Page 19 of our supplemental that reflects our leasing success. Lastly, our multifamily portfolio continues to deliver excellent performance with 99% occupancy and 9% year-over-year net rent growth. These results reflect strong market fundamentals and our focus on operational excellence. Thank you. I will now turn the call over to Steve. Steve? Stephen Horn: Thanks, Ryan. For the third quarter of 2025, we reported core FFO of $0.23 per diluted share. Same-store property cash NOI, excluding lease termination fees, increased 1.1% year-over-year after adjustment for approximately $1.7 million of nonrecurring items recognized in the third quarter of 2024. Adjusted for these nonrecurring items, same-store cash revenue and operating expenses increased 1.3% and 1.5%, respectively, year-over-year. Operating expenses increased due to the timing of planned repair and maintenance work and higher real estate taxes and were partially offset by higher tenant reimbursement income. As we progress through the balance of 2025, we expect a strong fourth quarter from a year-over-year cash NOI growth perspective due in large part to a real estate tax abatement we expect to recognize at the end of the year. In our Observatory business, we generated approximately $26.5 million of NOI in the third quarter. Observatory expenses totaled $9.5 million and revenue per capita increased 2.7% year-over-year. Core FAD increased to $40.4 million in the third quarter from $11.9 million in the second quarter. This mainly reflects a reduction in FAD FX spend from $52 million last quarter to $25 million this quarter. This is consistent with the commentary from our previous earnings call, where we conveyed our expectation for CapEx to trend lower in the second half of 2025. With that, I will now turn the call over to Christina. Christina? Christina Chiu: Thanks, Steve. I'll touch on the Observatory and our capital allocation strategy before we shift to Q&A. Our iconic Empire State Building Observatory remains a resilient asset and strong contributor to our bottom line cash flow. As Tony mentioned, performance has been consistent with our revised guidance. We continue to see steady domestic demand offset by reduced international visitation. We remain focused on the levers within our control to enhance the guest experience, broaden our marketing reach and drive operational efficiency. Our unmatched brand position as the authentic New York City experience anchored by the world's most iconic building supports sustained long-term growth as global travel patterns normalize. Our well-positioned and flexible balance sheet remains one of our key strengths with ample liquidity, lower leverage versus sector peers at 5.6x net debt to EBITDA, a well-laddered maturity schedule and no unaddressed maturities until the end of 2026. Subsequent to quarter end, we announced the issuance of $175 million of senior unsecured notes in a private placement at a rate of 5.47% that will fund in mid-December and mature in 2031. Proceeds will be used towards general corporate purposes, including potential new investments and repayment of debt. And as a reminder, all $250 million of our Williamsburg acquisitions since late 2023 were executed on an unlevered basis. From a capital allocation standpoint, we continue to actively underwrite new investment opportunities across New York City office, retail and multifamily. The market has seen a pickup in transaction activity and investment opportunities, the return of institutional capital and strong recognition of the strength of New York City underlying property fundamentals. We continue to pursue opportunities where our operating and repositioning expertise can create meaningful value and our strong liquidity provides the flexibility to act decisively when conditions align. As we look ahead, our focus remains on driving sustainable cash flow to the bottom line through our high-quality New York City portfolio that is well diversified across sectors and sources of income that benefit from live, work, play and visit. Our operating expertise, flexible balance sheet and high-quality assets continue to position us to capitalize on the strength of the Manhattan office market. Over the last several years, we have achieved more than 600 basis points of positive lease absorption across our Manhattan office portfolio. At the same time, we have tax efficiently recycled out of noncore suburban market and invested approximately $675 million into Manhattan multifamily and Williamsburg retail assets to optimize cash flow growth over time through higher rent growth and lower CapEx requirements. We continue to evaluate additional recycling opportunities that are accretive to long-term cash flow and seek ways to operate more efficiently. We also continue to evaluate opportunistic share repurchases within our broader capital allocation framework. That concludes our prepared remarks. And with that, I'll turn the call back to the operator to begin Q&A.[ id="-1" name="Operator" /> [Operator Instructions] Our first questions come from the line of Manus Ibekwe with Evercore ISI. Manus Ibekwe: I was just wondering if you could expand a little bit more on the capital uses side after you now placed a private placement in December. And just in terms of if there's any specific acquisition or potential transactions that you're looking at, maybe also comment on the general transaction market a little bit more, if there are kind of like pockets within New York that are more attractive than others? If you could talk about cap rates to the extent you can, that would be great. Or just kind of giving a little bit more color just on that bucket in general, that would be very helpful. Christina Chiu: Sure. So as we've mentioned, we continue to actively underwrite deals in New York City, and that would span across office, retail as well as multifamily. So that remains the case, and we're really positioned with good liquidity so that we can move quickly when the right deal comes up. On top of that, we also have a couple of debt maturities early next year, which is why we referenced that within our remarks. You're asking about cap rates. And I think the market has had some transactions that have provided some cap rate evidence, but the reality is not all deals are the same. And so you see some deals with sort of mid- to high single-digit cap rates, but they're very bespoke to the transaction. And then you have other deals that are more situational and cap rates aren't as relevant of a metric. You really have to look at those on a per pound basis. So overall, we want to be well positioned as always to be able to transact, and we are actively looking. [ id="-1" name="Operator" /> Our next questions come from the line of Seth Bergey with Citi. Seth Bergey: I guess as you think about kind of New York and the mayoral election, it seems like some of the policies are largely kind of aspirational or require state legislative support to pass. But are you concerned about any tenants that may be more directly exposed to changes in rent or anything like that? Anthony Malkin: So first of all, as I've said so many times, we are incredibly fortunate to be in New York City. And New York City is the best market in the United States, and that makes it one of the best, if not the best markets in the world. Number two, we very clearly operate on the basis, as I've mentioned before, we do policy, not politics. So whoever shows up, whatever administration arrives, that's the one with which we deal, and that's where we try to contribute both to policy and do our best to work from a business perspective. We're always concerned about all developments. And at the same time, New York City has and continues -- has been and continues to be a magnet for the job seeking college graduates, the folks who want to come and make their careers and live in a vibrant environment. And by the way, those are an awful lot of today's voters. So they are the employees. The employers are here because they want those employees, and we are very positive on the future of New York City. Outside of that, it's all speculation. There are certain checks and balances, as you said, and we'll see what comes. Seth Bergey: Okay. Great. And then I guess just a second one, as you think about capital allocation, how attractive is buying back stock where your shares are currently trading? Christina Chiu: We think our share price is very attractive, provides a great entry point for those interested in our portfolio that's extremely well positioned, well leased, strong operating fundamentals. For us as a company, we definitely look at that. As I mentioned, we've done $300 million of share buybacks over the years. So clearly, a part of our strategic capital allocation. And we've also mentioned we're looking at opportunities. And I think it's a balance that you want to find the right deals and be able to act and you need to have liquidity and capacity for that and at the same time, balance that against share buybacks. So both are definitely on the table. And I think with our flexible balance sheet, we can -- we have room to do both. [ id="-1" name="Operator" /> Our next questions come from the line of Blaine Heck with Wells Fargo. Blaine Heck: Great. And Tom, all the best in the future. Thanks for your help over the years. We've seen a recent uptick in layoff headlines for some companies with Amazon probably being the largest and most recent. So within that context, can you comment on whether you've seen any change in trends with respect to expansion versus construction of space at expiration? And more broadly, just how you guys are thinking about the potential rising trend of layoffs as it relates to demand for office space as we head into '26 and '27. Anthony Malkin: So first of all, I just to make sure that you're aware, Tom is not only here, he's here for the announcement for months to come. So several quarters to come, possibly as long as for the full duration of what was announced in our disclosure. So you'll have an opportunity to see them if you'd like to because we get to see them every day. Second of all, I think it's very important to note, we've had over 3.1 million square feet of expansions of existing tenants within our portfolio since our IPO in 2013. We have active discussion, though not -- actually active discussion and part of our leasing pipeline consists of existing tenants with intention to expand. So we still see good growth, number one. Number two, we serve the fatest, widest component of the office market. And that's the opportunity with ESRT. And we are top of tier in our price range. So from our perspective, we do not see anything in the way of contraction. Everybody with whom we speak comes to us because of the quality of our portfolio and several of them have migrated from what would be thought of as glass and steel buildings. And finally, and most importantly, we still have ongoing expansion within our portfolio from existing tenants. So as we look and we go forward, there are all kinds of reasons for which people might not expand or take additional space. We don't see any of them play out right now. And the Amazon announcement, as we might say, they announced people they had already laid off and plans for future layoffs. The word we get from the sources with whom we work, New York City is still the #1 desired desk for anyone who works at Amazon. Blaine Heck: Got it. That's very helpful, Tony. Switching gears, I think you guys covered the acquisition side. But with respect to dispositions, is there any update to share on Metro Center? And then past that, are there any assets in the portfolio or groups of assets in which you think you might have maximized value and could be good funding sources if you were to look at kind of a larger deal on the acquisition side? Christina Chiu: Yes. We don't have an additional update on Metro. As we've mentioned, we can be flexible on that front. We are looking to sell that asset. But if it doesn't work out, we also have attractive in-place debt and can continue. There is still tenant demand in that space, and that was really a capital allocation decision for us. As it relates to other capital recycling, as I mentioned, we are definitely open to that. And it's as you stated, if we've added value and it's a quality asset, there could be buyers that are interested in a strong market like New York City, and it may make sense for us to dispose of those assets so we can redeploy proceeds into assets where we can add more value, and that would span New York City office, retail and multifamily. So it's extremely consistent with what we've communicated to you. And now with more activity in the market, it does feel like a better time as compared to 18, 24 months ago, where financing wasn't as readily available weren't as many deals, institutional capital had some question marks. So as we get into a more vibrant market, it does feel like that's a logical consideration, and we'll keep the market updated. [ id="-1" name="Operator" /> Our next questions come from the line of Dylan Burzinski with Green Street. Dylan Burzinski: Tony, you mentioned that your guys' portfolio caters to the largest subset of demand in New York. Can you kind of just talk about any trends you're discerning? Are you seeing more activity amongst some of the larger tenants out there in the market? Are there certain industries that are outpacing? I know, obviously, tech leasing has been subdued lately, but are you seeing any sort of green shoots on that front as it relates to demand within that industry? Ryan Kass: So this is Ryan here. We -- one of the advantages that Tony spoke about in our portfolio is diversification, we appeal to everybody. So we have a lot of interest from a lot of different sectors. It does range from TAMI, consumer products, fire, professional services. Our job is to assist our tenants with employee recruitment and retention. And what we're seeing is a lot of the conversations right now are driven by tenants looking to upgrade into better quality spaces and also expand their offering. Dylan Burzinski: That's helpful. And then I guess just touching on the net effective rent environment. I know you guys have noted in the past that you guys have continued to see net effective rent growth across the portfolio. But I guess as you look out to 2026, given limited competitive availability that you guys compete with as well as just the amount of robust demand in the market. I mean, is there a potential to sort of see, call it, rent spikes in '26 and '27? I know one of your peers talked about potentially seeing cumulative rent growth of like 25% over the next 5 years. So just sort of curious you guys' thoughts on that. Anthony Malkin: Gosh. Well, if you look at what we've accomplished over the last 5 years, we have very much seen rent spikes across our portfolio. And as an example, the active negotiations underway at Empire State include rents over long terms in the mid-90s for their -- the lives of those leases and going into the 90s at One Grand Central Place. So from our perspective, we're very much in that environment. We still think it is a very healthy environment. And when it comes to the future, we do, at this point, still anticipate increased rents due to shortage of available space. When you talk about our competitive set, I think it's really important to note, the buildings which are being taken out of circulation, the important thing to us is that limits our competitive set. Those buildings, which will not be reinvested in, will not be modernized, will not be amenitized, will not be made energy efficient for office tenants means that we are the best house on our block for sure. It also means we're the most affordable house on the best block. So number one, from our competitive set, many of which are being taken out of circulation, but we're top of tier. Number two, we do pull from other buildings where either because they may be glass and steel, but they are not modernized and amenitized with energy efficiency and sustainability in great locations or just the rent is too darn high, they come to us, and we're a bargain even at our increased rents. Ryan, anything else you want to add there? Ryan Kass: No, I think you summed it up really well. [ id="-1" name="Operator" /> Our next questions come from the line of Regan Sweeney with BMO Capital Markets. Regan Sweeney: I just wanted to dive into the pipeline of 150,000 square feet. Is that really all office? Or is there also a retail component in that? And then just can you give the breakdown between the different property types if available? Ryan Kass: So that's a healthy mix of both office and retail as well as a mix of new and renewal. So right now, what we're focused on, as Tony spoke about earlier, is the creation of the large blocks of space. We're 93.1% leased. We have the 150,000 square feet of leases in negotiation. Roughly 20% of our Manhattan office vacancy right now is strategically held off market in connection with the assemblage of those large blocks. And that's really in response to market demand, and we believe it's going to provide better long-term economic results. Anthony Malkin: I would add in addition to Ryan's comment that -- look, we don't have that much retail to lease. So the vast bulk of that 150,000 square feet is office. And it's across our portfolio and its price ranges. Regan Sweeney: Great. And then just on the rent spreads, obviously, the office has done very well, but there's been a few quarters of weakness in the retail segment. So just where rents really going out today? Is there an opportunity for the Williamsburg portfolio to pick up on that? And then just also on multifamily, I know you said there was a 9% rent growth in the quarter, but I noticed in the presentation, you removed the bullet on the year-over-year rent growth. So has there been a change in October or something expected going forward? Anthony Malkin: So, Ryan, why don't you talk to Williamsburg and then we'll move things around from there. Ryan Kass: So we're very excited with what's happened in Williamsburg. This week, we signed 3 transactions. Obviously, Tourneau will be putting Rolex at the redevelopment at 86-90, Tocovus, HOKA. We're left with one vacancy. We leased our -- the Hermès temporary space that will be vacated next year, and we've been pushing rents there and continue to see an increase in demand from tenants that are walking the street. Anthony Malkin: Yes. Of course, the great news for us on that Hermès moves to its permanent new flagship store, and we've already got that backfilled. Ryan Kass: Correct. Anthony Malkin: And the 8690 acquisition, that lease to Tourneau /Rolex is -- that's terrific for us. It exceeded what we expected to happen and happened much more quickly than we thought it would. That was a direct deal that we did ourselves with no representing broker. We just dealt with the tenant broker. Very grateful to Andrew Greenberg, a CBRE for that. When we look at the resi, Christina, maybe you want to comment on that? Christina Chiu: I'm not familiar with the specific bullet that was mentioned, but we continue to see good fundamentals. Happy to take it offline and go through any of the items that you want to. But overall, fundamentals remain quite strong. Anthony Malkin: Yes. Just to give a bit more details there. Year-over-year, Ryan already mentioned the net effective rent growth of 9.3%. But we have 2 other factors that play into the success there year-over-year. We had 180 basis points of occupancy pickup, which contributed to about 25% of that rent growth -- or revenue growth, I should say. And then also, we had a number of units that we held offline that we disclosed as part of a potential 421A program, and those have now all been re-leased. And so that contributed to about another 15% of that pickup. So really firing all cylinders on the residential side. [ id="-1" name="Operator" /> There are no further questions at this time. I would now like to hand the call back over to Anthony Malkin for closing comments. Anthony Malkin: So thanks so much. Thanks, everybody. At ESRT, we are steadfast in our focus on 5 strategic priorities: lease space, grow Observatory revenue, maintain a strong and flexible balance sheet, pursue disciplined growth and advance our sustainability leadership. Each of these pillars supports our mission to create lasting value for our shareholders. With our differentiated portfolio, strong financial position and proven track record of execution, we are well positioned to capitalize on opportunities as they arise and to continue to deliver results with focus, discipline and consistency in the quarters ahead. Thanks, everyone, for your participation in today's call, and we look forward to the chance to meet with many of you at non-deal roadshows, conferences and property tours in the months ahead. onward and upward. [ id="-1" name="Operator" /> Thank you. This does now conclude today's teleconference. We appreciate your participation. You may disconnect your lines at this time. Enjoy the rest of your day.
Operator: Good morning, ladies and gentlemen, and welcome to Patrick Industries Third Quarter 2025 Earnings Conference Call. My name is Rob, and I'll be your operator for today's call. [Operator Instructions] Please note, this conference is being recorded. And I'll now turn the call over to Mr. Steve O'Hara, Vice President of Investor Relations. Mr. O'Hara, you may begin. Steve O’Hara: Good morning, everyone, and welcome to our call this morning. I'm joined on the call today by Andy Nemeth, CEO; Jeff Rodino, President; and Andy Roeder, CFO. Certain statements made in today's conference call regarding Patrick Industries and its operations may be considered forward-looking statements under the securities laws. The company undertakes no obligation to publicly update any forward-looking statement, whether as a result of new information, future events or otherwise. Additional factors that could cause results to differ materially from those described in the forward-looking statements can be found in the company's annual report on Form 10-K for the year ended December 31, 2024, and the company's other filings with the Securities and Exchange Commission. I would now like to turn the call over to Andy Nemeth. Andy L. Nemeth: Thank you, Steve. Good morning, everyone. We appreciate you joining us on the call today. We delivered solid third quarter performance, demonstrating the resilience of our business in a dynamic and unique environment. Net sales for the quarter increased 6% to $976 million, with organic growth contributing more than 4% and offsetting an almost 2% decline in our industry shipment levels. Earnings per diluted share was $1.01, including approximately $0.07 of dilution from our convertible notes and related warrants. On a trailing 12-month basis, net sales were approximately $3.9 billion. Our results reflect both the strength of our diversified business model, solid organic growth as a result of our team's innovation and advanced product efforts and their incredible execution as we continue to navigate dynamic demand levels across our end markets and challenges facing the broader economy. Our OEM and dealer partners continue to exhibit disciplined production, leaving inventory even leaner across all of our Outdoor Enthusiast markets and positioning us positively for a potential restock when retail inflects. We remain well equipped to capture meaningful upside when that inflection occurs, both strategically and organically. We ended the quarter with a strong balance sheet and total net liquidity of $779 million. Our financial position enables us to remain flexible and nimble in supporting our customers' growth needs with a variety of levers while continuing to execute a balanced capital allocation strategy. We expect to continue our investments in the aftermarket and new product development, both through heavy emphasis on model year prototyping and in combination with our Advanced Product Group, which is focused on product development several model years out. Additionally, and importantly, we are continuing to invest in digital tools, data analytics and AI-powered solutions across our business to drive greater efficiency, accelerate decision-making, reduce costs and unlock new value for our customers. We continue to be proactive in strengthening the Patrick platform through strategic initiatives like the acquisitions of LilliPad Marine, Medallion Instrumentation Systems and Elkhart Composites, as well as the modernization of our processes, technology and equipment and optimizing our aftermarket resources to create new opportunities for our brands. These investments are expected to continue to contribute to our share gains across our end markets. Building on strong revenue execution across our primary end markets, we continue to make meaningful progress in expanding our content per unit, or CPU, through a combination of innovation, collaboration and targeted investment. Our teams are working closely with OEM partners to integrate new products and technologies that elevate the functionality, design and consumer appeal of products like RVs, boats and side-by-sides. In the third quarter, we achieved content gains across all of our Outdoor Enthusiast markets and our MH market, reflecting both our expanding product portfolio and the growing adoption of our integrated full solutions platforms. These content gains underscore the power of our diversified model and validate the continued demand for Patrick's high-valued, individualized and differentiated solutions that enhance performance, efficiency and aesthetics across every category we serve. Subsequent to quarter end, our Marine brands had a successful and prominent showing at IBEX, the marine industry supplier show. Our increased presence unveiled the scale of Patrick's platform while reinforcing our commitment to a brand-forward approach and showcasing our innovative product lineup, fully demonstrating the depth and breadth of Patrick's solutions. At the show, guests had the opportunity to explore our Full Solutions Experience Boat, allowing them to engage with numerous Patrick products, including Medallion's touchscreen displays, Wet Sounds speakers, BHE harnesses and wiring, LilliPad ladders, SeaDek flooring and lighted cup holders, XT carbon tops and TACO seating. I also want to congratulate the team at TACO on their IBEX Innovation Award for their Altura Luxury Helm Seat, a new flagship helm chair with a patented stainless steel frame concealed inside a teak ladderback. Additionally, I'm proud to share that our former President of Marine, Rick Reyenger, was inducted to the NMMA Hall of Fame. With more than 40 years of leadership in the recreational boating industry, Rick has influenced many generations of colleagues and competitors alike. Finally, I want to again recognize the remarkable efforts of the Patrick team. Their commitment, adaptability and focus on serving our customers has been extraordinary during these dynamic times and continues to drive brand-funded partnership model with our customers. Beyond cyclical dynamics, we expect to drive continued strategic growth through M&A, aftermarket expansion, innovative product development and our diversified portfolio. Our solid balance sheet and solutions-driven strategy keep us well positioned for sustainable long-term profitable growth. I'll now turn the call over to Jeff, who will highlight the quarter and provide more detail on our end markets. Jeffrey Rodino: Thanks, Andy, and good morning, everyone. Looking closer at our end markets, third quarter RV revenue increased 7% to $426 million versus the same period in 2024, representing 44% of consolidated revenue. Our RV content per unit on a TTM basis was $5,055, an increase of 3% from the same period last year. On a quarterly basis, CPU increased 8% sequentially compared to the second quarter of 2025 and increased 9% year-over-year. The improvement in the revenue and CPU in the third quarter was driven by our commitment to working with and supporting our customers with model year innovations as they refine and upgrade their products, coupled with recent acquisitions. We estimate RV retail unit shipments were approximately 100,100, and according to RVIA, wholesale unit shipments were approximately 76,500 in the third quarter. This implies a seasonal dealer inventory destock of approximately 23,600 units during the period, resulting in an estimated dealer inventory weeks on hand of approximately 14 to 16 weeks. This is down from 19 to 21 weeks in the second quarter of 2025 and reflecting continued OEM wholesale production discipline. This remains well below pre-pandemic historical averages of 26 to 30 weeks, and we further believe the number of discrete units in the field is well below levels seen during the pre-pandemic period. Over the last year, we revealed a long-term strategy related to composite solutions. This highlights our efforts to seize emerging market opportunities through both acquisition and innovation. After several years of early-stage development and prototyping, we recently unified our composite solutions under the Alpha Composites brand name. Alpha Systems is a Patrick brand that is synonymous with high-level customer service, providing innovative solutions to RV and MH industries. The team at Alpha Composites will continue to build on the foundation through continued collaboration with our OEM partners. We believe our unified branding approach and dedicated resources will further enhance our competitive position as a leading composite solution provider and an innovator in a market where weight, durability, overall cost and sustainability matters to our customers. Our third quarter Marine revenues increased 11% to $150 million, outperforming what we estimate were flat wholesale powerboat unit shipments. Our estimated Marine content per wholesale powerboat unit on a TTM basis was $4,091, an increase of 4% from the same period last year. Estimated content per unit on a quarterly basis was up 15% sequentially compared to the second quarter of 2025 and increased 10% year-over-year. We estimate Marine retail and wholesale powerboat unit shipments were 42,700 and 32,300 units, respectively, in the third quarter, implying a seasonal dealer field inventory destock of approximately 10,400 units. Dealer inventory in the field remains lean at an estimated 16 to 18 weeks on hand, down from 20 to 22 weeks in the second quarter of 2025, and 19 to 21 weeks on hand last year at this time, remaining well below historical pre-pandemic averages of 36 to 40 weeks. Like RV, we believe the discrete number of units in the field remains well below pre-pandemic levels. Our broad Marine portfolio and design expertise position us as a key partner to new entrants and our existing base of valued customers alike. New entrants in the pontoon space have begun to leverage the breadth of our offerings and customer services early in their processes. Additionally, related to Andy's mention regarding IBEX, we've identified opportunities in the Marine market related to composites and are now offering a full composite deck solution, including composite flooring, woven fabric and the adhesive that brings it all together, enhancing the strength, sustainability and ease of installation for our customers. During the quarter, we completed the acquisition of LilliPad Marine, a Traverse City, Michigan-based designer and seller of premium innovative boat ladders, diving board systems and other Marine accessories. LilliPad delivers their award-winning and patented products through both OEM and aftermarket channels, deepening our lineup of innovative solutions in the Marine space. Our Powersports revenue increased 12% to $98 million in the quarter versus the prior year period, representing 10% of third quarter 2025 consolidated sales. Our revenues improved across all Powersports businesses, including those that serve recreation and audio markets, coupled with continued growth in attachment rates for Sportech's products. Entering the fourth quarter, we believe the OEMs and dealers will continue to carefully monitor and manage inventory in the channel despite some positive retail signals in recent months. Recently, our Rockford Fosgate brand launched a new 2024+ HD aftermarket solution at Sturgis. This kit includes Rockford's first aftermarket motorcycle amplifier with a built-in A2B digital interface. Not only is this a Rockford first, it is an industry first. This digital amplifier pairs with Rockford's newly launched speakers to create a premium plug-and-play solution for newer Harley motorcycles. Finally, on Powersports. As we have discussed on a number of calls, the utility segment of the Powersports market has shown much better resilience than the recreation market, leading to improving attachment rates with existing customers. We have begun to see an increasing interest in adding HVAC and other creature comforts from some of the traditional legacy Powersports OEMs, which should lead to a broader base of demand for enclosures, which Sportech provides. On the Housing side of the business, our third quarter revenues were up 1% to $302 million, representing 31% of consolidated sales. In Manufactured Housing, which represented approximately 58% of our Housing revenue in the quarter, our estimated content per unit on a TTM basis increased 2% year-over-year to $6,682. We estimate MH wholesale unit shipments and total Housing starts both decreased 2% in the quarter. As evidenced by our solid manufactured housing content per unit performance in the face of lower industry wholesale unit shipments, our team continues to perform with strong customer relationships and our ability to align and scale quickly to demand while maintaining a lean fixed cost structure. Despite recent softness in MH shipments, we continue to believe there is a lack of affordable housing options in the United States, and we believe our solutions can help both MH and site-built housing industries provide quality, cost-effective homes efficiently. We believe lower interest rates and improved customer confidence remain pivotal to unlocking pent-up demand. I'll now turn the call over to Andy Roeder, who will provide additional comments on our financial performance. Andrew Roeder: Thanks, Jeff, and good morning, everyone. Consolidated net sales for the quarter increased 6% to $976 million. Our team drove increased revenues in both our Outdoor Enthusiasts and Housing end markets, including a 7% increase in RV revenues, an 11% increase in Marine revenues, a 12% increase in Powersports revenues and a 1% increase in Housing revenues. As Jeff noted, we generated solid content gains across our end markets during the quarter. Our total revenue growth of 6% was comprised of 4% acquisition growth, 4% organic growth and negative 2% industry. Gross margin was 22.6% versus 23.1% in the third quarter of last year. The decline reflected items, including short-term inefficiencies related to the model year changeover. Operating margin was 6.8% compared to the prior year at 8.1%. This change was driven by the previously described factors. Our overall effective tax rate was 26.2% for the third quarter compared to 24.8% in the prior year. Net income was $35 million or $1.01 per diluted share compared to net income of $41 million in the prior year quarter. Our diluted EPS for the third quarter of 2025 included approximately $0.07 in additional accounting-related dilution as a result of the increase in our stock price above the convertible option strike price for our 2028 convertible notes and related warrants. The prior year's diluted EPS included just $0.04 per share. Adjusted EBITDA was $112 million compared to $121 million, while adjusted EBITDA margin was 11.5%, lower by 170 basis points from the third quarter of 2024. Cash provided by operations for the first 9 months of 2025 was $199 million compared to $224 million in the prior year period. Purchases of property, plant and equipment were $26 million in the quarter and $65 million year-to-date. This implies free cash flow of approximately $134 million for the first 9 months of 2025. Total net liquidity at the end of the third quarter was $779 million, comprised of $21 million of cash on hand and unused capacity on our revolving credit facility of $758 million. As a reminder, we have no major debt maturities until 2028 and continue to have the financial strength and capital necessary to capture long-term organic and inorganic growth opportunities. At the end of the third quarter, our net leverage was 2.8x. In the third quarter, we returned approximately $13 million to shareholders through quarterly dividends. Regarding our share buyback, we remain opportunistic, having repurchased approximately 377,600 shares year-to-date through the third quarter for a total of $32 million, leaving approximately $168 million left on our repurchase authorization. Regarding tariffs, our strategy remains unchanged and our teams are actively working with supply chain partners to minimize the potential impact. This remains a dynamic landscape, and we will continue to utilize all of our tools that we believe will help neutralize the absolute impact to our pricing pass-throughs and ultimately mitigate any material impact to our operating margin. I'll now move to our outlook. We estimate RV retail unit shipments will be down low single digits in 2025 with estimated full year RV industry wholesale unit shipments between the range of 335,000 to 345,000 units and continue to anchor on equivalent dealer inventory weeks on hand year-over-year. In Marine, we estimate retail shipments will be down high single digits and estimate wholesale shipments will decline low single digits, again, with dealer inventory weeks on hand year-over-year remaining approximately the same. In our Powersports end market, we now estimate that wholesale industry shipments will be down high single digits and our organic content will be up high single digits, offsetting the industry decline as our content continues to grow given ongoing increasing attachment rates for our cab enclosures. In our Housing market, we estimate MH wholesale unit shipments will be up low- to mid-single digits for 2025. On the residential housing side of the market, we estimate 2025 total new site-built housing starts will be down mid- to high-single digits year-over-year. Moving to our financial outlook. We expect our full year 2025 adjusted operating margin to be approximately 7%. We continue to estimate that our effective tax rate will be approximately 24% to 25% for 2025, implying a quarterly effective tax rate of approximately 26% for the fourth quarter. We estimate operating cash flow will be between $330 million to $350 million, and we estimate capital expenditures will total $75 million to $85 million as we continue to reinvest in the business, focusing on automation and innovation initiatives. This implies free cash flow of at least $245 million. For modeling purposes, we'd like to give our initial thoughts regarding 2026 based on where we sit today. We expect RV wholesale shipments to increase low- to mid-single digits and RV retail to be flat. For Marine, we expect wholesale shipments to be up low-single digits and retail to be flat. In Powersports, we expect low-single digit shipment growth and low-single digit organic content growth. For MH and Housing starts, we expect both to be flat to up 5%. We believe improved consumer confidence and lower interest rates are key factors necessary for our end markets to rebound more aggressively. Based on these estimates, we expect our operating margin in 2026 to improve meaningfully, an estimated 70 to 90 basis points. That completes my remarks. We are now ready for questions. Operator: [Operator Instructions] And our first question comes from the line of Scott Stember with ROTH Capital. Scott Stember: A lot has been made of some of the increased optimism coming out of Open House. What are you currently seeing from your OEM customers regarding production? What are they telegraphing as far as their desire to start ramping up production to potentially put more units into the field? Jeffrey Rodino: Yes, Scott, this is Jeff. As I look at our production numbers or production numbers from the OEMs, we are seeing -- we saw a little bit of a slight increase in October. We're seeing a little bit more of an increase in November. So we do feel like just the pure production numbers would tell us that there is some ramping up to what degree that will be consistent through into the first quarter. But right now, we're seeing a little of that. As I look forward, after this week, we really only have 6 more weeks of production in 2025 with a week off for Thanksgiving. There is some production in Thanksgiving, and then we'll take 2 weeks off for Christmas. So I think early indications are, if I look year-over-year, we're seeing some increases in the back half of the fourth quarter. Scott Stember: Got it. And then moving over to the aftermarket. I know you guys have been doing a lot of cross-pollination with RecPro. Can you give us an update of new SKUs or just -- is that accelerating? Just give us an idea of what's going on. Jeffrey Rodino: Yes, Scott, this is Jeff again. On the RecPro side, we've had several hundred SKUs that have carried over from other Patrick divisions into RecPro this year so far. We'll be close to 400 or 500 when it's all said and done since the inception of the acquisition. We are looking to accelerate that a little bit. We've really got them entrenched with our Marine side now and all of our Marine divisions to really start to grow that portfolio within the RecPro side. So really excited. We've put a little bit more capacity in that area to help accelerate that. So we're excited about what we've seen so far and what we're going to see going forward. Andy L. Nemeth: One of the other things -- Scott, this is Andy -- is that we just formally launched our aftermarket strategy, which includes a combination of not only direct-to-consumer but direct to dealer and third-party distribution. So we've rolled out a formal strategy. We're implementing structure to really kind of formally launch kind of an overall vision for where we want to take the aftermarket in alignment with our RecPro platform on the direct-to-consumer side. So we're looking forward to really driving some real value in the aftermarket. Scott Stember: Got it. And maybe just a little bit more granularity on your comments about the 70 to 90 basis points of operating margin expansion next year. I assume there will be some sales growth. Just trying to get a sense of how much is sales leverage? How much is internal self-help like things that you have going on like automation and AI and things like that? Just trying to flesh that out. Andrew Roeder: Sure, Scott. This is Andy. A lot of it is going to be sales leverage. But I would also tell you, content gains, the solutions that we're putting together for customers, allowing them to reduce cost overall, but allowing us with more product content with our customers is going to add value there. And then I think as it relates to the automation efforts, we're going to continue to push forward aggressively on automation amongst our facilities and continue to invest in CapEx. And we're definitely picking up nickels and dimes along the way as it relates to the automation efforts that we expect to see. So a combination of all of those across the platform to drive that margin improvement. And certainly, volume plays heavily in there, especially if we go above and beyond kind of our industry expectations. So we expect to be able to really leverage our fixed cost structure today. We don't need to add a lot of overhead to support significant incremental volumes. Operator: Our next questions come from the line of Joe Altobello with Raymond James. Joseph Altobello: I guess just to follow up on that operating margin commentary. Obviously, the outlook for '26 is encouraging, but it sounds like you're looking for operating margin this year towards the lower end of your prior range. So maybe what's kind of weighing on margin this year ahead of the '26 improvement? Andrew Roeder: Well, Joe, here in the third quarter, we really experienced some model change inefficiency. If you look back through the first couple of quarters, we've seen gross margin expansion driven primarily by the addition of our direct-to-consumer aftermarket business, RecPro last fall. Along with that came a heavier OpEx profile. This quarter, our OpEx is in line, but we just had some, I'll call them one-timers, short time -- short-term investments. We brought on significant new business here in the quarter. CPU was up 9% and 10% for RV and Marine. So significant new business. And with that just comes some material and labor inefficiencies. Joseph Altobello: Got it. Okay. And in terms of the -- what were you seeing so far in terms of production and shipments in October and November? I think it was on the last call, you guys thought that we might see some sort of restock either in the fourth quarter or maybe the first quarter of next year. Are you starting to see that potential restock? Or is this just kind of noise at the end of a year? Jeffrey Rodino: I think there might be a little bit of potential restock. I mean we're getting ready to get into the selling season. You got Tampa right around the corner at the beginning of January. I think if you noted during the prepared remarks, 14 to 16 weeks on hand is extremely low. I mean, that's really the lowest we've seen since the pandemic, where it was in the high-single digits of weeks on hand back then. So there's a lot of room there. At the end of 2025, we're at about 17 to 19 weeks on hand. So there's got to be a little bit of restock in there to be able to get the right units on the lots and be prepared for the selling season that's going to come in the first quarter. Operator: Our next question is from the line of Noah Zatzkin with KeyBanc. Noah Zatzkin: I guess, first, maybe if you could expand upon how you're thinking about CPU opportunity in '26. And I guess within that, you talked quite a bit about composites. So just would love to hear some more thoughts on how that kind of plays into CPU opportunity. Jeffrey Rodino: Noah, this is Jeff. In 2026, we expect all of our businesses, as we always do, to pick up anywhere between 3% and 5% organic growth. Our expectation is composites is going to be a big part of that. I would tell you, if we look right now where we sit today, we believe the total addressable market in that composite area is about $1.5 billion. If you net out some of the cannibalization that may happen, it's close to $1 billion. Our teams are poised and ready to attack that piece of the market. And I think with some of the other things going on in the market, that opportunity continues to be very strong. Again, our APG groups are coming up with new product development, both on the Marine, RV and Powersports side. We believe that the further, I guess, increased attachment rate on the Powersports side is going to give a lot of opportunity to Sportech as more and more OEMs are looking to go to that full attachment. So I think across all of our markets, we have a lot of opportunity to grow that CPU and continue to grow the business. Joseph Altobello: Really helpful. And maybe just one more. Maybe an update on just M&A and what you're seeing out there and kind of how you're thinking about that? Andy L. Nemeth: Sure, Noah. This is Andy. On the M&A front, we've been really active in the last quarter for sure as it relates to cultivating the acquisition pipeline. We've got candidates identified really across our markets. And so we've been out actively kind of talking, kind of building that pipeline up. But as well, we're starting to see more deal flow come at us from outside sources as well. So both the organic side of it, where we're working with potential targets, as well as the deal feed coming in from investment bankers has increased over the last probably 30 to 45 days in particular. So we're seeing increased activity on the M&A front. Operator: Our next questions are from the line of Daniel Moore with CJS Securities. Dan Moore: I appreciate all the color. I want to maybe ask -- obviously, I appreciate the color about dealers' weeks on hand, both in RV and Marine. As you talk to OEMs and dealers, and we have the sort of historic backdrop of what averages look like pre-pandemic, do you have a sense for or a guess for what a new normal could look like in terms of weeks on hand in those key end markets when we get back to, say, low- to mid-single digit retail growth cadence? Andy L. Nemeth: Dan, this is Andy. So if we look at historical numbers pre-pandemic, pre-pandemic RV weeks on hand was roughly 26 to 30 weeks and Marine weeks on hand was roughly 36 to 40 weeks pre-pandemic. So if you look at where we're kind of sitting today, RV at 14 to 16 weeks and finishing out last year at roughly, let's just call it, 18 weeks, we definitely think there's some restock needed. We absolutely feel that the inventories in the channel today across the spectrum are low and that there is a restock needed even in the current environment. So we feel like there's some restocking needed. We don't expect to see the historical pre-pandemic levels, 26 to 30 on RV and again 36 to 40 on Marine. That being said, we definitely know it's -- and we feel like it's bigger than where we're at today. So Marine today, as Jeff mentioned, 16 to 18 weeks on hand. Last year, at the end of the year, we were at 22 weeks. So again, we feel like there's some restock coming and needed. We do feel like inventories are low. But we do think -- I'm going to say let's just say 22 to 24 weeks is probably a good range to kind of think about right now, at least in our estimation. But we also know that dealers have gotten really good at working with less inventory. That being said, we also do feel across our spectrum. And we have multiple touches with the dealer network, whether it's our transportation business or whether it's our touches with the OEMs or dealers themselves. We get a feel that inventories are lean and dealers will need some more balance out there. So we do feel like there's some, again, restock needed. Dan Moore: Really helpful. Switching gears, initial guidance for '26 implies operating margin getting back close to 8%. As you look across the businesses and when demand starts to return, where do you see the most significant capacity and strongest kind of incremental margins and opportunity for further expansion beyond that across the various businesses? Andy L. Nemeth: Sure. Given what we've done with our business, our team's discipline and really managing their businesses, some of the consolidations that we've done -- but as well, we're just really maintaining a lean operating structure and continuous improvement environment. There is leverageability across all of our pillars in all of our business segments. So incrementally, there's a few puts and takes. But overall, I'd tell you there is significant incremental opportunity for us to leverage the business in each of our markets. Dan Moore: Got it. And if you did and I missed it forgive me. Could you maybe quantify in ballpark terms the impact of inefficiencies related to the model year changeover in this quarter? Andrew Roeder: Yes, Dan. I mean, we saw in the first 2 quarters our gross margin expand by near 100 basis points. There's some noise in there with tariff impacts and timing. But for the most part, I think that's -- we expect a meaningful gross margin expansion driven by our RecPro direct-to-consumer margins and that acquisition last fall. So we were down 50 basis points. I guess I'd expect us to be up 50 basis points in that ballpark as we look forward. Operator: The next question is from the line of Tristan Thomas-Martin with BMO Capital Markets. Tristan Thomas-Martin: Do you have any kind of thoughts or have you seen any of the consumer kind of changes based on model year '26 pricing being up, call it, mid- to high single digits? Andy L. Nemeth: Can you repeat that question, Tristan? Sorry. Tristan Thomas-Martin: Yes, just asking with model year '26 pricing up mid- to high single digits kind of like-for-like, how are you seeing consumers and dealers react to that? Jeffrey Rodino: Yes, this is Jeff. I think they've certainly passed that along into the channel. As we could tell, we did see some increased retail year-over-year in June and July. That came down a little bit in August. But overall, we can only tell you what the production numbers are telling us right now since we haven't really seen retail for September and October. So once we see those, we'll get a better feel overall of the retail demand. But from what we can tell from production levels and where we think wholesale shipments are going, there's still demand out there, and we feel good that they've been able to absorb that into the pricing. And we have seen a little bit of interest rate help, which certainly will help mitigate some of the pricing that's happened. But overall, we feel good about kind of where the pricing has ended up. And I think that as far as what tariff noise has been out there earlier in the year, we've got a few more countries they need to sort some things out with. But as we look -- we've been working very closely with customers. We know that affordability is a big concern, and partnering with our customers to help with that affordability is something that we've been very active in over the last quarter. Tristan Thomas-Martin: All right. Just kind of the obvious follow-up is how is the production mix been looking in terms of like are we seeing maybe a little shift towards fifth wheel from single axle? Jeffrey Rodino: Yes, we've seen a little of that. I mean it certainly does occur a lot of times in the fall where we'll see a little bit more on the fifth wheel side as you get the full-time RVers. They're going to use it for the full winter, getting into a fifth wheel versus the smaller entry level. Certainly, the mix is not back to what I would call a normal mix that we've seen in the past with fifth wheel and travel trailer and the smaller travel trailers. But we have seen a little bit of a shift in the third quarter. We expect that, that will stay for the fourth. If we get into the first part of next year -- I think the dealers were so kind of keen on the entry-level product for most of 2025 as we see that they need to refill some of the stock that's out there. I think we're going to see that's going to be in some of the mid- to higher-end product. So we feel good about where the mix is at. I don't think it will go backwards into the more small travel trailers, but we're keeping an active look at that. Tristan Thomas-Martin: Okay. Got it. And then let me squeeze one more in. Is there any way to think about the composite $1 billion addressable market opportunity, kind of how that breaks out across your end market? Jeffrey Rodino: Yes, it's primarily in the RV market right now. When you look at the roofing and flooring solutions that we're providing, something that we're really not into that business right now with roofing, flooring and slide outs. The interior and exterior skins are something that we're participating in right now, and we're very active in shifting from some of the wood products that we're currently selling into composites. And we feel really good about all the prototyping that we've done and the activity and the products we've been able to bring to market. Certainly, we see some opportunity on the Marine side. That's pretty fresh on the Marine side. We've done a lot on the wood products within Marine, and now we're starting to shift over into some of the composites. So I would tell you that the majority of what we talked about in the addressable market is going to come on the RV side to start with. Operator: The next question is from the line of Craig Kennison with Baird. Craig Kennison: Apologies for joining a little late. I wanted to ask about Slide 15, talking about Powersports' organic content growth up low-single digit. What is driving that? Andy L. Nemeth: Craig, without question, content gains that we've seen as it relates to attachment rates for our enclosures in particular, we've seen, as we've talked about kind of the utility side of the business, which is really where we've got tremendous focus, being more resilient than the rec side of it. But that being said, the overall take rate continues to go up on enclosures, and the continued take rate on HVAC systems, which in the side-by-side markets, continues to go up. So we're seeing that. We're seeing some new entrants come back -- come into the market in 2026, but as well as some of the product innovations that we've had teed up over the last couple of years are expected to continue to drive content as well. So we're excited about not only the uptake rate, but some of the solutions we're bringing and then the opportunity for us to really exhibit our full solutions model as well into the Powersports market. So not only in enclosure, for example, but also a sound system, a wiring harness, a dash panel, instrumentation system, all combined into one solution for our customers going forward. So a tremendous opportunity for us to continue to realize additional content gains in the side-by-side market. Craig Kennison: And then maybe just to follow up on the RecPro topic. How do you manage any sort of channel conflict that might come about from setting up a direct-to-consumer platform? Jeffrey Rodino: Yes, Craig, this is Jeff. I don't see a lot of channel conflict in what we're doing. Prior to having RecPro on board, which gives us that direct-to-consumer avenue for our products, we had very little aftermarket touch points with -- if you look at the content that Patrick is putting into RVs and Marine and then not really having an outlet to be able to get that product into the hands of the end consumer, this has really just given us that avenue. So I don't see a lot of conflict there. Craig Kennison: And then maybe finally on the MH side, what will it take to see a more sustained recovery? It feels like there's ample need for affordable housing and we're going to get interest rates moving in our favor. What are your industry context suggesting is necessary for that really to take off? Andy L. Nemeth: Sure, Craig. This is Andy. It's a good question. I think as we look at the MH side of the business, we certainly continue to believe in the model that it provides the low-cost alternative, especially for first-time entrants into the Housing market. Historically, MH has run 9% to 11% of single-family housing starts if you go back in history, and we continue to see that trend continue. As far as I'm concerned, as we continue to watch that, we're going to continue to look for an inflection point where we see that trend change a little bit. We see a greater percentage of single-family housing starts as our indicator. But overall, the model, the narrative makes a lot of sense, especially with where things are at. We just think some of the pent-up demand needs to be released into that market. But we're fully supportive of it. And as well the quality of the homes have gotten so much better over the years. And so it really is an attractive solution. We're as well waiting for kind of that inflection point. Operator: [Operator Instructions] Our next question comes from the line of Mike Albanese with Benchmark. Michael Albanese: Just want to touch on -- Craig had asked a question about the Powersports segment. And as we think about attachment rates and products like HVAC and audio, is it possible to kind of frame maybe from an industry standpoint what percentage of the overall utility industry comes with enclosures? Andy L. Nemeth: Let me think about that for a minute, Mike. So the percentage of the industry probably today... Michael Albanese: Utility side-by-side. Like how -- yes, I guess what percent... Andy L. Nemeth: How many utility vehicles are coming with enclosures? Michael Albanese: Yes. Andy L. Nemeth: I mean, I got to take a guess. Probably 60%, 70% is a guess. I can't tell you exactly. Jeffrey Rodino: And it's definitely going to be heavier on the utility side versus the side-by-side, Mike. And then we're dealing primarily with a couple of the large manufacturers. There are some of the manufacturers out there that aren't even offering that yet, but we believe that's a big tailwind for us when they start to go into that market. So within our customers, it's that 60%, like Andy was talking about. But the overall market, I think there is opportunity beyond that. Michael Albanese: Yes, that's exactly where I was going with the question, to get a sense of -- as just enclosures proliferate, with that comes more opportunities to drive new product and increase attachment rates, right? So I was trying to get a sense on... Andy L. Nemeth: Not only that, Mike, but the frame -- not only -- so some come with a frame, right, some come with a windshield, the attachment to add doors, to add windows. Then the additional content that we've talked about on top of that from a solution perspective kind of all play into that. Operator: Thank you. Ladies and gentlemen, I'll turn it back to Andy Nemeth for closing remarks. Andy L. Nemeth: Thank you. Once again, I just really want to acknowledge and thank our incredible team for just their continued efforts, dedication, passion for really partnering with our customers, bringing new products to market, managing the tariff situation and continuing to deliver consistent and predictable results. I'm just so proud of the team and all their efforts. And as well, I want to thank our customers for their tremendous support through these incredibly dynamic times as we continue to really work to partner to make sure we're promoting kind of the industry as a whole in alignment with their goals and objectives. So really appreciate all the efforts of the team. We will continue to push forward. I think there's a ton of opportunity for Patrick as we look at where the industries are teed up and where they can go. And not only that, the resilience and scalability of our model and the ability to inflect when our customers need it I'm really excited about. So once again, thank you very much for joining us. We look forward to talking to you after our fourth quarter results. Operator: Thank you. Ladies and gentlemen, this concludes today's teleconference. Thank you for your participation. You may now disconnect.
Operator: Good morning. My name is Danny and I will be your conference operator today. At this time, I would like to welcome everyone to the Agnico Eagle Mines Limited Q3 2025 Conference Call. [Operator Instructions] Mr. Ammar Al-Joundi, you may begin your conference. Ammar Al-Joundi: Thank you, Operator. Good morning, everyone, and thank you for joining our Agnico Eagle third quarter conference call. I'd like to remind everyone that we'll be making a number of forward-looking statements, so please keep that in mind and refer to the disclaimers at the beginning of this presentation. Once again, we are pleased to be sharing a good news story with you. In a nutshell, with record gold prices with strong and importantly, safe production, along with continued solid cost control we are once again delighted to be reporting record financial results. Across all metrics, our business is running well. And beyond the record financial results, we continue to invest in the best pipeline we've ever had and we continue to invest in the most ambitious exploration program we've ever had, which continues to deliver exceptional results. With almost 70 years of history behind us, we have never been stronger than we are now, and we have never had a better future than we have today. Before I turn this call over to my colleagues, who will go through our business in more detail, I'd like to spend a few minutes to summarize the key takeaways. One, we're reporting record financial results, driven by, of course, record gold prices, but coupled with strong and consistent operational performance. We delivered another exceptional quarter of strong production at 867,000 ounces, putting us year-to-date at 77% of our full year guidance range. We sold gold at an average price of $3,476 per ounce, another record and a full $20 per ounce higher than the spot average in the quarter, well done to the treasury team. At the same time, we continue to work hard to control costs, which means continue to deliver benefits of these record gold prices to our owners through record margins. While our reported Q3 cash costs of $994 an ounce are higher than the previous quarter, the majority of this cost increase is due to higher royalty costs which are a direct result of the higher gold prices. If we back out the impact of these higher royalties, which, again, are the direct result of higher gold prices, our Q3 cash costs would have been $933 an ounce, well below the midpoint of our cost guidance range. Year-to-date, our average cash costs were $943 an ounce. Again, if we back out the impact of higher royalties, our year-to-date average cash costs would be $909 an ounce well below the bottom end of our cash cost guidance range for the year. All of this, the record gold prices, the solid production, the continued good cost control has led to another quarter of record financial results for our owners. Record EBITDA, record adjusted net income and record returns to our shareholders. Two, we continue to strengthen the company to strengthen the balance sheet and to return record amounts of cash to our owners. We repaid $400 million of debt this quarter. We returned $350 million directly to shareholders through dividends and share repurchases, and we increased our net cash position to $2.2 billion, while at the same time, receiving an upgrade in our credit rating. Three, we continue to invest heavily in building the foundations of our future growth, advancing construction, development and studies of our 5 key pipeline projects and investing heavily in an exceptional exploration program. At Malartic, we are ahead of schedule on the underground development, ahead of schedule on the shaft and progressing studies for Marban, Wasamac and a potential second shaft. At Detour, the ramp portal is built. We have begun building the ramp to access the underground, and we continue to optimize the mill. At Upper Beaver, I was there just on Monday, we are on budget and we are ahead of schedule. The team is doing an exceptional job. At Hope Bay, we continue to get great drill results, and we are accelerating on-site activity. We've upgraded the port, we're upgrading the camp. We've emptied the mill building. We're progressing the Madrid ramp, and we have completed the box cut for a ramp at Patch 7. At San Nicolas, we continue to progress engineering on this high-grade, high-quality copper project in the best mining jurisdiction in Mexico. These projects cumulatively represent about 1.3 million to 1.5 million ounces of potential production. All from assets we already own in regions we've been operating for decades and in most cases, leveraging off existing infrastructure in place. At the same time, we are investing more than we ever have by a wide margin in our exploration program, and as Guy will illustrate at the end of this call, we continue to get truly exceptional results that will position Agnico Eagle well for decades to come. These 3 key messages are consistent with our story last quarter and are consistent with our focus over the past couple of years. But on this call, I've asked the team to spend some time on a fourth key message. I've asked the team to spend some time to talk about our continued focus on productivity. Dom and Natasha will go through a few examples to convey the message that even with gold at $4,000 an ounce, even with record financial results, our teams continue to be absolutely laser-focused on improving productivity at every opportunity at every mine. We are proud of our teams and how hard they continue to work to deliver not only great and consistent results, which, by the way, make my job a lot easier but to also focus every day on pushing themselves to operate even better and even safer. With that introduction, I will now turn over the presentation to our CFO, Jamie Porter, to review our third quarter financial results. James Porter: Thank you, Ammar, and good morning, everyone. Our operating teams delivered another excellent quarter with strong cost control, particularly on a per tonne basis. By delivering on our production targets and managing costs, our investors continue to benefit from margin expansion in a record gold price environment, a dramatically strengthened balance sheet and increased direct shareholder returns. We are in the strongest financial position in the company's history. The strong operational performance and cost control paired with higher gold prices to drive record financial results, including record revenue of $3.1 billion, record adjusted earnings of $1.1 billion or $2.16 per share and record adjusted EBITDA of $2.1 billion. These are excellent financial results, delivering the leverage to higher gold prices as you would expect. At current spot gold prices, key financial return metrics such as return on equity could be as high as 20% for the full 2025 year. Gold production in the third quarter was approximately 867,000 ounces of total cash costs of $994 per ounce and all-in sustaining costs of $1,373 per ounce. We have achieved 77% of our full year production guidance to the end of September. Though we have budgeted lower gold production in the fourth quarter, we are confident in achieving the midpoint of our full year production guidance range of 3.4 million ounces. We are benefiting from record gold prices. However, the higher gold prices do result in increased royalty expense. In the third quarter, cash costs were approximately $60 per ounce higher than what we had budgeted largely as a result of the increased royalty expense. Despite that I'm pleased to report that our cash costs remained within our guidance range on a year-to-date basis, and we still expect to be at or near the top end of our cash cost guidance range of $965 per ounce for the full year. Our teams have done an excellent job managing costs, the costs that are within our control and continue to work on ongoing optimization initiatives that Dom and Natasha will talk about later in this presentation. All-in sustaining cost per ounce were higher than the prior quarter, primarily due to the increase in cash costs and the timing of sustaining capital spending. We also expect to be close to the top end of our all-in sustaining cost guidance range of $1,300 per ounce on a full year basis. Our all-in sustaining costs continue to be hundreds of dollars per ounce below those of our peers. Again, this is the result of continued efforts by our teams to control costs and to continuously improve while maximizing the cost synergies and benefits resulting from our regional strategy. We move on to the next slide. We had another strong quarter of free cash flow generation that directly and indirectly benefited our shareholders through direct shareholder returns, the dividend and share buyback and indirectly through the strengthening of our balance sheet. We generated $1.2 billion of free cash flow this quarter and added another $400 million through the sale of equity investments which allowed us to continue to strengthen our balance sheet. Our net cash balance more than doubled in the third quarter, increasing to $2.2 billion. Given our strong financial position, we decided to redeem an additional $350 million of long-term debt in addition to the $50 million of debt that matured during the quarter. Over the past 18 months, we have significantly delevered the balance sheet reducing our gross debt in that period by over $1.6 billion. Reflecting this strength in credit profile and financial position, I'm also pleased to report that during the quarter, Moody's upgraded us from Baa1 to A3 with stable outlook. We are, again, in the strongest financial position in the company's history, giving us the flexibility to take a balanced, disciplined approach to capital allocation. We move to the next slide. We continue to deliver record shareholder returns this quarter, totaling approximately $350 million in dividends and share buybacks and totaling $900 million on a year-to-date basis. This brings the cumulative shareholder returns in Agnico's history to over $5 billion, the majority of which has been returned in the last several years. Our capital allocation strategy remains unchanged, and we are well positioned in this gold price environment. We expect to continue to increase shareholder return through increased share buyback activity and potentially through higher dividends. We also expect to continue strengthening our financial flexibility by increasing our net cash position. Given our profitability, we are expecting a significantly higher cash tax payment relating to the 2025 fiscal year in the first quarter of 2026. This is estimated at approximately $1.2 billion we are allocating cash to fund that obligation. Lastly and importantly, we will continue to reinvest in our business in order to bring our high-return organic growth projects online. We have our 5 key value driver projects Detour Underground, fill-in-the-mill at Canadian Malartic, Upper Beaver, Hope Bay and San Nicolas, all of which generate solid returns at gold prices significantly below the current spot price. At current spot prices, these projects have the potential to generate phenomenal returns. Detour, for example, once ramped up to 1 million ounces of annual production has the potential to generate over $2 billion of annual after-tax free cash flow at that mine alone at these gold prices. We will continue looking for opportunities to accelerate reinvestment in the business to drive long-term shareholder value. At current gold prices, we're generating a lot of cash, but we will remain disciplined and continue to take a measured approach to capital allocation with a focus on increasing returns to our shareholders over the long term. With that, I'll turn the call over to Dom, who will provide an overview of our Quebec and Nunavut and Finland operations. Dominique Girard: Thank you, Jamie, and good morning, everyone. Our Q3 results for Quebec, Nunavut and Finland continued to show strong and consistent operational performance, just as we saw in Q1 and Q2. We are on track to meet our guidance and we're positioning ourselves on good foundation for 2026. The production costs remain well controlled and as shown in the bottom right table here, we are seeing record profit margin thanks to the gold price. I'm very happy of our team's leadership and mindset. Even with higher gold price, the focus remains on debottlenecking the operation and improved productivity. As for example, this quarter, we have 3 mills that beat record -- quarterly records at Meadowbank, Meliadine and Goldex. For the next 2 slides, Ammar asked Natasha and myself to explain more and give examples about what we're doing at the site and regional level to control our cost to manage our business. You will hear not about cutting, cutting and cutting what you're going to hear is going to be more about productivity improvement, integrating technology, leveraging skill sets and leveraging our people. The first example is going to be Kittila, led by the team that you could see here on that picture celebrating the 3 million ounces ore. And the second one is going to be about new technology implementation in underground. Next slide, please. So at Kittila, following the new shaft commissioning and ramp-up the team were struggling to meet their operational targets at underground. And from there, I need to recognize the leadership of Jani, Mikko and [indiscernible] for taking action leveraging learning from similar initiatives done at Meliadine in 2023 to drive meaningful change. So in June 2024, they've launched an underground productivity improvement program and as at Meliadine, their approach was built on ownership focused on what matters and on problem solving. They work in collaboration with the employees. They did benchmark to define what perfect shift could look like and to be more productive. At the end, what they did, they've worked with the guys driving the equipment, as you could see there, a scoop to find how they could help them to be more productive. And some examples, like just bring the equipment faster than it was before either -- it's an easy one, but it's things that you -- that we kind of implemented to be more efficient. I will just show you some results of that, if I take the 2 graphs on the -- bars on the left, the bottom one, you could see the tonnes mined per day improved by 13% year-over-year to the first 9 months of 2024 compared to the first 9 months of 2025, 13% more tonnes moved or mined from underground. This is with the same equipment, same fleet, same people, more efficient. That allowed them also to do more by themselves and less relying on contractor which helped to reduce the cost. And on the cost side, if you take the top 1 on the left, you could see that euro per tonne minesite cost decreased by 4%, and this is despite inflation and higher royalty. So a very good job to the Kittila team. Thanks for that. Next slide. The second example is about implementing new technology of remote operations. The gains we are doing with those remote operations are not just helping us to control our costs and manage their business. It is more than just the current operation performance. It is also unlocking future growth project, enabling future growth projects. All of our projects if we could improve what we use into our studies in terms of tonnes move, tonnes mined as well as we're going to see at Odyssey, if we could improve the ramp development speed, this is significant improvement. So I will start with the example of LZ5 in 2016 where they've implemented the first LTE system in the world, underground, since that time, they really, really did very good progress. You could see with the yellow here through the time, we are now approximately over 20% of the tonnes are done through remote operation. And how this is -- the gain -- where is the gain is there were some areas some time that we were not operating the equipment because we need to do the out of the mine for the ventilation purpose, for example. So the same skill set and the same thinking has been applied to Odyssey ramp. And you could see the jump done in the year in 2023 when we started to do remote mucking and remote drilling at Odyssey. So we've increased the productivity by 20%. Again, same people same team just using the technology. This is a significant improvement. How it works? So you could see the people here sitting on the front of screen in a seat, which is the same that than the one in the scoop. So they are able to operate 3 to 4 equipment each, and we're collaborating very closely with Sandvik, LZ5 with Epiroc at Odyssey to push those technologies to do more and more. So this is helping us to control our costs. This is also enabling future projects. It is also an aspect on the workforce. Natasha is going to talk about opportunities and action on the workforce. But those type of things are in the balance to help the workforce. So we are in Quebec approximately 5% of turnover, which is fantastic and those type of initiatives are helping us to have better conditions for the workers for giving them great challenges to our professional. This is helping for the retention. This is helping for the recruitment, and this is helping for the stability of our operation. Next step, stay tuned. We're moving into the fleet management system. So the blue that you see on the graph there, this is still conventional hauling. Now to be better in that area, we're implementing fleet management system underground. We're going to be in the first of the world to implement such a software advanced like we're thinking about. In the coming years, you're going to hear about that. Next slide, moving to the project pipeline. As Ammar mentioned, both projects are on track and evolving very positively. As Guy will talk later, the drilling results keep adding value to the project. Very, very interesting. Canadian Malartic, in terms of shaft sinking where we start more conditional shaft sinking in Q3 we did a record in terms of speed. And we are about 2 months in advance of what we were planning initially when we updated the study in 2023. I would like also to highlight the construction team in Q3 did triple zero for 70,000 hours. What is triple zero is no lost time, no modified work, no medical aid and 70,000 hours, this is equivalent of 1 guy working in the construction for 30 years. Congratulations to the team, it's fantastic during those type of achievements. So to close on Canadian Malartic, the study is progressing for the vision to 1 million ounces with a second shaft Marban, Wasamac, everything is on track, and the construction team keep delivering what needed. For example, the administration building is going to be delivered in Q1 is going to be a good thing for the team to be in better position. At Hope Bay, potential 400,000 ounces annual production from the good drilling, I see, I think it's going to be slightly more than that. Let's see where the study is going to end. But in the meantime, we are -- the key thing is to advance engineering. So we are currently around 25% achieved on the engineering, and we are progressing between 3% and 4% per month, which bring us to the 40%, 50% we were looking before greenlighting the project next year, everything is in good position for that. And also, the construction team are preparing the field to be able to do that heavy construction time. So you could see here on the picture, there's 2 new wings. Both of them were approximately 133 people per wing. So we're building capacity. We're going to have 6 of them ready to go for construction, operation and keeping exploration. On that, I will pass the microphone to Natasha. Natasha Nella Vaz: Thanks, Tom, and good morning, everyone. So I'll cover the operational highlights for Ontario, Mexico and Australia. The regions delivered good safety, operating and cost performance this quarter. And along with the higher gold price, this led to record operating margins at both Macassa and at Detour. Now at Detour, as we continue to stabilize the mill at the higher throughput, the team achieved another quarterly record mill throughput. The open pit mining rate in the quarter, however, was affected by slower progress around the historical underground working. But grade is still expected to improve in the fourth quarter as we move into the higher grade domain in the pit. Over at Macassa, we had a really good quarter there, too. The team continued to see some overperformance with higher-than-expected grades in localized areas. And then at Fosterville, production this quarter was on target, following a very strong first half of the year. Now in terms of business improvement, similar to what Dom discussed, the teams, they continue to push hard to optimize our business. There is a constant effort to keep all of our operations at a state of optimal performance. It's just part of their DNA. And the optimization of the ore haulage system at Detour is a really good example of that. It's a good example of the many initiatives that are going on. It's a good example of how the team is looking at ways to sustainably lower cost and improve efficiency. And this particular journey started 10 years ago with incremental slow enhancements made over time and significant progress made, as you can see from the utilization and payload improvements as noted on the graph. And the team, they continue to look for optimizing our unit costs by involving external experts to review their performance and help identify possible efficiency gains similar to what Dom was talking about at Kittila, not just as it relates to haul optimization, but really the entire mining cycle. Another hot topic, and Dom touched on this, is related to the skilled labor shortage that the entire industry faces. Labor is a large portion of our overall cost, and our focus is to not just maintain our operational needs, but also secure the workforce to grow our business and at the same time, manage the costs. So we're taking a very proactive approach to workforce planning as we grow in Ontario by leveraging our region strategy by leveraging our competitive advantage, specifically when it comes to people. So our strategy to address the short and long workforce needs is multi-layered, of course, the first one is to ensure we continue to be a Great Place to Work for our employees by continuously investing in our people, by continuously leveraging the culture that Agnico has built we have increased the engagement levels of our teams. And Macassa is a really great example of how powerful this combination can be. Since 2022, we have significantly increased production at Macassa, and at the same time, we've significantly improved safety performance. They say that a safe mine is not -- is a productive mine. In our experience, it's also a highly engaged mine. In addition to that, we're investing in local workforce training. This quarter, we started the underground school of Mines for Macassa. Our plan is to, over a period of time, train local candidates to meet the increased demand for Macassa, for Upper Beaver, for Detour underground. While we remain focused on hiring First Nations and local employees, we're also seeing success in filling roles through our immigration program for skills that are generally hard to recruit for in Canada. So I'm very proud of the team because even at these gold prices, like Ammar was seeing their foot is still on the gas. They continue to safely and responsibly make our mines more efficient and more productive, ultimately reduce our costs. Now moving to the next slide. I'll give you a quick update on the 3 projects for Ontario and Mexico. As you are aware, the Detour Underground project plays a big part in the plan for the complex to be a 1 million-ounce producer annually. It's still early days, but as Ammar mentioned, this quarter, we commenced the exploration ramp and have advanced just over 250 meters laterally. We're also continuing with the infill and expansion drilling and continuing to see positive results, and Guy will talk about that later on in the presentation. As for Upper Beaver, during the quarter, there's been a lot of progress made in a short period of time. We did have the pleasure of hosting our Board and our senior management team this week at Upper Beaver, but also Macassa. And they were complementary, not just about the progress, but also strong teams that we have on the ground, and I completely agree. In terms of the project with respect to the shaft head frame, the structural steel and the cladding is completed, the winches have been roped up and the service hoist is ready for commissioning. So shaft sinking is still expected to commence in the fourth quarter. And over at the portal, the excavation of the exploration ramp began at the end of July and has advanced over 250 meters. Finally, with respect to San Nicolas, we continue to engage with government and authorities and our stakeholders related to the key permits that are needed. In the meantime, we're continuing to advance the engineering of some critical infrastructures which will just help us further derisk and build confidence in the execution strategy. So all in all, good progress being made on the projects. And I just wanted to end by thanking our operations team and the project team for another solid quarter. And so with that, I'll pass it over to Guy. Guy Gosselin: Thank you, Natasha, and good morning, everyone. First of all, I would like to start by taking a moment to thank the team at all sites for another excellent quarter, both safety and productivity and cost control went extremely well with an excess of 120 drill rig in action. We've completed north of 370,000 meters of drilling in the quarter, now exceeding 1 million-meter year-to-date. That is ahead of our schedule by about 9%, year-to-date in terms of meter and our unit costs are approximately 8% below budget year-to-date as a result of our strong involvement at controlling costs. Our Journey Excellence program continues to deliver. We're improving safety by introducing more mechanized feature such as robotic arm technology to reduce weightlifting and repetitive motion and we are ramping up our unattended drilling capacity that allow for drilling between shift, which is very beneficial for our underground mining sites. . Ending towards year-end, we continue to focus on key value drivers, expanding a little bit the drill program on several sites, such as Marban, Detour Underground, Hope Bay and Canadian Malartic, Odyssey where we have good exploration results that continue to blaze the trail to support studies that will support studies to deliver on our vision of growth for these assets. From a results standpoint, I would like to comment on a few projects, starting on Slide 15 with Canadian Malartic. We currently have 29 drill rig in action at Malartic, both underground and on surface at Odyssey in the extension of the deposit around the mine, including the recently acquired Marban project. And once again, this quarter has seen some very exciting results in the upper eastern portion of East Gouldie, results here says 4.8 over 25 meters at 800-meter depth in the area, we anticipate can get to mineral reserve by year-end that could provide additional flexibility to accelerate ramp-up of production in the upper portion of the East Gouldie deposit. Then also in the lower extension of East Gouldie with result of 2.3 over 30-meter 2,000 meters below surface, which is also kind of aligned with our decision to extend the depth of the first shaft down to 1,870 meters and the deposit remains open at depth and laterally. And on the adjacent Marban project, we've so far completed 96 drill on the property for 30 in excess of 30,000 meters since the acquisition -- since the drilling started in May following the acquisition mostly to test the eastern extension of the deposit on ground that belonged to Agnico prior to the consolidation. And the results have the potential to increase the ultimate design with result of to 3.3 over 11 meter, 4.6 over 10 meter, approximately 2,200 meter east of the current open pit being considered. Now on Slide 16, at Detour, as mentioned by Natasha, the exploration ramp is now progressing well with just over 250 -- almost 260 meters developed in the quarter, reaching a depth of 43-meter below surface, 62-kilometer of drilling were safely completed in the quarter with 9 drill rate and continue to infill and extend the deposits from surface in areas that are targeted for the underground mine project, both below the saddle portion of the deposit with result up to 3 gram over 40 meters, 2.7 over 55 meters. And to the west of the pit, where the planned exploration ramp would result pretty significant of to 7.4 over 27 meters. The result so far should lead to growth in the underground mineral resources system at [indiscernible]. And based on these results, we've added an additional 55,000 meter of drilling in the fourth quarter and expecting to achieve almost 220,000 meters by the end of the year. Now on Slide 17, as discussed by Dominique, again, some very good results in exploration. We have 6 drill rigs in operation. We've completed in excess of 100,000 meters year-to-date, expecting to achieve north of 120,000 meters by year-end. And we continue to see very strong results in Patch 7 area. First of all, in the southern extension of Patch with a result up to 6.7 over 10 meter, 10.7 over 3.8 meter at shallow depth 350-meter below surface, showing that the deposit remains open to the south on the right-hand side of that graph. And two, at depth in Patch 7 with very strong results, up to 12.7 gram over 9.3 meter and 16.9 gram over 4.6 meter both at around 880-meter depth in the strong new discovery at Patch 7 that shows that the deposit remains open at depth and laterally. So we anticipate that all of the good results we've seen at Hope Bay this year, where we have a very positive impact on the mineral resources at year-end and as mentioned by Dominique, all of that be integrated and our potential project development scenario to be communicated in 2026. Then on Slide 16 (sic) [ Slide 18 ], I would like to add a bit more color around Meadowbank. And as you are aware, we're looking in a current gold price environment to look at opportunity to continue to operate Meadowbank. So we've been since 2024 validating some option for pit pushback in the IVR area, but also continue to derisk the underground extension of the deposit that is known to be still open at depth. And all of those good results that we are displaying will be integrated in our scenario analysis to evaluate the pushbacks scenario and eventually to continue to mine from underground only with mill operation at a lower throughput once the open pit are fully depleted. Finally, at Slide 19, at Fosterville, not mentioned in our press release because it came out right after the cutoff of our press release today, we're pleased to announce that we've reached an agreement with these 2 resources to acquire their 39,000 hectares exploration license that surrounds our mining leads at Fosterville. This will consolidate in total more than 250,000 hectares stretching over more than 100 kilometers along the great at Fosterville to allow the continuation of the full investigation of those structure without any property boundary constraint and the transaction obviously is subject to the Victorian government approval and the closing is expected to close within about 2 months. So on that, I will return the microphone to Ammar for some closing remarks. Ammar Al-Joundi: Thank you, Guy. As you can see, we continue to work hard for all our stakeholders, and we'll continue to build off the same foundational strategic pillars that have served us well over the past 68 years. We will focus on the best mining jurisdictions based on geologic potential and political stability. We will be disciplined with our owners' money, making investment decisions based on technical and regional knowledge creating value through the drill bit and through smart, disciplined acquisitions when it makes sense. We are uniquely well positioned with a quality project pipeline leveraging existing assets in the best regions in the world where we believe we have a strong competitive advantage. And we will continue to be focused on creating value on a per share basis and on being leaders in our industry in returning capital to shareholders as evidenced by over 42 years of consecutive dividend payments and increasing share buybacks. And finally, before we open up for questions, I'd like to comment briefly on the current exciting gold environment, both the gold price and the sector more broadly, including our recent investment in Perpetua. On the gold price, of course, nobody has a crystal ball and nobody can predict near term moves, but it is very common that when a market moves up quickly, there is often a measured retracement in a period of consolidation before the next leg up. I think that is where we are on the gold price. Long term, we remain very constructive on gold and as all the factors that have pushed gold to outperform over the last 25 years remain in place and in many cases, have become more prevalent. On the M&A front, while we do have the best organic growth in our history, while we continue to have great success in our exploration programs, and while we feel absolutely no pressure to do anything, of course, we will continue to look at opportunities to create more value for our owners through smart and disciplined opportunities on the M&A side. Our owners want us to look at these opportunities our owners expect us to look at these opportunities, it is frankly part of our job. Our investment in Perpetua is a good example of this. Perpetua is 1 of the largest, highest grade undeveloped open pit gold mines in the United States and to paraphrase one of our senior exploration people. It is the most exciting U.S.-based gold exploration project she has seen in many, many years. Perpetua is also an investment in gold. Yes, there are valuable byproducts that will reduce cash costs but that's a good thing. This is what we do. We focus on geologic potential in safe jurisdictions, and we try to get in early to gain a knowledge advantage. Thank you again for joining us on this call. Operator, may I ask now that we open up the call for questions. Operator: [Operator Instructions] Your first question comes from Fahad Tariq of Jefferies. Fahad Tariq: Ammar, can you talk a little bit about the noncore investments in critical minerals? It sounds like it's a new subsidiary. I'm just trying to understand what type of investments will be vended in or spun out in there? It sounds like it would be things like Canada Nickel and maybe some other equity investments. And what is the future strategy of that subsidiary. Would it invest in like -- make equity investments or actual project development? Ammar Al-Joundi: Fahad, thank you for that question. You're absolutely right. For example, Canada Nickel will be in that subsidiary. I think as most of you know, there's been a lot of interest globally on critical metals. We are a gold company, but we're also, in my opinion, the best miners in the regions we operate, and we're the largest by far a mining company in Canada. We get asked about critical metal all the time. We want to remain a gold company. And so what we've -- the approach we've taken, which is consistent with being disciplined and consistent with our philosophy on capital allocation, which is that it should be based on knowledge. For the last 3 years, we've had a small team, as again, most of you know, looking at opportunities on the critical metals side. With everything that we've got going on with the great pipeline we've got, with our continued focus on gold, we felt now was the time to let that small group of people have a little bit more independence and look at opportunities on their own. So we've contributed small investments that are non-gold, non-copper into that subsidiary. We've given a little bit of seed capital. And frankly, Fahad, it's their job to look at opportunities. We are not obliged to invest more money. We'll be supportive, but we'll also have a first shot at looking at what they're doing. Fahad Tariq: Got it. And then may be switching gears, can you talk a little bit about how just government relations are going with the new federal government in Canada. Have you noticed changes in terms of the level of access to the government dialogue? And any opportunities in particular for Nunavut infrastructure? Ammar Al-Joundi: That's again an excellent question. We have been very pleased with the new government. I'll give you an example. While we are the biggest mining company in Canada, we really didn't get a lot of attention from the previous government. The weekend after the election and I got a text from Tim Hodgson, I've never met Tim Hodgson. He went out of his way to find out who I was, and I guess who other and I know he's talked to a lot of other mining executives and so you've got to give a government credit when the minister in the very first weekend reaches out to people on their cell phone via text. We know the teams there well. We've probably had more discussion with the new government on the importance of mining and the opportunity of mining to contribute to Canada than we had with the previous government over several years. So we're very pleased. They are very smart. They're very engaged, and they really are interested in leveraging off of what mining, for example, can do for the average Canadian. Operator: Next question comes from Anita Soni of CIBC World Markets. Anita Soni: First question is with respect to Hope Bay. What are you expecting to deliver by year-end in terms of a resource update? And then what are you targeting for the 2027 study. Dominique Girard: I could start maybe with the study, and I will let Guy for the resource. On the study, we're expecting in the first half of next year to deliver PEA study with the engineering at over 40%. And again, as we did that mediating to really have a good view on the schedule and on the cost. We like to give the information when we have enough of that engineering done. I'm very happy to see the progress with the team and midyear -- before midyear next year, we're going to give you more detail on all those KPIs Anita. And with that, I will pass it Guy. Guy Gosselin: Yes. So as a follow-up, so for year-end, I would say reserve will remain as last year. We're going to be updating indicated and inferred resources, obviously, integrating all of the new results we've been getting expanding Patch 7 driven. And along with what Dominique described our study in 2026 with the new development scenario, new [ cusp ]. So our desire would be to update with a brand-new PFS supported reserve and resources filing by the end of 2026. Anita Soni: Okay. And then just a question with respect to cost. I know you talked about tariffs a little bit, and it seemed like it was the standard customary cautionary language. But is there any -- is there any other -- I guess, I'm just trying to get an idea of what inflation -- what kind of inflation expectations you're seeing going into next year? Is it the typical 3% to 5%? Or -- and you obviously talked about optimizations where you're trying to defray some of those 3% to 5%. You've done an excellent job this year of maintaining costs within the original range despite a more than $1,000 gold price move. But what can we -- what should we be thinking about going into 2026 and other moving parts like changes in grade and things like that? James Porter: Yes. Anita, it's Jamie here. We're obviously working through the budgeting process now. I think 3% to 5% is where we've seen labor inflation over the past several years, but across all of our costs, it's been closer to 6% to 7%. And if you go back over the last 3 years, the average cost of inflation we've seen has been 6% to 7%. Our guidance has been up on average by about 3%. So we've been able to do a bit better than the rate of inflation over the last few years. Going into 2026, I think we're seeing a similar level of inflation in around 6% to 7%, across all of our various cost components, and obviously, we're seeing the pressure on royalty costs as a result of the higher gold price. So we would expect costs will be higher next year just based on the impact of higher gold prices. But as we've talked about through the call today, we're always looking at opportunities to do better than inflation. Operator: Your next question comes from John Tumazos of John Tumazos of John Tumazos Very Independent Research. John Tumazos: Could you review the rigs operating across the company? I think I heard there were 29 rigs at Malartic and the meters were being increased 55,000 to 220,000 for the year. Could you give us that review across the portfolio, please? Ammar Al-Joundi: John, I'm going to -- thank you for the question, John. I'm going to ask Guy to comment on that. Guy Gosselin: Yes. So basically, the 120 rigs as reported are spread over operating mine, advanced projects. I can go through maybe with you off-line if you want to see, but basically, we have those 29 rigs, the 220,000-meter an additional 55,000 meters, you're referring to pertaining to Detour, where we have those 9 rig operating. So we haven't seen -- I'd say, quarter-over-quarter, we have the exact same number of rigs. We've just seen an increase in productivity, and we're trying wherever we've been getting some good results, especially in the pipeline to keep drilling at the same pace during the fourth quarter. Therefore, we're expecting that we will be in a position to go all the way to around 1.25 million, 1.3 million meters by year-end without spending much more because of the lower unit cost we've been getting with those productivity improvements such as the unattended drilling. Basically, what it means on a day to day is when the driller -- with the new rig that we are currently revamping on each of the sites with collaboration with our entrepreneurs, you're basically adding the function that when the guy hit the rig at the end of the shift for the blasting and the gas clear up you can just press the button, the drill, continue to drill in between shift. So if you look at it, if you can drill 3 more meters at the end of the shift 3 more meter at the end, for an underground mine, it is quite significant. So those are the things that with the same fleet of rig, we can get more done. And we're going to continue to drill at the same pace because we have some good results. And overall, we are expecting our global exploration budget for the company, $525 million, including an exploration project to be about right on that $525 million for the year based on our [indiscernible] forecast we've just done. John Tumazos: Could you just run through several sites where the most rigs are running, I don't remember how many rigs were at each site. Guy Gosselin: Yes. Well, maybe I can provide you with those detail offline, but we have those 29 in Malartic, we have 9 at Detour. We have 12 in Macassa. We have 6 at Hope Bay so maybe I can provide you with the detailed list of the spread of our rig offline, John. Operator: Your next question comes from Tanya Jakusconek from Scotiabank. Tanya Jakusconek: I just wanted to talk to you about the reserve and resource replacement this year, year-end 2025. I think if I go through the -- what you mentioned we're going to see increase in reserves at East Gouldie. That was really the only mine the only cause that I heard and then resource growth at Detour and Hope Bay. Is that correct? Guy Gosselin: Yes, yes, I can take it. So we will also -- we are in a good position to fully replace what we mine at Kittila, Macassa and several of our sites will see some partial replacement. We will also have Marban that will get into the mix siding the first iteration of Marban. So net bottom line, we're expecting to see a net growth, net of mining depletion by year-end by maybe, I don't know, my guess we should be up by 0.25 million or 0.5 million ounces year-over-year despite the fact that we've mined we've extracted 3.8 million and will produce 3.45 million this year. So all in all, the drilling has fully replaced what we've mined out with a light growth year-over-year. Tanya Jakusconek: Okay. And should I be thinking as you have done historically that you take your reserve and resource pricing and you look at inflation and adjust accordingly. So I know your reserves are at about $1,450 our resources at $1,750. If I put that 5%, 6% or thereabout inflation, I guess, $1,550 and $1,850, respectively. Should I be thinking that's how you're going to approach your pricing for your reserves and resources at year-end? Guy Gosselin: Well, that's a very good question. Obviously, with the current gold price environment, we are at that question, and we're working on it. But our care remains to deliver the margin ounces upfront. Therefore, we don't want to lower the cutoff grade that will change our mining sequence in the upcoming couple of years. So we are looking at it on a mine-by-mine basis, if there is some excess milling capacity. If we can mine some -- so we're going to be having that in mind, Flexing maybe our gold price assumption on some projects, whether it's a life of mine extension scenario or where there is additional milling capacity. But our firm intention remains to keep the cut-off rate stable while as you described, offsetting inflation, moving the gold price up in line with that inflation we see overall on the market. Tanya Jakusconek: So then it's really what you talk about is real actual replacement of ounces rather than any movement in gold price for what you're seeing for year-end? Guy Gosselin: Yes. Tanya Jakusconek: Yes. Okay. Perfect. Maybe over to you, Ammar, if I could, about just the strategy on the overall portfolio, both from an investment equity standpoint. And then also on your portfolio, your asset -- overall assets. So some really -- there are some smaller ones that you have in there as well. So I'm just interested in how you're approaching this -- let's start with the equity portfolio. Should I be thinking your investing in Perpetua is 1 investment. But should I be thinking that whatever sales or sales you make from that investment portfolio, it just gets reinvested into other equities rather than being thought about this gain as allocated to shareholder returns. Should I be thinking about it in that way? Ammar Al-Joundi: Thank you, Tanya, for the question. No, the money belongs to our owners. We make strategic investments in things that we have looked at and think might have an opportunity to create value for our owners. We don't do it as a trading position. We do it really again, in line with our philosophy on being disciplined with capital. It's an opportunity to make an early investment to learn about a project that we might be interested in. And so if you take a look at something like Orla and there's a long history there. We -- eventually, Orla did a fantastic job. They didn't really need us anymore. There was a lot of money tied up. We took up -- we liquidated that position, but that does not go into a pool that goes back into equity. That is our owners money, and that money everything competes for that money. Investments into our mines, technology, everything has to have a business case. So we do not simply take that gain and allocate it to future equity investments. It's our owner's money, and it gets treated like the rest of our owners' money. Tanya Jakusconek: Okay. So it just goes part of your cash flow and then gets allocated accordingly. Ammar Al-Joundi: Correct. . Tanya Jakusconek: Okay. And then in the portfolio itself, as you hire gold prices, everyone is looking at their portfolio and some you have a lot of big assets that you're focusing on coming up these top 5 assets that you talk about. Anything that you see as anything within the portfolio for noncore . Ammar Al-Joundi: Yes. I mean there -- I just looked at it this morning, John and I talk about this all the time. You're right, Tanya. There are some things that transition well, and we continue to be interested in. And as you would expect and as in the history of our company, there are some projects that while we invest in early we end up concluding don't make the criteria for our owners, and we will be disposing of them. And frankly, again, you're right at these current gold prices, it's not a bad time to in some cases, sell those assets. Tanya Jakusconek: Yes. So when we're talking about assets, we're talking about assets, not investments? Ammar Al-Joundi: Correct. Well, no, no. In this case, I'm talking about the equity investments. Tanya Jakusconek: Equity investment. How about just overall within the portfolio, just some smaller within the portfolio, anything in Mexico. You've got some smaller stuff with that... Ammar Al-Joundi: Yes. I mean the -- you asked about Mexico. There are some things that are now pretty small and nonstrategic. We always look at opportunities to get the most value from any asset, whether that means we operate it or we sell it. I can assure you we do that with all of our assets, including ones that are small. And so if there are some that you might wonder, well, why haven't you sold them, the simple answer is you can assume that we've looked at all the different opportunities and have concluded on the ones that will make the most money for our shareholders, even if it's a small asset. Operator: There are no further questions at this time. I will now turn the call back over to Mr. Ammar Al-Joundi. Please continue. . Ammar Al-Joundi: Well, thank you, everyone, once again for joining us this morning. More importantly, thank you for being our friends and supporters over many decades in many cases, everybody 1 day early, have a nice weekend. Operator: Thank you. Ladies and gentlemen, that concludes today's conference call. Thank you for your participation. You may now disconnect.
Operator: Ladies and gentlemen, welcome to AIXTRON's analyst conference call Q3 2025. Please note that today's call is being recorded. [Operator Instructions] Let me now hand you over to Mr. Christian Ludwig, Vice President, Investor Relations and Corporate Communications at AIXTRON for opening remarks and introductions. Christian Ludwig: Thank you very much, Gunner. A warm welcome also from my side to AIXTRON's Q3 2025 Results Call. My name is Christian Ludwig. I'm the Head of Investor Relation and Corporate Communications AIXTRON. With me in the room today are our CEO, Dr. Felix Grawert; and our CFO, Dr. Christian Danninger, who will guide you through today's presentation and then take your questions. This call is being recorded by AIXTRON and is considered copyright material. As such, it cannot be recorded or rebroadcast without permission. Your participation in this call implies your consent to this recording. Please take note of the disclaimer that you find on Page 1 of the presentation document as it applies throughout the conference call. This call is not being immediately presented via webcast or any other media. However, we will place a transcript on our website at some point after the call. I would now like to hand you over to our CEO for his opening remarks. Felix, the floor is yours. Felix Grawert: Thank you, Christian. Let me also welcome you to our Q3 '25 results call. I will start with an overview of the highlights of the quarter and then hand over to our CFO, Christian, for more details on our financial figures. Finally, I will give you an update on the development of our business and our guidance. Let me start by giving you an update on the key business developments of the second quarter on Slide 2. The important messages for Q3 '25 are our free cash flow in the quarter was EUR 39 million, totaling EUR 110 million in the first 9 months '25, while inventories are down to EUR 316 million, coming from EUR 369 million at the year-end '24. This shows we are well on track with our strategy to rebuild our cash position after we had depleted that with the construction of our 300-millimeter cleanroom, the innovation center in the years '23 and '24. In Q3, we recognized new orders of EUR 124 million, which lead to an equipment order backlog of EUR 287 million, where we have achieved a book-to-bill of 1.04. We concluded the quarter with revenues of EUR 120 million. With that, we were in our guided range of EUR 110 million to EUR 140 million. The gross margin reached 39% in Q3 and averaged 37% in the first 9 months. This figure includes a one-off expense related to our implemented personnel reduction earlier in the year. Adjusted for this effect, the gross margin after 9 months came out at 38%, slightly below previous year's 39%, mainly due to volume shifts and FX headwinds. As the market remains soft, we had to adjust our fiscal '25 guidance 2 weeks ago. We are now expecting revenues in the range between EUR 530 million and EUR 565 million, which corresponds to the lower half of the initial guidance of EUR 530 million to EUR 600 million, and a gross margin of now 40% to 41%, down from previously 41% to 42%, and an EBIT margin of now around 17% to 19% from previously 18% to 22%. AI continues to be the main end market driver, especially for our Optoelectronics segment. Automotive-driven power electronics demand, on the other hand, remains soft. Christian will now provide a detailed look into our financials on the following pages before I take over with an update. Christian? Christian Danninger: Thanks, Felix, and hello to everyone. Let me start with the key points of our revenue development on Slide 3. In a soft market environment, we achieved revenues of EUR 120 million, down versus the EUR 156 million last year, but well in the guided range of EUR 110 million to EUR 140 million. For the first 9 months, revenues came in at EUR 370 million, down about 9% year-over-year. A breakdown per application shows that 66% of equipment revenues after 9 months come from GaN and SiC power, 14% from LED, 16% from Optoelectronics and a 5% contribution from R&D tools. The aftersales business contributed to total revenues with EUR 80 million. The aftersales share of revenues after 9 months was up by 2 percentage points year-over-year to about 22%. Now let's take a closer look at the financial KPIs of the income statement on Slide 4. I already talked about the revenue line. Gross profit decreased year-over-year in Q3 '25 to EUR 246 million. Gross profit in the quarter was negatively affected by approximately EUR 8 million due to volume shifts from Q3 into Q4 and around EUR 2 million due to FX effects. Subsequently, the gross margin in the quarter came in at 39%, down 4 percentage points versus the prior year. After 9 months, gross profit was at EUR 136 million, 15% below last year's figure. At 37%, our gross margin after 9 months was 2 percentage points lower than after the same period last year. But please recall, as stated in our Q1 release, this includes a one-off expense of a mid-single-digit million euro amount in connection with the implemented personnel reduction in the operations area. Adjusted for these effects, the gross margin after 9 months would be around -- at around 38%. For the remainder of the year, we calculate with an average U.S. dollar-euro exchange rate of 1.15 and the continued weakness of the Japanese euro rate. Due to high expected revenues in foreign currency in Q4, we expect an additional around EUR 3 million negative impact in revenues and gross margin with the larger part resulting from the U.S. dollar and the smaller part from the Japanese yen. Together with the above-mentioned EUR 2 million effect realized in Q3, this totals to approximately EUR 5 million negative FX impact, which corresponds with the 1 percentage point gross margin adjustment of our guidance. OpEx in the quarter were slightly up by 4% year-over-year to EUR 31 million, primarily driven by higher R&D spending compared to the previous year. For the first 9 months, OpEx came in at EUR 94 million, a reduction of minus 6%, driven primarily by around 13% lower R&D expenses. R&D expenses were down mainly due to reduced external contract work and consumables costs. As stated before and visible in Q3 numbers, R&D costs in H2 will be higher than the H1 number. So for the full year, we expect R&D costs to be slightly lower than in 2024. EBIT for the quarter is EUR 15 million, a significant drop versus Q3 2024. The main drivers besides the already mentioned negative factors impacting gross profit is a negative operating leverage effect resulting from lower revenues. The weaker performance in Q3 led to an EBIT of EUR 42 million for the first 9 months, a decrease of 30% year-over-year. This translates into an EBIT margin of 11%. Again, please record the one-off expense in connection with the personnel reduction I've mentioned before. Adjusted for this effect, the 9-month EBIT margin would be around -- at around 12%. Now to our key balance sheet indicators on Slide 5. On a more positive note, working capital has continued to come down -- has come down by around EUR 100 million since end of fiscal year '24. Several balance sheet items contributed here. We continued to decrease inventories to EUR 316 million compared to EUR 369 million at the end of 2024. Year-over-year, inventories have been reduced by EUR 111 million as we continue to work through the surplus accumulated last year. And as stated before, we expect further inventory reductions to materialize throughout 2025 and into 2026. Trade receivables at the end of September were at EUR 129 million compared to EUR 193 million at the end of 2024. The reduction versus year-end is mainly the result of the collection of the payments related to the large shipments end of 2024. Advanced payments received from customers at quarter end were at EUR 73 million, a nice recovery of about EUR 20 million versus end of last quarter, but still down about EUR 9 million from end of 2024. This is primarily driven by some cutoff date effects and some regional shifts in the order book. Advanced payments now represent about 25% of order backlog. The fourth key element of working capital, trade payables, has now come down to EUR 24 million from EUR 34 million at the end of 2024. This reflects a now fully adjusted supply chain situation with significantly reduced purchasing levels. Adding it all up, our operating cash flow after 9 months improved to EUR 128 million, a strong improvement of EUR 100 million versus last year's EUR 28 million. On the back of the improvement in operating cash flow, free cash flow improved even more. It came in at EUR 110 million after 3 quarters compared to negative EUR 58 million last year. This was supported by a strong reduction in our CapEx. With EUR 18 million after 9 months, our CapEx was significantly lower than last year's number of EUR 86 million. This is primarily due to the now completed investment in the innovation center. As of September 2025, our cash balance, including other current financial assets improved to EUR 153 million. This equals an increase of EUR 88 million compared to EUR 65 million at the end of fiscal year 2024, despite the dividend payment of about EUR 17 million in Q2. As stated before, a key priority remains the rebuilding of a strong cash position. Our financial decisions continue to be guided by this objective to ensure a robust liquidity foundation for the future. This has served us well in the past, and we see ourselves well on track towards this target. With that, let me hand you back over to Felix. Felix Grawert: Thank you, Christian. Let me continue with an update on key trends in our different markets, starting with optoelectronics and lasers. In optoelectronics, AIXTRON has seen a continued recovery in demand for datacom applications, which began earlier this year and has been reaffirmed in Q3. This trend is expected to continue into '26 and beyond. Our customers are increasingly transitioning to 150-millimeter indium phosphide substrates and photonic integrated devices, PIC devices requiring advanced epitaxial performance. This segment is technology-wise very demanding. It requires excellence in the uniformity, doping control and defect management, areas where our G10-AsP platform excels. Historically, AIXTRON has held a market share of over 90% in this domain served by our G3 and G4 planetary reactors. The G10-AsP is now establishing itself as the tool of record to the laser market, replacing legacy systems at leading customers. Q3 shipments and scheduled Q4 deliveries underscore our strong market position with repeat orders from key customers such as Nokia. Additionally, VCSEL demand is recovering, driven by LiDAR modules and automotive applications. We, therefore, expect that tools for the various laser applications will contribute significantly to our full year order intake and also into next year '26. Now let me move on to our LED business. We are seeing first encouraging signs of reinvestment in red, orange, yellow -- ROY LED applications. Utilization rates for red, orange, yellow LEDs have been high throughout the year with double-digit system shipments for mini LED applications driven by demand for RGB fine pitch displays. Notably, some TV manufacturers such as Samsung are shifting to full RGB backlighting, boosting micro LED demand. While overall micro LED demand remains moderate, medium-term drivers are positive. We've received multiple orders for our G10-AsP platform, primarily for red pixel production in next-generation AR devices. The recent announcement of Meta's AR glasses based on micro LED technology signals a broader trend with more OEM products expected in '27 and '28. Our G5+ and G10-AsP platforms are ideally suited for these applications, which require ultra small pixels and defect-free epitaxial die. The launch of Garmin's first micro LED watch is likely to further stimulate demand across blue, green and red micro LED segments. In solar, after years of moderate investment, we are now seeing renewed interest, including multiple orders for low earth orbit -- LEO satellite applications in constellation projects. LEO satellites are those that orbit the earth at altitudes of about 2,000 kilometers. They enable both fast communication as well as high-resolution earth observation by operating in a zone just above the earth's atmosphere, where they can maintain strong signal connections with ground stations. These satellites work in interconnected constellations of hundreds of thousands of satellites of hundreds or thousands of satellites to provide global coverage, examples are Starlink or OneWeb. We anticipate this trend to continue in the years '26, '27 and '28. Let me now come to gallium nitride power. AIXTRON continues to lead GaN power segment with over 85% market share across all wafer sizes and power ranges. Although demand is softer compared to last year, we are seeing solid volume orders for both 150- and 200-millimeter solutions, particularly from Asian customers with ramp-up plans extending into '26 and '27. We've also strengthened our partnership with imec. Together, we are accelerating innovation at both the architecture and device level. imec has been using both our G5+ as well as the G10-GaN platform for its 150- and 200-millimeter partner programs for quite a while. And we have now shipped a 300-millimeter gallium nitride platform to enable broader access to imec's recipes. We see first power semiconductor manufacturers adopting 300-millimeter GaN technology such as Infineon Technologies. Regarding the overall GaN market, we are still dealing with a moderately oversaturated installed base, requiring some more time to absorb existing capacities. This digestion phase is expected to continue for some quarters before a broader recovery sets in. With that, let me come to silicon carbide. While end-user demand remained soft, we observed moderately increased utilization rates at some of our customers. On the one hand, this is due to new EV models being launched, which drive demand. On the other hand, SiC is starting to enter the AI data center value chain, especially in voltage classes of 1,200 volts and above. You have seen the new NVIDIA power architecture, which relies exclusively on wide band gap power devices. At the International Conference for Silicon Carbide and Related Materials -- in short, ICSCRM in Busan, Korea early in Q3, various industry players confirmed midterm adoption of super junction silicon carbide technology. This technology basically means that instead of one thick silicon carbide epi layer deposited today, we will see in the future multiple thinner silicon carbide epi deposition steps. These thinner epitaxial layers require enhanced uniformity and shortened process time. Our G10 silicon carbide platform is well positioned to meet these needs, offering superior productivity due to the benefit of the batch concept, especially for thinner layers. We are proud to have shipped our 100 G10-SiC CVD system, marking a major milestone and reinforcing our leadership in the silicon carbide power segment in this quarter. The silicon carbide market is still undergoing a longer digestion period, particularly in western-oriented regions. As a result, there are no major decisions for new fab investments on the agenda these days. In summary, we can say that the soft market period still continues in almost all markets, apart from the laser market, driven by the hunger for data from AI applications. A demand pickup will not materialize in '25, and visibility in '26 is still limited. With that, let me now move to our guidance. Due to the market situation just described, we had to adjust our guidance for 2025, 2 weeks ago. Based on the current soft market environment and assuming an exchange rate of USD 1.15 per euro for the remainder of the year, we now expect the following outlook for '25. We expect to generate revenues in the range between EUR 530 million and EUR 565 million, which corresponds to the lower half of the initial guidance, which was initially EUR 530 million to EUR 600 million. FX effects led to an approximately 1 percentage point reduction of gross margin and EBIT margin. As a result, we expect now a gross margin of around 40% to 41% and an EBIT margin of around 17% to 19%. The guidance for the gross margin and EBIT margin includes a one-off expense of a mid-single-digit million euro amount in the relation to the implemented personnel reduction in the operations area earlier this year. The measure will lead to annualized savings in the mid-single-digit million euro range in the future, which corresponds to an improvement in the gross margin and EBIT margin of around 1 percentage point. As previously stated, we expect our tools to remain exempt from U.S. tariffs. However, we continue to closely monitor the impact of U.S. trade policies on the global economy and stand ready to implement any necessary measures to ensure the best possible outcomes for our customers and stakeholders. Let me, at this place, also give you a first outlook for the next year 2026. We clearly see that the medium and long-term drivers for AIXTRON's growth such as demand for GaN and SiC power devices, LED and micro LED applications, lasers and LEO solar applications remain intact. However, visibility for the fiscal year '26 remains low. And as of today, we do not see signs of a demand recovery yet. Therefore, our view today is that 2026 revenues are likely to be slightly below those of '25, maybe flat. Furthermore, assuming an exchange rate of USD 1.15 per euro, we expect the EBIT margin not to come out below the range of the current year, maybe better. As always, we will give you a firm guidance with the release of our financial year results end of February 26. With that, I'll pass it back to Christian before we take questions. Christian Ludwig: Thank you very much, Felix. Thank you very much, Christian. Operator, we will now take the questions. Operator: [Operator Instructions] The first question comes from Janardan Menon from Jefferies. Janardan Menon: I just wanted to touch upon your final comments on 2026 to start off with. You said that 2026 is likely to be flat or down, but it sounded like you expect Opto to be up, and your trend -- when I look at your Q3, GaN seems to be doing quite well, while SiC is down quite sharply. So would it be fair to say that at current visibility, you would expect Opto to be up, SiC to be down and GaN to be somewhat flattish. Is that a view that -- which would be sort of a preliminary view for next year? Felix Grawert: It's a good -- I think you got a perfect read on this one. Let me try even to quantify it for you. I think roughly in terms of percentage of revenues, we expect as a percentage of total revenues next year, we're expecting to gain about 10 percentage points for Opto, 10 percentage points gain for GaN and minus 20 percentage points in silicon carbide. So a pretty weak year for SiC, but very strong year for the Opto segment. It used to be a smaller segment. So adding 10 percentage points of the total is quite a significant one. This also helps on the margin. You have seen my comment related to margin quality. And GaN also as a percentage gaining a bit. Janardan Menon: Just a follow-up. On the SiC side, yes, I understand that demand is quite weak right now. There's quite a bit of supply out there and automotive is still sluggish. But listening to companies like STMicro and all who are under quite severe margin pressure on the silicon carbide side, they seem to be accelerating their 6-inch to 8-inch transition because they see that as a way to improve their profitability. And ST specifically said that they'll do it within -- through the course of '26 and by early '27. I would assume that that would be true for other parts of the installed base as well given the price pressure on silicon carbide. Do you not see this as a driver at all for your silicon carbide revenue? And do you really need the end demand to recover before any improvement happens? Felix Grawert: I think you catch it very well. Yes, the 6- to 8-inch transition is going very fast, especially at outside of China players. I think worldwide outside of China, we see the 6- to 8-inch transition progressing at rapid speed, as you have indicated with one company name, and we see the same in other players. In fact, we do hear from some of our customers that while end customer revenue is flat or down, the unit numbers are going up and unit numbers is, of course, what we as an equipment maker like, because in the end, it's about wafers and increasing numbers of wafers. So in fact, we expect that by the end of '26, the transition in the Western world, as I may call it now, including Japan, is probably concluded '27, '28, I would expect the volume to be completely going on 8-inch. We do see on 8-inch also much better quality wafers, which helps the customers in terms of yield. That's one of the cost reduction drivers. Also 8-inch substrates are getting good pricing now. Initially, they used to be very expensive. Now the pricing for 8-inch substrates is going well. And that, at some point, means the excessive overcapacity that I was speaking about at some point will be digested. I would not dare at this point to give an exact prediction because there's multiple variables that we are just discussing. But I think we can clearly see at some point, the overcapacity will be digested and then there will be new demand. Janardan Menon: But that transition doesn't mean buying new 8-inch machines from you, is it to generate revenue for you? Felix Grawert: At some point, it will mean buying new demand and new tools when the existing overcapacity is consumed. Right now, we talk about existing overcapacity, which is just being converted. Operator: Next up is Martin Marandon-Carlhian from ODDO BHF. Martin Marandon-Carlhian: The first one is on something that you put on the press release on gallium nitride. You talked about utilization rate rising in data center. And I was wondering what does it mean exactly? I mean, does it mean that you already anticipate orders in the near term linked to the new 800-volt architecture from NVIDIA? Does that mean something else? Felix Grawert: Let me explain what we mean by that. Thanks for the question. What we have seen is we have seen in the years, especially '23 and '24, we have seen quite a number of gallium nitride orders, which were happening a bit ahead of the wave, such that, I would say, early '25 at the existing volume customers, we have seen quite a significant overcapacity of installed base also in gallium nitride. That was the reason why in '25, compared to '24, our gallium nitride shipments have been slowed down quite a bit, because our existing and established volume customers literally had also in GaN, not only in SiC, but also in GaN, some overcapacity to be digested. So as we started into '25 at some of our customers, also in gallium nitride, we have seen installed base utilization to be quite low. Now towards the end of '25 and looking into '26, we see that a much larger fraction of the installed capacity is being utilized at the existing GaN customers, while those who newly entered the GaN market in '24 and '25 in previous earnings calls, you may have recalled that we said -- well, there's still new players entering the market to gallium nitride. And those new entrants at this point in time are still in the qualification or in the device and the sampling phase of their technologies to their end customers. You have seen the numbers that I was just commenting towards the question that Janardan was asking. We expect the GaN segment for us to be slightly up next year. Again, it's an indication, qualitative indication. as we see that utilization is increasing, and we expect due to the increasing utilization, some expanding orders from some customers kicking in. The broad market recovery, as I've indicated, with the real volume pull, we don't expect in '26. We rather expect that in '27, '28, but some increasing orders in '26. Does that answer the question? Martin Marandon-Carlhian: Yes, that's very clear. But just a follow-up on this. I mean, why would you anticipate more of that volume in '27 and '28? Because we read that this new architecture from NVIDIA is supposed to be for Rubin Ultra, which is launched in H2 '27. So I was expecting capacity maybe to come a bit earlier than this. So does this mean that maybe it will not be 100% GaN for some steps at the beginning, the 50 and 12-volt steps and it will go gradually. I mean just can you explain a bit why it should come more gradually, let's say? Felix Grawert: So this is based on our current view, what we have and the signals we get from our customers. I share the view that the new 800-volt architecture will lead to significant volumes around '27, '28. This is also our view, I share that. Now for us, it's always very difficult to predict the exact timing when customers will place the orders for new equipment because we do see certain trends, but we cannot look into the exact budgets and plans of our customers. Therefore, at this point in time, we can only comment on what we are currently seeing. If later on in the year, volume kicks in and orders accelerate, we are very happy to it. We don't see signs to that yet. Martin Marandon-Carlhian: Great. And maybe a last question on GaN. I mean, you all is saying that the GaN market will be close to $500 million this year with that data centers really being really a contributor. What would you guess would be the size of the data center market for GaN compared to the overall size of the market this year, like $500 million? Felix Grawert: So I do not have the exact timing for my message in mind. We have looked at a midterm perspective, I think somewhere triangulating '28, '29, '30, something a little further out. And in this triangulation that we've done, the data center opportunity with an upside of about 50% on top of the market without the data center opportunity. You may recall that we have a slide out there in the investor deck, which on the X-axis has 3 time horizons. I think '20 to '23, I think '24 to '26 and whatever '28 to '30, something like this. And on the Y-axis, the different voltage levels, low voltage, medium voltage and then very high voltage. And there, we have put the AI data center opportunity, and this is the market that I'm referring to. Martin Marandon-Carlhian: Maybe last question for me on the gross margin. I mean the current guidance implies record gross margin in Q4. Just can you help us maybe see the main drivers of this? Christian Danninger: Yes. Martin, Christian here. I'll take that one. I mean, like in the last years, the Q4 will be the strongest quarter just by volume, purely shipments. Beyond that, we expect an improved product mix, especially a higher share of final acceptance revenues coming with high margins and also some fixed cost degression effects. A little bit of color on the product mix. We expect a big share of G10 family products, around 50% of Q4 revenue so that you get an idea. So also looking at the -- comparing this with the last year, these margin ranges appear achievable for us. Operator: Next up is Didier Scemama from the Bank of America. Didier Scemama: I've got a couple of questions maybe clarification on the comments you made earlier on '26. And perhaps my math is not right, so please don't shout at me if I'm wrong. I think you said the SiC part of the business would be down 20 percentage points in terms of group sales. I mean, by my calculation, that would imply a pretty minor revenue contribution in '26. So is that correct? And then equally, Optos up, I think you said 10 percentage points within the group, that's going to put it at something like EUR 150 million next year. Is that the right ballpark? Felix Grawert: I would say right ballpark, right indications, Yes. As far as we can say. I mean, it's very early, but we really want to give you some… Didier Scemama: Yes, of course. Felix Grawert: Yes, exactly, yes. Didier Scemama: No, that's incredibly helpful to me perfectly honest. So I guess the question, when I look at the comments you put on the 9-month report, you said about 50% of the bookings came from power electronics. So I have to assume that the rest mostly come from Optos because LEDs, et cetera, is fairly de minimis, which if you compare to what you said last year, means that the bookings in Optos are probably up meaningfully, which is again consistent with what you said. So perhaps when you look at history, Optos, like all the other segments have tended to be incredibly cyclical. So would you think that there is duration in that growth in optoelectronics beyond '26? Or do you think that the big CapEx cycle we see currently for silicon photonics and lasers is going to be as we've seen in the past, a big year and then it falls off a cliff. Felix Grawert: I think you asked the trillion, the multitrillion dollar question, how long the AI bubble will last. I do not have the crystal ball for you, right? If I would, I might not be sitting in this place right now. Didier Scemama: Okay. Well, yes, I mean, honestly, I wish you good luck. Felix Grawert: I think it fully relates given the serious note, yes. Some joking aside, a big part of the laser part is, in fact, coming from the datacom, right? And the datacom, again, is driven by the AI and the AI data center build-out. So it's really hinges on that one, to a very big part, probably 50%, 60%. So it really depends on how exactly that's progressing. But we can only see what we have now in our visibility. But a longer-term view 2, 3 years out, I think it's as difficult as for everybody predicting the AI trend. Didier Scemama: No, for sure. And if I may, as a follow-up, I mean, you mentioned Nokia/Infinera as a customer for your G10 platform for their peak products. Can you give us a few more examples of key customers for that division so that we understand the underlying dynamics, please? Felix Grawert: Unfortunately, I cannot, because we keep customer names always strictly -- very strictly confidential as under NDA. We stick to that. We are extremely sensitive to that. I can give you a qualitative indication. Imagine you think who may be the top 10 providers for data communications devices for AI, you can assume that at least 80%, 90%, maybe 100% of those guys are our customers currently placing order with us and 90% of those are placing orders for the G10-AsP. Maybe I can give you that indication. And I really mean it as I say it. Operator: Now we're coming to the next question. It comes from Madeleine Jenkins from UBS. Madeleine Jenkins: I just had one on utilization rates. You mentioned that the GaN power were increasing. Could you quantify that at all? And also, I guess, get a sense of what your silicon carbide utilization rates are at kind of Chinese and then Western customers? Felix Grawert: So I understand your question about detailed utilization rates. We don't have those. And we could also not share them if we would have them. But what we can say is that based on spare part orders, based on service orders, we see a trend here, which is a good utilization increase for the GaN power, which leads us to expect some volume expansion orders in '26 at a moderate level as we have indicated. At the same time, in silicon carbide for the overall market, I think towards the beginning of the year, we have seen very low utilizations with very low -- I mean, clearly far below 50% means far more than 50% of the capacity installed in the market was standing idle early in the market. And maybe we are now approaching a 50%, 60%, 70% utilization in silicon carbide. So we do see it increasing, but we are still far from a level on a market level where customers are really going into reorders and expansion orders. I think that's not yet on the agenda. Madeleine Jenkins: Then I guess all your kind of new orders in silicon carbide specifically, are those kind of new customers in China? Is that the right way to look at it? Felix Grawert: Yes. We did have significant orders and shipments in '25 in silicon carbide into China, quite a diverse set of customers, highlighting the success of our G10 silicon carbide platform. So I think we've managed to establish that platform very well in the China market. That was all relating to the earlier question by Janardan. That was all for 8-inch or having 8-inch in mind. However, we are all aware of the large overcapacity in silicon carbide in China. Also the China silicon carbide business at this point in time has slowed down. I think the market overall is digesting the existing overcapacity. However, I think we all see the very nice success of Chinese electric vehicles. At some point, the overcapacity will be digested and there will also be new orders. Madeleine Jenkins: Then just a quick final question. Do you have a sense of kind of how much of your current gallium nitride revenues this year, let's say, are for data center applications? Felix Grawert: That's honestly very difficult to predict. Sorry for having only a vague answer, because our gallium nitride customers, I think we all have a couple of very big names, leading power electronics makers in mind, right? They use our platform essentially our tools, essentially for all the applications across the board. On our tool in the same configuration, you can produce a 20-volt, 100 volt, a 650 volt and even if you want a 1,200-volt device without any change in configuration. And therefore, we, as a maker, just send the tool as it is and the customer can do whatever the customer wants with it without a modification in those power ranges. Therefore, it's for us very difficult to predict. If there would be a different configuration by voltage range, then at least we would have an indication. But therefore, it's difficult for us to say. Sorry for that one. Silicon carbide is different, right? 6- to 8-inch, right? It's always the customer needs a configuration and we see spare parts orders or parts orders, and we can at least give you here in the call a qualitative indication for the GaN, it's really one size fits all. And yes, customer takes it and then we don't know. Operator: Next up is Ruben Devos from Kepler Cheuvreux. Ruben Devos: I just had a follow-up on silicon carbide. I think you touched upon it already, but it was around your comments on benefiting over proportionally when the cycle would return. I think you talked about a more diverse set of customers. So that might be an explanation, right? But just curious around what degree of confidence you have, right, to make that statement of outgrowing the market. And even outside like automotive, how does the pipeline shape up thinking about industrial as well in silicon carbide? Felix Grawert: Thanks a lot. I think your question hints very well towards the future direction of silicon carbide. Let me go a little deeper to expand on it, maybe some of the backgrounds, the technical backgrounds are interesting. So the first generation of silicon carbide devices, which we have seen, I would say, in the last 5 years with a very simple MOSFET consisting essentially of just one thick layer, one thick epi layer. Now what I mentioned, the next generation of devices, which to the expectation of all market participants will be the main volume in the next wave. Everybody expects the next wave of growth, '27, '28, exact timing to be TDD to be super junction MOSFETs. So this is a device where this thick layer is split into 3 or 4 thinner layers. So each of them about 1/5 or 1/4 thick of the initial one. And it's not just one big epi, but the wafer would be put into a tool 4 times. So you make 1 thin layer, then you do some device processing and then the wafer returns to the silicon carbide epi tool comes the next thin layer and so on multiple times. And this super junction technology shifts the operating point from one thick layer, which, let's say, has in the past been deposited, let's say, in about 1 hour to 2 hour processing time, now into multiple thinner layers and depending on which type of equipment, let's say, it now takes 15, 20, 30 minutes instead of 1 or 2 hours. So the wafer gets into the equipment multiple times. And with that, the complete dynamics about the productivity of the tool, the key KPIs and so on is shifting because essentially, it's a very different operating point. You can buy -- in an analogy, you can buy a car which is perfect as a city car, small and nice and fits into parking lots, but doesn't drive very fast, you don't care. And a perfect travel car for long-distance travel or a nice sports car for going up the mountain pathways or driving races, right? And each of the operating points has a different optimum. And this new operating point about thin layers to our calculations and also to the feedback we receive from customers is very beneficial for the batch tool which we are offering. This is the reason why we've made these positive earlier statements. With that, let me come to the second part of your question. The other part of the market, which may provide further growth, I think it's still a little further out than '27, '28 is the market for industrial applications. That market could probably towards the end of the decade grow very big. What we are talking here is about the following. Today, we use the silicon carbide devices mainly in switch mode power supplies or like power devices for the car in the main inverter and in voltages, 650 to 1,200 volts. We can also make silicon carbide devices, which have 3,000 volt or 6,000 volt or 10,000 volts, much, much higher voltage classes. And the industry is working on. That was, for example, one of the elements in the NVIDIA power architecture. I think everybody here in this call has the chart of the architecture. If you look at the chart of NVIDIA, on the very front end, you come from the grid and you enter the grid into the data center at voltages around 14 kilovolts, and that's 14,000 volts. And this down conversion from over 10,000 volts eventually down to 1,000, this is done by silicon carbide and then from 1,000 to 1 is done by gallium nitride. Now you cannot only use the silicon carbide in the data center for these high voltages, but in the entire grid. And we all know as more and more renewables are being used worldwide, I think China leads the pack with driving down the cost of solar and wind, but the whole world is following. And we need much more active grid stabilization, load management, active management and so on and so forth. So the grid, the worldwide power grid will experience over the next 2 decades, massive investments into switching infrastructure. Today, this is all being done by transformers. I think everybody knows next to the highway like these transformer stations standing. In the future, many of those will be done by active switching, and this will all be done by silicon carbide power devices. So all the leading grid suppliers, whether this is Siemens and ABB, Schneider Electric, General Electric in the U.S. are working on such devices. And it's a nice end segment for silicon carbide to come. However, I think this is a longer-term trend. I would not put the years '27, '28 on it. I would rather put '29 onwards as a nice trend for the turning of the decades on this trend. Ruben Devos: Just my second question related to optoelectronics, basically. I think you've called co-packaged optics as a key driver for indium phosphide adoption. How quickly would you expect the market to move there from pilot into volume co-packaged optic deployment? And you've very helpfully framed the tool market size for silicon carbide and gallium nitride in your slide deck. So may I opportunistically ask whether you've done a similar exercise for the G10 arsenide phosphide platform. Felix Grawert: Thanks a lot. I take the suggestion. It's a good one. Let's take that on our action item list that he smiles around me here in the room, yes. It's a good one. We don't have it yet for today, so I cannot give it to you maybe in the next earnings call. Now to your question about the sizing and what we see. For the optoelectronics market, unfortunately, it is much more difficult to predict than for the GaN and for the silicon carbide market. Let me try to illustrate to you why. In GaN and SiC, we talk at least for the low volume segment for pretty standardized segments and types of devices, right? For GaN, we talk 20 volt, 100 volt, 650 and then exotic 1,200. Silicon carbide, 650, 1,200 and now I was talking a bit about the very high voltages. So you can put it into 2 or 3 classes. Unfortunately, the optoelectronic market is extremely fragmented. We both see that in the number of players. I don't know there may be a couple of hundred optoelectronics producers and companies, while in power electronics, we talk probably about like maybe a dozen or 2 dozen, 3 dozen maybe at most, yes. So it's extremely fragmented. And such are the different technologies, which is competing with each other. The good thing is this is physics. They all have in common. As of today, they need a wide band gap semiconductor, gallium arsenide or indium phosphide for generating the light. But then the way the light is being processed, whether this is on an indium phosphide or gallium arsenide-based photonic integrated circuit or whether the light coming on is put into a silicon photonics. You can use silicon -- silicon dioxide waveguides and switching devices. This is extremely diverse and therefore, very difficult to predict. I wouldn't dare at this point to make a prediction where it goes. We are aware that all the guys who are working on the leading-edge CMOS nodes and also doing heterogeneous integration, all of them work on multiple technologies because even for the big guys in the industry, things at TSMC, it's difficult to really say, well, this technology is winning out against the others. Operator: Next up is Andrew Gardiner from Citi. Andrew Gardiner: I just had one on the margin outlook into next year that you provided us, Felix, saying that you thought EBIT margin next year would be in line, perhaps better year-on-year. Can you just sort of give us some of the drivers there in terms of gross margin? I mean, obviously, you've given us the mix in terms of Opto and GaN up and SiC down. How would you sort of quantify that in terms of magnitude of gross margin change next year? And also, you've done a sort of a workforce reduction earlier this year. Given the still slow market in SiC, do you see any need to continue to reduce OpEx? Or are we far enough through this down cycle now where you just sort of have to -- you weather it because you can see the long-term opportunity. So really there's not much change -- incremental change in terms of OpEx into next year? Felix Grawert: Yes. Thanks a lot for the question. I think part of the answer you've given, let me try to give an end-to-end consistent picture. So we were referring to EBIT margins really to bottom line. I have not given indication on the gross margin, no quantitative, right? So I was really mean EBIT margin. And I think there's three drivers behind our indication towards. So we wanted to give you a very clear indication that the margins is not getting worse despite the top line suffering probably a bit. And I think there's three drivers behind it. On the one hand, we see margin-wise, a bit stronger product mix. I indicated the gain of Opto, that helps a lot. And secondly, we will see the full year effects of the headcount reduction, which we conducted early in '25. '25, there's also cost and restructuring costs. In '26, we get the benefits of that. And the third topic is we use the slow period of the cycle right now for some operational improvements, be it working on our storage topics, be it working on logistics topics, be it currently working on our operational efficiency. So we have quite a bunch of these things ongoing, which are just making our operations more fluent, which reduce the external spend that's going out the door all the time. And we expect some of those effects to kick in. And based on those 3 effects altogether, we expect, yes, in terms of absolute terms and a stable bottom line or percentage-wise, stable or even improved bottom line despite the probably slightly weaker top line. But I think that's important in the end for you guys also then to everybody here in this call to give an indication where does it lead on the profitability. Operator: The next question comes from Adithya Metuku from HSBC. Adithya Metuku: Firstly, I just wondered if you could give us some clarity on what drove the push out this year, which end market drove the reduction in outlook for the year? Felix Grawert: Sorry, I didn't -- acoustically, the line was very bad. I didn't get the question. Could you repeat it, please? Adithya Metuku: Sorry, apologies. I was just wondering if you could give us any color on what drove the reduction in guide in 2025? Where did you see this push out, which end market? Felix Grawert: Okay. Sorry, I get it. Honestly, this was all across the board, except for the laser market. I think the laser market we've indicated is strong and continues to be strong and this is growing into next year, as we have just discussed. We have seen a weaker-than-expected GaN in silicon carbide. Initially, as we started into the year, it's always very difficult, right, to predict the full range. And we have put the full guidance range accounting early in February '25. So looking now 7 months back. In our full guidance range, we have accounted for both a slow market scenario, which now is unfolding. So therefore, we now look at the lower half of the guidance. And early in '25 with the upper end of the guidance, we have also taken into account a more positive market environment. As we all see, the more positive market environment for power semis for electric vehicles is not yet unfolding. So the upper half, therefore, had to be corrected now down to the lower half. We are narrowing down at the lower half of the guidance. Adithya Metuku: Then just on the LED and the micro LED market, you talked about seeing signals of improvement. I just wondered if you could give us a bit more color on what exactly you're seeing, especially on the LED side? Is it driven by China? Is it anything construction related? Just any color you can give us on these two end markets in terms of the signals of improvement. Felix Grawert: Yes. Thanks a lot. So on the LED market, this is typically almost exclusively China-only market. I think we can say, because of cost and volume effects. We all know, right, China is very, very strong these days on the display making. It used to be, as you have indicated in your question, historically, there used to be a lot of the LEDs going into construction, right? In China, they put these big, big walls on the skyscrapers. But as we all know, the China housing bubble has collapsed, right? That was also the reason why the segment was bad for us for 2 years. Now we are seeing the classical LED market coming back with, we call it fine pitch displays means and especially display backlighting. Local dimming, local backlighting of display, you can achieve magnificent effect by either having white LEDs behind your LED display, you can create a beautiful black or you can produce quite some nice bright colors on it with that one, and that's even going now into -- turning into RGB. The good news is it is revenue already today. The bad news is it makes it much more difficult for micro LED to gain ground in the televisions because the normal displays are already getting much improved quality. So let's see what it means for the micro LEDs. The other point, which I was indicating, we still see that on micro LED, research work is ongoing. We've seen some first devices. I was relating in my prepared notes to the Garmin watches, which is the first micro LED watch coming out at quite high prices and unfortunately, with low battery lifetime. So we are seeing that coming. And we see a lot of companies currently doing work on AR glasses and VR glasses. You may have seen the glasses launched by Meta. There's much more stuff in the preparation. I think this is a new device category, which will really come into the market quite soon. And yes, we see some moderate demand for that also next year, as I've indicated in my prepared notes. But again, it's far away, to be clear, it's far away from the micro LED massive investment wave that all of us 2, 3 years we were expecting where we would expect that micro LEDs are penetrating everything from smart watches to notebook displays and televisions, right? That one we are not seeing yet. We still see the research ongoing. So some -- many companies are still working on it, but we don't have a clear in our view when exactly that's coming. Adithya Metuku: Just one last question. With TSMC getting out of the GaN market, I just wondered, do you see a market for secondhand tools for your GaN epitaxy tools? And would that affect demand maybe next year or the year after? How do you see the implications of TSMC getting out of the GaN market? Felix Grawert: Honestly, I see it as a bit of a reshuffle, which happens normally in all the markets where there's a bit of a slowdown in the market. I think we see the same in silicon carbide, some players are exiting, some others use the opportunity to buy some used tools to get a hold of in or to get used tool and then newly to enter the market, I think it's a normal play that happens in a softer market environment. For the overall market and for us, this has essentially no implication because whether a used tool is installed or whether a tool is installed at company A or changes the ownership and is later on installed within the factory of company B, it doesn't change the overall installed capacity in the market or doesn't change the market dynamics. So for us as an equipment maker, we are -- we support customers when they need help in either way, sometimes for moving tools, for reinstalling tools, but it doesn't change or doesn't impact the market. Operator: The next question comes from Michael Kuhn from Deutsche Bank. Michael Kuhn: I'll start with, let's say, the usual update on 300-millimeter GaN. I think it's quite well known that Infineon is quite advanced in that context. And obviously, no big surprise there, cooperating closely with you in that regard. So when should we expect tool orders to arrive and, let's say, outside Infineon, what's your view? How many companies are currently working on the transition and preparing orders? Felix Grawert: So I think with 300-millimeter GaN, the market unfolds pretty much as we have expected. If you recall, we stated earlier that we see the 300-millimeter GaN as a subsegment of the overall GaN market, initially targeting the lower voltage classes means 100 volt, 20 volt, maybe 200 volt. Maybe at a later time, also 650, but really starting at the lower voltage classes. And we get confirmation from many customers what we had expected early on that customers are really targeting to switch and to reuse existing silicon MOSFET or silicon IGBT capacities and to rededicate existing fabs for gallium nitride. Of course, customers need to buy new epi tool because the silicon epi tool is a completely different tool from a gallium nitride epi tool. So in any case, there's a new tool demand for gallium nitride tools. However, the market adoption and the customer decision to the largest part depends on the installed base of factories. So customers who have today their silicon MOSFETs running in a 200-millimeter silicon fab are likely to switch to a 200-millimeter GaN tool. Customers who today are running their silicon MOSFETs in a 300-millimeter fab will want to switch and rededicate their 300-millimeter fab to a 300-millimeter GaN fab. So that is the market dynamic. And I think based on that dynamic, we never comment on customers unless we have a joint press release with customers. So allow me to describe the trend without names as we always try to do. So we really see customers who have installed 300-millimeter silicon capacity are switching now and starting to switch and have plans. There are many, many, many other customers who have 200-millimeter silicon fabs continue to work on gallium nitride 200-millimeter. And as a result of that, our strategy going forward is that we will support both groups of customers. So GaN 300 is not displacing GaN 200. We have our GaN 300-millimeter road map. We are very happy with the results that the 300-millimeter tool is giving. But at the same time, we also maintain an active 200-millimeter GaN road map where we also work on improvements. We have multiple very close customer collaborations on 200-millimeter tool improvements or even next-generation tools for 200 millimeters. Michael Kuhn: Then on cash flow and working capital, given that you don't expect top line growth next year, how much more would you think you can further optimize working capital? Because I think you mentioned you see further potential also into 2026. Christian Danninger: Let's focus maybe on the inventories because the rest of the working capital is always a little bit arbitrary, the receivables and the down payments. But on the inventories, our key ambition is to drive them down further. It's a little bit difficult yet to predict, not knowing the exact product mix and so on, but like at first, like high level expectation would be another 20% down. Felix Grawert: I would be more ambitious. Let's check. So I would say by the end of this year, I would expect inventory EUR 275 million, plus/minus EUR 15 million. To give you a number, let's see how close we come. Maybe next year, EUR 200 million. Let's see, something like this. Christian Danninger: Let's see. Michael Kuhn: Looking forward to it. Maybe you can do a little bet between the 2 of you who comes closer. Operator: There are no further questions. Felix Grawert: Good. Perfect. And I think we had a lively discussion. We very much appreciate as you see. And yes, stay tuned. I think this is a good exchange. And I think we all see each other latest in the February call for the full year results. Christian Danninger: Exactly. We will be on the road at various conferences. So I guess a lot of you at one of the conferences. And for those we don't catch before end of the year already in Merry Christmas. Felix Grawert: In October. Okay. Cheers, guys. Christian Danninger: Thank you. Bye-bye.
Operator: Good afternoon, ladies and gentlemen, and welcome to the Extra Space Storage Inc. Q3 2025 Earnings Conference Call. [Operator Instructions] This call is being recorded on October 30, 2025. And I would now like to turn the conference over to Mr. Jared Conley. Thank you. Please go ahead. Jared Conley: Thank you, and welcome to Extra Space Storage's Third Quarter 2025 Earnings Call. In addition to our press release, we have furnished unaudited supplemental financial information on our website. Please remember that management's prepared remarks and answers to your questions may contain forward-looking statements as defined in the Private Securities Litigation Reform Act. Actual results could differ materially from those stated or implied by our forward-looking statements due to risks and uncertainties associated with the company's business. These forward-looking statements are qualified by the cautionary statements contained in the company's latest filings with the SEC, which we encourage our listeners to review. Forward-looking statements represent management's estimates as of today, October 30, 2025. The company assumes no obligation to revise or update any forward-looking statements because of the changing market conditions or other circumstances after the date of this conference call. I would now like to turn the call over to Joe Margolis, Chief Executive Officer. Joseph Margolis: Thank you, Jared. Good morning, everyone, and thank you for joining us today. Extra Space delivered solid results in the third quarter with Core FFO of $2.08 per share, meeting our internal expectations and demonstrating our ability to generate consistent earnings through our diversified platform. Same-store occupancy at quarter end was 93.7% and averaged 94.1% during the quarter, a 30 basis point improvement year-over-year. Last quarter, we reported that our high occupancy allowed us to begin pushing new customer rates, which inflected positive for the first time in 3 years. This trend continued and accelerated in the third quarter as we achieved new customer rate growth of over 3% year-over-year net of discounts. While new customer rates continue to improve, same-store revenue prior to other income was flat and slightly below our internal projections. This was partially due to strategic discounts, which were offered in the quarter focused on long-term revenue optimization. Excluding the impact of discounts, same-store new customer rate growth was approximately 6%. While these initiatives created a short-term headwind in the quarter and for the year, we view them as an investment for future revenue growth and still believe we are well positioned for accelerating revenue going forward. We have also been active in our diversified external growth channels. We have been able to complete and secure strategic off-market transactions through deep industry relationships at attractive going-in and long-term yields. I am particularly excited about the $244 million purchase of a 24-property portfolio in Utah, Arizona and Nevada, which is the primary driver of our increased acquisition guidance to $900 million. A portion of this acquisition closed earlier this week, with the rest to close shortly when we complete the assumption of the seller's below-market secured loans. The acquisition will be primarily capitalized by the disposition of 25 assets, 22 of which are former Life Storage properties and which should close late this year or early in 2026. The stabilized yields of the newly acquired stores will be greater than those of the disposed assets, and those assets are of higher quality and in markets which provide better diversification and future opportunities for growth. Additionally, our Bridge Loan Program delivered strong performance with $123 million in originations during the quarter, and we strategically sold $71 million in mortgage loans. This program continues to provide interest income, attract customers to our management platform and serves as an acquisition pipeline as we deepen our relationships with key industry partners. Finally, our third-party management platform expanded by an additional 95 stores during the quarter with net growth of 62 stores. Year-to-date, we have added over 300 stores, which brings our total managed portfolio to 1,811 stores. This multichannel approach to prudent growth allows us to create value across market cycles, whether through direct ownership, joint venture partnerships, lending activities, management services or other creative structures. Our ability to deploy capital efficiently across these complementary strategies positions us to capitalize on market conditions regardless of the external environment. As a result, we are raising our full year Core FFO guidance per share at the midpoint, reflecting our confidence in our operational execution and gradually improving storage fundamentals. While we expect same-store revenue to remain relatively flat for 2025, we have driven outsized growth in our other revenue streams, which are bridging the gap until the positive trend in new customer rates translates into revenue acceleration. I will now like to turn the time over to Jeff Norman. Jeff Norman: Thank you, Joe, and hello, everybody. As Joe mentioned, our third quarter Core FFO was in line with our internal expectations at $2.08 per share. Same-store revenue declined 0.2% year-over-year, which was slightly below our internal forecast. While the improvement in new customer rates is taking time to translate into revenue growth, we are encouraged by the sustained positive rate trend we achieved during the third quarter. While many operators continue to see year-over-year rate and occupancy declines, we have been able to increase rate growth sequentially every month since May due to our strong acquisition -- customer acquisition platform and proprietary pricing systems. We are also encouraged that our other income streams outperformed expectations and helped offset the same-store NOI headwinds. Tenant insurance and management fee income were both stronger than anticipated, demonstrating the value of our diversified revenue model. As expected, property taxes normalized in the quarter, returning to a growth rate of 1.6%, and we expect taxes to be low again in the fourth quarter. That said, same-store expenses were still above our internal estimates driven by repairs and maintenance and marketing expense. We view marketing expense as a revenue driver and continue to see strong returns from our marketing dollars. Like discounts, marketing spend causes a short-term drag from an expense standpoint. However, we made this strategic decision to increase marketing spend to enhance long-term revenue growth. Our balance sheet remains exceptionally strong, providing significant financial flexibility to execute on strategic opportunities. We maintain a conservative capital structure with 95% of our interest rates being fixed, net of our bridge loan receivables. During the quarter, we recast our credit facility and added $1 billion in capacity to our revolving line of credit. Through the recast, we also reduced our revolving and term interest rate spreads by 10 basis points. We also executed an $800 million bond offering at a rate of less than 5% which completed our 10-year debt maturity ladder. We are raising our full year Core FFO guidance to a range of $8.12, $8.20 per share based on our year-to-date performance and updated fourth quarter outlook. For same-store revenue, we are adjusting our forecast to a range of negative 25 basis points to positive 25 basis points growth for the full year, acknowledging that the positive impact from improving customer rates has not driven acceleration early enough in the year to reach the high end of our previous range. We are raising our same-store expense growth guidance to 4.5% to 5% due to our decision to invest in marketing to drive long-term revenue growth, while other expense categories will continue to normalize moving forward. Our updated guidance also incorporates higher interest income projections based on the strong performance of our Bridge Loan Program, higher tenant insurance and management fees and lower G&A as we continue optimizing operational efficiency across the platform. The self-storage sector continues to demonstrate its resilience with our business model proving its strength as market fundamentals gradually improve. Our geographically diversified portfolio of over 4,200 stores across 43 states provides significant protection against localized economic fluctuations. Our scale and data give us a significant operational advantage over other industry participants and our high occupancy and positive rate momentum all position us well as we close out the year and head into 2026. With that, operator, let's open it up for questions. Operator: [Operator Instructions] And your first question comes from the line of Michael Goldsmith from UBS. Michael Goldsmith: First question, you're starting to see new customer rate growth, and it's well up above over last year. But I guess, like how long does that take to flow through the whole algorithm to start to benefit same-store revenue growth? Trying to understand kind of when we should start to see this drive that improved second derivative of same-store revenue growth? Jeff Norman: Thanks for the question, Michael. In terms of specific timing, it depends, as you can imagine, on churn and other factors. So I'm not able to pinpoint a time when you see that inflect specifically into revenue growth. But what we can tell you is we're encouraged to see that go from slightly positive rates in May to then over 1% in June, over 2% in July, 3% to 4% in August. So 3% for the quarter net of discounts is an encouraging trend for us. As we extend that into October, it's over 5% net of promotions. So we continue to see that accelerating trend. As we get into '26, we'll guide and give a little more detail about how that translates into revenue, but the trend is encouraging. Michael Goldsmith: Got it. And my follow-up question. It sounds like you've been using discounts and promotions to drive customers to the channel. Has that continued into October? And is the plan to continue to lean on that in the fourth quarter? Joseph Margolis: So we in the past several years have not used discounts as a tool very much. And that's why historically, we've given one number for new customer rate growth because there really was almost no difference between the new customer rate growth before and after discounts. In the quarter, we've tried an effort -- continual effort that we always do to optimize long-term revenue. We tried some different discounting strategies, particularly in states with states of emergency to try to maximize performance in those states. And it's proven to be a short-term headwind, although we believe long-term value creation. So that's why we're now kind of giving 2 new customer rate numbers, gross and net of discounts, because there is a more meaningful difference between there, and we want to be fully transparent. And how long and in what fashion we continue will depend on the results of the testing. Operator: And your next question comes from the line of Jeff Spector from BofA. Jeffrey Spector: Great. I appreciate the details so far. Joe, maybe can you discuss a little bit more on your comment regarding the short-term headwind. Just to confirm, was there anything specific you can cite, whether it was a particular region, EXR legacy versus LSI. Is there anything that helps you or investors understand like what exactly happened, maybe that was a bit worse than expected? And so we know it's -- you'll consider, I guess, next year in the guidance. Joseph Margolis: Yes. So I would say our efforts -- our new efforts with discounting were focused first on states with states of emergency, so I think Los Angeles and some other states and then also some randomized stores to produce a good data set, if that's helpful. Jeff Norman: And Jeff, if I understood the spirit of your question, I think you're wondering is this sort of a permanent change versus something temporary? I'd view it as more temporary. We leaned into it in this quarter and the headwind is felt primarily in the quarter. Jeffrey Spector: Okay. And just to confirm, you're seeing normal seasonal patterns. This has nothing to do with seasonality. Jeff Norman: Correct. October has continued to play out pretty similar to September. As we mentioned, we've actually accelerated rates further, still have healthy occupancy. It's 93.4% today. So continues to be a positive trend into October. Operator: And your next question comes from the line of Caitlin Burrows from Goldman Sachs. Caitlin Burrows: The prepared remarks talked about the $244 million portfolio acquisition. Wondering if you could give any detail on the initial and stabilized yields and how long you expect it will take to reach the stabilized yield and kind of what that upside is driven by? Joseph Margolis: Sure. Happy to, Caitlin. So the portfolio is a mix of stabilized assets and their stabilized assets are 78% occupied. So we're happy to get our hands on them and prove the performance to our standards. But there's stabilized stores and then the balance of the stores are in different stages of lease-up, kind of from very beginning to close to completion of lease-up. So the yield is a blend of different types of stores. That being said, the leverage deal, we're assuming $50 million of debt at 3.4%. The leverage yield is about 4.5% in year 1 and gets to the mid-7s by the end of or into year 3. Caitlin Burrows: Got it. Okay. And then wondering if you guys could talk about what you've seen recently on the reasons for storage use and if there's been any changes? Joseph Margolis: No real changes than we've talked about for the last several quarters. When we look at moving customers, in the third quarter we were at about 58%. That's up from mid-50s in the first and second quarter, but that's a seasonal increase. More people move in the third quarter than early in the year. So I don't think it's an indication of any significant improvement in the housing market. Just as a data point, the peak was the third quarter of '21 at 63%. So third quarter of '25, we're at 58%. So you see the decline in the for-sale housing market there. That's been partially picking up, that lack of demand has been partially taken up by customers who cite lack of space as a reason they're storing, and they stay about twice as long. Their average stay is about 15 months versus 7.5 months for the moving customers. So no real change in that dynamic. Operator: And your next question comes from the line of Ronald Kamdem from Morgan Stanley. Ronald Kamdem: Just 2 quick ones. Just the corollary to sort of the discount conversation being increased, should we take that as also sort of implying that maybe the marketing spend on sort of the web and all that is maybe incrementally less efficient as it was in the past. I guess the question is, has anything sort of changed in terms of those dollars online being spent and the return you're getting on those? Joseph Margolis: That's a really good question. So we view marketing spend as an investment, and we test every dollar we spend has to have a certain ROI or we're not going to spend it. And we haven't seen any decline in that ROI. So we don't -- we wouldn't tell you that our marketing spend is any less efficient. And I think you can see the benefit of that spend in the rate growth that we experienced. So I mean, to answer your question without all the excess words is, no, there's not been any diminution in the effectiveness of marketing spend. Ronald Kamdem: Helpful. And then my follow-up is just on the expense side. Obviously, property taxes, it is what it is, but this year seemed to be a little bit sort of outsized, right? You guys are running over 6% year-to-date on all expenses here. Just any sort of comments as you're sort of flipping over the next couple of years. Is there an opportunity for even more expense savings outside of property tax essentially? Joseph Margolis: Sure. Let me just give some high-level comments on that, and then we can get into specific line items. We're in a very high-margin business. And we want to make sure that we invest in the properties in a way that maximizes long-term revenue. So that means we want to invest in R&M to keep the properties up and of the condition that we want them to be because we know in the long term that chicken comes home to roost. And similarly, we want to invest in our people because we know that through testing and data, when you take customer -- take store managers out of stores, it hurts you on the revenue side, it hurts you on the safety side, it hurts you on the catastrophic events side and it hurts you on the cleanliness side. So we're going to try to be as efficient as we can without impacting the long-term value of our stores. And we just talked about marketing. It's the same way. We look at it as an investment that has a return. And frankly, when we've had over 300 people choose us to manage their properties even though we're more expensive, we know that our view of how to take care of scores and people is agreed to by most of the marketplace. So that's our general philosophy. We want to be as efficient as we can. We want -- we don't want to spend money we don't have to. But we're going to take the long-term view and make sure we protect our revenue stream. Jeff Norman: And Ron, maybe to hit a couple of the specifics around some of the expense line items. You mentioned property taxes. Last call, we talked about how it was a bit of the tale of two halves with -- or excuse me, with property tax expense. We have lapped that comp. So you saw that drop significantly in the third quarter. As a reminder, a lot of that first half was driven by outsized increases at the legacy Life Storage stores and that mark-to-market has taken place. So it was at 1.6% in the quarter. We expect it to be low again in the fourth quarter. And then as we look at a few of the other line items, we know payroll and benefits stands out as being outsized relative to our norms. A lot of that's a comp from last year. If you look at the 9-month number, it's sub-3% and that's more in line where we'd expect it to be in the full year, closer to that 3% inflationary level. And then Joe touched on our approach to marketing and R&M, we view those more as investments, and we'll make those investments as needed knowing that there's a long-term return. Operator: And your next question comes from the line of Todd Thomas from KeyBanc Capital Markets. Todd Thomas: I wanted to go back to the discounting strategy. Two questions. First, what exactly was the catalyst for offering these strategic discounts? And then second, you mentioned that this was tested or rolled out in some markets like L.A., where there are some state of emergencies, but it was -- it seems like it was a drag on customer rate growth to the tune of about 300 basis points or half of the gross increase that you achieved. You talked about October, but are you expecting both net and gross customer rate growth to continue increasing moving forward? Joseph Margolis: So I'll start by saying we are always trying new pricing offerings and strategies based on the amount of data we have, the amount of stores we have, the amount of testing we can do. So this isn't out of line with what other things we've done in the past to try to improve long-term performance, right? We're not running this company for the third quarter of 2025. We're trying to maximize long-term revenue. Jeff Norman: Todd, maybe to hit the second half of your question, we won't get ahead of ourselves in terms of forecasting rate growth because we're more focused just on revenue growth overall, and we're open to using any of the levers as needed. That said, based on what we've seen sequentially since May and into October, that the increase in pricing power has been a trend. Todd Thomas: Okay. But in terms of the impact that the discounts had on overall portfolio rate growth in the quarter or move-in rent growth in the quarter, what percent of the portfolio had you rolled out or were you testing this discounting strategy on? Just trying to get a sense of what the magnitude of these discounts were like and potentially, assuming you're pleased with the results and you roll this out more broadly across the portfolio, just trying to get a sense for the magnitude of these discounts. Jeff Norman: Yes. Good question, Todd. I think we're electing to share a lot of detail about the specifics of the test because, frankly, we view this as a competitive advantage. But in terms of trying to help quantify the magnitude maybe another way, you talked about gross rent growth to new customers of about 6% in the quarter and the net number being closer to 3%. For October, that has tightened significantly. So it's gross improvement of a little over 6%, net improvement of a little over 5%. So I guess, it gives you a feel of sort of the more temporary nature of some of the testing and it being less of a drag thus far into the fourth quarter. Joseph Margolis: Todd, I also want to be clear. We're not saying that the sole reason we made a change to our revenue guidance was this discounting strategy. It's certainly a factor. But I'll also say that it has been a little slower than we expected for the new rates to roll into the rental, right? That's nothing -- that's not something we can predict perfectly. We do know it will happen over time, but it's hard to predict exactly when and how quickly that happens. So I just want to be clear on that. Operator: And your next question comes from the line of Eric Wolfe from Citi. Eric Wolfe: If I look at the last couple of years, you've had move-in rents down double digits at times, obviously improved a lot lately. But if I look at the times when move-in rents were down the most, your revenue per occupied foot wasn't down nearly as much, right? I think it was generally kind of just been flattish, right, over the last couple of years. So I guess I'm trying to understand, as move-in rents recover, why wouldn't the contribution from ECRIs come down, right? If the contribution went up over the last couple of years as you discounted more, as you discount less, why wouldn't that contribution from the ECRIs just come down? Jeff Norman: Yes, it's a great question, Eric. If you think through just the way that as we pull these levers and as rates flow into and out of the portfolio, it's a gradual process. So the same way of -- after 3 years of negative rates, we were still able to maintain relatively flat revenue growth by using all of our levers. It takes some time coming out as well and for that to inflect and reaccelerate on the other end. Specific to ECRI, generally, our approach has been very similar on a year-over-year basis. There's no meaningful difference with perhaps the small exception being that we are following and abiding by state of emergency restrictions in some states that put a little bit of a cap or a little bit of a headwind on a year-over-year basis to ECRI. So maybe modestly less contribution. But outside of that, it's generally similar. Joseph Margolis: Yes. And I would just add, importantly, that customers are accepting ECRI at the same rate as they have in the past. We don't see any greater reaction in terms of move-out from customers. Eric Wolfe: Got it. So the move-in rents not flowing through as quickly to the rent roll really isn't a function of ECRI specifically, that contribution starting to come down. I guess the question is what is causing that? Like -- and maybe it's just like some math problem like it's tough to solve, but like what would make the contribution from move-in rents be a bit less than expected? Jeff Norman: Yes. The primary driver in the third quarter was slower churn. You'll notice that both our rentals and vacates were lower. So it's just a little slower churn than we had modeled. Operator: And your next question comes from the line of Michael Griffin from Evercore ISI. Michael Griffin: Maybe to follow up on Wolfe's question there. I'm curious, Joe, if you can give us a sense of -- and I realize you're not going to give '26 guidance, but where those move-in rates need to go before you start to adjust your ECRI program, right? I understand that you all solve to maximize revenue, but it seems to me that as these move-in rents remain lower, you're going to have to make up for it on the ECRI upside. So at what point, not to say that we reach an equilibrium, but that this regime of higher ECRIs to solve for revenue comes down somewhat? Joseph Margolis: Yes. I look at it a little differently, right? Street rates, new customer rates are going up and that gives us more headroom to increase ECRIs to existing customers, right? We don't want to move existing customers up too far over street rate, right? It provides somewhat of a cap, a guide for us. And as street rate goes up, that puts more and more of our customers into the eligible pool to receive an ECRI. So one of the challenges over the past several years is as street rates decline, more and more of our customers were in the group that were ineligible for ECRIs. And now as that switches, that pattern should change. Michael Griffin: I appreciate the color there. And then maybe just on the acquisition opportunity set. I mean it seems like there are more transactions coming back into the market. You seem pretty constructive on this deal that the part of it is closed and part you're expecting to close by year-end. But maybe give us a sense of the opportunity set within the transaction market? Are buyers and sellers more willing to come together on price? Is it interest rate stability? Like I guess, what's the catalyst for maybe an incrementally positive outlook as it relates to acquisitions? Joseph Margolis: So I'm not overly positive on the open market. I don't see cap rates at a level that given our cost of capital, it's attractive for us to be the high bidder in a competitive bid. And we've seen lots of deals that we've managed, where we had first and sometimes last shot that we let them go because we want to be disciplined and adhere to our cost of capital metrics. But what I am encouraged and positive about in the future is our continued ability to create accretive deals through our relationships like the one we just discussed through our joint venture partners, which we've done several of which were at very high yields this year. We have another one of those under discussion and through being creative and the vast industry relationships we have, right? Having over 1,800 properties we manage, gives us an awful lot of relationships that allow us to do transactions others can't. Jeff Norman: Yes. And Grif, I'd just add, being involved in the industry in all these ways, it allows us to hang around the hoop. Oftentimes, these acquisitions really are triggered by a life event for the seller or maybe a debt maturity or something else where it's not really a market function that's pushing them to sell it. It's more of an event, and we want to be close by when those events happen and have first shot. Joseph Margolis: I mean another example is our Bridge Loan Program where to date, we've bought 22% by dollar volume of the collateral we've lent against. So that provides somewhat of a proprietary acquisition pipeline for us, too. Operator: And your next question comes from the line of Juan Sanabria from BMO Capital Markets. Juan Sanabria: Jeez, if I'm beating a dead horse here, but on the discounting, I guess a 2-part question. What's the strategy behind using it more aggressively in some of the rent restriction areas like L.A.? And then in October, you mentioned the gross versus net delta shrunk. So does that mean you're not discounting as much as you did in the third quarter? Or just why is that discount narrowing in October? Joseph Margolis: So we're always looking for ways to maximize long-term revenue while complying with law and substituting discounts for ECRIs is an effort to do that. And our use of the tool and how it evolves as we learn more will change over time. And that's one reason you see a difference in October or will see a difference in October. Juan Sanabria: Sorry. And then just on the dispositions, you noted that there's a big kind of portfolio that you've put out there for market. Just curious if you could share any feedback on pricings in the market for those assets. You mentioned that on the acquisition side, cap rates are necessarily super attractive. So it probably means good demand on those Life assets. Any color would be appreciated there. Joseph Margolis: Yes. We'll provide more color when they close. But we had bidders. We've selected a buyer. We're going through the process. I mean, I think it's very important for us as a company every year to look at our portfolio and due to market concentrations or individual asset growth or capital requirements, try to consistently improve the portfolio by doing some dispositions. And we're a little heavy historically this year because we're 2 years out from the Life merger, and we want -- we have some Life assets that we want to dispose of. But I think we'll sell assets every year and just try to recycle the money into better long-term assets. Juan Sanabria: Not to be greedy, but one very quick follow-up on the occupancy. I think you said October was 93.4%. Just what's the year-over-year delta on that? Jeff Norman: So the year-over-year delta is about negative 40 basis points, Juan. And I would look at that much more as a result of last year's comp. If you look at our same-store occupancy September to October in 2024, it actually accelerated, part of that was related to the Life Storage assets. That's about the time we unified everything under the Extra Space brand. We got aggressive with pricing and took a lot of occupancy at those stores. So if you look at the sequential progress, 93.7% at the end of September, 93.4% in October, pretty similar to what we've experienced historically. Operator: And your next question comes from the line of Ravi Vaidya from Mizuho. Ravi Vaidya: I wanted to ask about the bridge lending book. How do you expect the lower rate environment to impact the growth of this part of your business? Do you expect maybe that some operators might take more traditional financing options? And would a greater proportion of the mezz lending turn into acquisitions from here on out? Joseph Margolis: So I think a lower rate environment will affect the bridge lending program if it loosens up the acquisition market. Many of our new bridge lending customers, who are folks who if they could get the price they have in their head would sell the asset, but they can't get in the market today. So they're looking for a bridge solution to get them to a future date when they could sell. So I think there's some countercyclicality between the acquisition market and the bridge lending business, and that's fine, right? That's one of the reasons we have all these different growth channels because in any 1 year, one could grow more than the other, and we just -- we want to be doing what's right, given current -- what's best for our shareholders given current market and economic conditions. Jeff Norman: Yes. And one thought, Ravi, that I'd add to that as well, as we've talked about, we originate these loans in a mortgage mezzanine structure. And as interest rate spreads as a whole tighten, the required spread of our A note buyers also tightened. So in terms of kind of the relative spread that we can bring in, we have some flexibility there, especially to the extent that we're holding mezz notes to optimize those yields. Operator: And your next question comes from the line of Nicholas Yulico from Scotiabank. Nicholas Yulico: I'm trying to just piece together this quarter versus last quarter, some of the comments on occupancy and pricing. Last quarter, you guys felt good about occupancy, you felt good about pricing. You hit an ending occupancy number, which was the highest you had in several years. And then for whatever reason, then this quarter, I felt like you were pushing pricing and then you didn't get what you wanted. You had some discounts you offered. And so I guess, you did that in relation to -- I don't know, some worries about occupancy or move-in volume coming in through the front door. Is that the right way to look at this? Joseph Margolis: Yes. I respectfully think it's not. I think that we don't solve for occupancy. We don't get worked up if occupancy is 20 or 30 basis higher or lower. We don't solve for rate either. We solve for long-term revenue, and in some instances, if that's going to be a little higher rate and lower occupancy or a little lower rate and higher occupancy, we're ambivalent. We just want the highest long-term revenue. And the discounting strategy was not a reaction to any type of occupancy number. It was more thinking about we see more and more of these state of emergencies, how can we change our pricing structure to maximize revenue as these things come up across the country. Nicholas Yulico: Okay. I guess the issue here is that it kind of feels like you guys have higher occupancy than the industry. And you can see that in various ways, but presumably, you guys took some market share over the last couple of years as you went to this discounted pricing on the front-end strategy. And I'm just wondering if the issue here now is that the rest of the industry just doesn't have as high occupancy. So if you guys are trying to push rate, has -- you got to deal with the rest of the industry and what they're going to do. And so I'm just wondering if that is something that played out this quarter, again, where you guys seem like you're in a little bit better position to be pushing rate than the industry and then you hit a wall and problem is that the rest of the industry isn't at the same sort of starting point as you guys right now in occupancy. Jeff Norman: Yes, I appreciate the question, Nick. I would say, I don't think we've hit a wall, right? We continue to see rates accelerate through the quarter and beyond and continue to be pleased with the occupancy level. I think this is a fragmented enough industry that while we kind of think of the industry as maybe being the large public operators, and we're comparing and contrasting 10 basis points here and there. I think holistically, we look at this as we've had negative rates as an industry for a long time. That -- despite that, we've been able to maintain flattish revenue growth for the last couple of years. And now as new supply moderates and as we maintain those high occupancy levels, we've been able to push rate, and we keep seeing it going. As Joe mentioned, we're always testing things. And the beauty of it is we have a large enough portfolio, we don't really have to guess. We can run tests and see what the winning strategies are and what is resulting in stronger revenue outcome. So I think we're pretty comfortable that the data is telling us how to maximize revenue. Joseph Margolis: It's easier to push rates when you have higher occupancies. And as long as our customer acquisition platform can fill the funnel, which they can, we'll do much better with rates at higher occupancy than lower occupancy. Operator: And your next question comes from the line of Spenser Glimcher from Green Street. Spenser Allaway: Just going back to the dispositions. Is there anything you can share on the 24 assets being sold just in terms of geography or rent levels just relative to the portfolio average? And as you continue to call the portfolio, as you mentioned, are there many more Life assets that you would say fit the disposition criteria, perhaps due to a lack of market concentration, just not being as efficient to operate? Joseph Margolis: So the existing portfolio has a concentration in Florida and the Gulf Coast. And I would say there are -- there certainly are more Life Storage assets, but there's not -- I think this is the big chunk. I don't think we'll do another 22 property portfolio. Spenser Allaway: Okay. And anything you can share on how those assets rent levels compare to the portfolio average? Joseph Margolis: They're lower. Spenser Allaway: Okay. And then just maybe the second question here. Can you just remind us what your on-site personnel looks like today just for your properties and then as well as regional managers, how many assets are these employees overseeing on average? And are you comfortable with this headcount for the near term? Joseph Margolis: So we're at about 1.4 full-time employees per store. It obviously varies, 100,000 square feet in Manhattan is going to be staffed more heavily than 45,000 square feet outside of Lexington, Kentucky. We're continuing to use technology to -- and testing to try to get more efficient, right? And some of it is when you have a cluster of stores, how can you staff efficiently without having every store staffed at a full-time basis and other testing that frankly isn't unique in the industry. I think everyone is doing it. But at the end of the day, we want to meet the customer, how the customer wants to meet us. And 30% -- a little more than 30% of the customers still walk into the store wanting to talk to a store manager. They all have phones. They all have computers. They can do a full transaction with us if they choose online. But they choose to go to the store for a reason. They want to see how clean it is. They don't really know what a 10x10 is. They have some questions on the store. And if you take the store manager out and force them to choose to scan the QR code or force them to call up someone on the phone, some of them will do that, but some of them will turn around and go across the street to a competitor. So as long as we have customers who are choosing to walk into the store, we will make sure we have a store manager there. Because if we cut expenses by 15% and lose one rental a month at our average rate, that's negative 2.5% NOI experience. So we're going to protect that revenue line item very carefully while still being smart on the expense side. Operator: And your next question comes from the line of Michael Mueller from JPMorgan. Michael Mueller: Just a general question here on acquisitions. Just curious, when you buy something that's not stabilized or actually something that has stabilized even, how much can you typically raise the going-in yield just from taking the assets, putting them on the platform and kind of getting the expense efficiencies? And I'm just thinking about that, like what's the low-hanging fruit in terms of going from an initial yield up to a stabilized yield that obviously has some additional revenue impact in it? Joseph Margolis: Yes. So it's a really good question and it varies widely. So if we're buying a store that's already on our management platform, either because it's -- we have a bridge loan on it or it's our management platform, then we've already optimized NOI. And it's much more of a core purchase, and we'll try to do a lot of those with joint venture partners to enhance the yield. If we're buying something that's managed by a third-party operator, it varies widely because the quality of the third-party operators vary widely. Some are very good and some are not as good. But it's not uncommon for us to see 150 basis points or more increase in NOI once we can get it on our platform. Operator: And your next question comes from the line of Omotayo Okusanya from Deutsche Bank. Omotayo Okusanya: The repairs and maintenance during the quarter and the elevation in that number, was that -- is that like a broad-based R&M across the entire portfolio? Was it more concentrated on the LSI portfolio because there was kind of maybe some deferred maintenance still associated with that portfolio? And how do you just kind of think about kind of going forward, the outlook for R&M? Jeff Norman: Yes. Thanks for the question. Yes, some of that outsized growth is driven specifically by the legacy LSI properties. And again, we expect that to normalize. We had some catch up to do on those properties but just started seeing that normalize. And -- but all in all, as Joe had mentioned, we want to take care of the properties. So in general, we're going to make sure that we're doing whatever we need to do to protect those assets. But yes, a little bit of an outsized contribution from the Life stores. Omotayo Okusanya: That's helpful. And then on the Bridge Loan Program side of things, could you just kind of talk a little bit about kind of what you're still seeing out there, ability to kind of put money to work and kind of at what kind of yields? Joseph Margolis: So we had a very active year last year. I think we did $880 million of originations. And a lot of that was new development stores that needed to pay off their construction loan and want to bridge to stabilization. That business has gone fairly quiet as the amount of new stores being delivered is going down, which is overall a good thing. That's been replaced somewhat by folks who need to buy out an equity partner because things are going slower than usual or wanted to sell, as I said earlier, and can't. So we've done through 3 quarters, a little over $330 million worth of originations. So we're on a good pace for that. The pricing of loans we have on our books, the A notes average about 7.6%. The mezzanine notes are about 11.3%. So over time, we would like to keep our on balance sheet balances fairly steady. It will go up and down slightly quarter-to-quarter but change the mix to have more B notes and fewer A notes on balance sheet. Operator: There are no further questions at this time. I will now hand the call back to Mr. Joe Margolis for any closing remarks. Joseph Margolis: Great. Thank you very much. Thank you, everyone, for your time and interest in Extra Space. I just want to reiterate that we're positive about the future. Our rent -- rate trends are positive and improving every quarter. Supply continues to go down. Our ancillary businesses are growing and help bridge the gap while we -- while the time it takes for these new higher rates to flow through the rent roll take time. So we're really encouraged about going into 2026 and are excited for better things tomorrow. Thank you again for your interest. Operator: Thank you. And this concludes today's call. Thank you for participating. You may all disconnect.
Operator: Good morning. My name is Tina, and I will be your conference operator today. At this time, I would like to welcome everyone to the Methanex Corporation Third Quarter 2025 Results Conference Call. [Operator Instructions] I would now like to turn the conference over to the Director of Corporate Development and Investor Relations at Methanex, Ms. Jessica Wood-Rupp. Please go ahead, Ms. Wood-Rupp. Jessica Wood-Rupp: Good morning, everyone. Welcome to our third quarter 2025 results conference call. Our 2025 third quarter earnings release, management's discussion and analysis, and financial statements can be accessed from the Financial Reports tab of the Investor Relations page on our website at methanex.com. I would like to remind our listeners that our comments and answers to your questions today may contain forward-looking information. This information, by its nature, is subject to risks and uncertainties that may cause the stated outcome to differ materially from the actual outcome. Certain material factors or assumptions were applied in drawing the conclusions or making the forecast or projections, which are included in the forward-looking information. Please refer to our third quarter 2025 MD&A and to our 2024 annual report for more information. I would also like to caution our listeners that any projections provided today regarding Methanex's future financial performance are effective as of today's date. It is our policy not to comment on or update this guidance between quarters. For clarification, any references to revenue, EBITDA, adjusted EBITDA, cash flow, adjusted income, or adjusted earnings per share made in today's remarks reflect our 63.1% economic interest in the Atlas facility, our 50% economic interest in the Egypt facility, our 50% interest in the Natgasoline facility, and our 60% interest in Waterfront Shipping. In addition, we report our adjusted EBITDA and adjusted net income to exclude the mark-to-market impact on share-based compensation and the impact of certain items associated with specific identified events. These items are non-GAAP measures and ratios that do not have any standardized meaning prescribed by GAAP and therefore unlikely to be comparable to similar measures presented by other companies. We report these non-GAAP measures in this way because we believe they are a better measure of underlying operating performance, and we encourage analysts covering the company to report their estimates in this manner. I would now like to turn the call over to Methanex's President and CEO, Mr. Rich Sumner, for his comments and a question-and-answer period. Rich Sumner: Good morning, everyone. We appreciate you joining us today to discuss our third quarter 2025 results. Our third quarter average realized price of $345 per tonne and produced methanol sales of approximately 1.9 million tonnes generated adjusted EBITDA of $191 million and adjusted net income of $0.06 per share. Adjusted EBITDA was higher compared to the second quarter of 2025, primarily due to higher sales of produced products, offset by our lower average realized price. I'll start by providing an update on our newly acquired assets and integration activities. During the third quarter, both the fully owned Beaumont plants as well as the 50% owned Natgasoline plant operated at high rates, produced a combined 482,000 tonnes of methanol and 92,000 tonnes of ammonia. We have a structured 18-month integration plan across all functions of the business to ensure we fully realize the expected benefits of this highly strategic transaction. We've begun executing on our integration plan and working with our new team members at these manufacturing sites on asset and safety reviews. On the supply chain side, we've integrated the new logistics operations into our business to ensure we meet customer needs while focused on planned synergies. Given normal inventory flows, the high rates of third quarter production from these new assets will not fully flow through earnings until the fourth quarter of 2025. Now turning to methanol market conditions. Global methanol demand was relatively flat in the third quarter compared to the second quarter across all downstream derivatives. Demand for methanol-to-olefins in China operated at high rates, consistent with the second quarter and increased to approximately 90% by the end of the quarter, supported by an increasing amount of import supply availability from Iran, which we estimate operated at close to 70% rates through the quarter. This increased supply from Iran, along with relatively high operating rates across the industry, led to an inventory build, particularly in coastal markets in China. Looking ahead to the third quarter, we estimate the methanol affordability into MTO and the marginal cost of production in China to be approximately $260 to $280 per tonne. We continue to see spot and realized methanol prices in all other major regions at premiums to these pricing levels. We posted our fourth quarter European quarterly price at EUR 535 per tonne, representing a EUR 5 increase from the third quarter. Our North America, Asia Pacific, and China prices for November were posted at $802, $360, and $340 per tonne, respectively. We estimate that based on these posted prices, our October and November average realized price range is between $335 and $345 per tonne. Now turning to our operations. Methanex production in the third quarter was higher compared to the second quarter with the full contribution from the new assets and higher production from Geismar, Medicine Hat, and New Zealand, which all experienced planned or unplanned outages in the second quarter. In Geismar, production was higher in the third quarter after the site experienced unplanned outages late in the second quarter. All plants returned to production in early July. As previously noted, both the Beaumont and the Natgasoline facilities operated at high rates during the third quarter. In Chile, we operated the Chile I plant at full capacity throughout the quarter, marking the first time we've had one plant operating at full capacity throughout the Southern Hemisphere winter months for more than 10 years. During the quarter, the Chile IV plant successfully completed a planned turnaround and restarted at the beginning of October. We expect both plants to operate at full rates through to April 2026. In New Zealand, we had higher production in the third quarter as the plant restarted in early July after a temporary idling of the operations to redirect contracted natural gas to the New Zealand electricity market. Gas supply availability in New Zealand continues to be challenged, and we're working with our gas suppliers and the government to sustain our operations in the country. In Egypt, we operated at approximately 80% of capacity during the third quarter as gas availability during peak summer demand remains constrained. There has been stabilization of gas balances in the country, but some continued limitations on supply to industrial plants are expected going forward, particularly during the summer months. The plant is currently operating at full rates. Our expected production -- equity production guidance for 2025 is approximately 8 million tonnes, which is made up of 7.8 million equity tonnes of methanol and 0.2 million tonnes of ammonia. Actual production may vary by quarter based on timing of turnarounds, gas availability, unplanned outages, and unanticipated events. Now turning to our current financial position and outlook. In late June, we closed the OCI acquisition, consistent with our financing strategy, using proceeds from the bond issued in 2024 and borrowing $550 million under the Term Loan A facility. During the third quarter, we repaid $125 million of the Term Loan A facility with our cash flow from operations and ended the third quarter in a strong cash position with $413 million on the balance sheet. Our priorities for the rest of 2025 are to safely and reliably operate our business and continue to execute on our integration plan. Our capital allocation priority is to direct all free cash flow to deleveraging in the near term through the repayment of the Term Loan A facility. We do not anticipate significant growth capital over the next few years and remain focused on maintaining a strong balance sheet and ensuring we have financial flexibility. Based on our fourth quarter European posted price, along with our October and November posted prices in North America, China, and Asia Pacific, our October and November average realized price is forecasted to be between $335 and $345 per tonne. Based on a slightly lower forecasted average realized price coupled with produced sales levels much closer to our run rate equity production, including the newly acquired assets, we expect meaningfully higher adjusted EBITDA in the fourth quarter of 2025 compared to the third quarter. We'd now be happy to answer your questions. Operator: [Operator Instructions] Our first question comes from the line of Ben Isaacson with Scotiabank. Ben Isaacson: Rich, can we talk about Trinidad? You saw Nutrien closure, and I'm not asking you to comment on their issue, but I believe you're next door. And so my questions are, what's your relationship with the NEC? Are they asking you for retroactive port fees or is that a risk? And then if Nutrien is down, which it is, does that mean more gas allocated to you? Rich Sumner: Thanks, Ben. Yes, we have a contract with the NEC for port fees or port arrangements, that's not -- we're not in a similar situation there. As it relates to gas and gas availability, we're in a similar situation as we've been talking about in Trinidad, which is gas markets are tight. A lot of the downstream contracts come up at the end of -- most of them come up at the end of this year. Ours runs until September 2026. So we're in discussions with the NGC about gas. When we look at the gas outlook, we think that in the near term anyways that tightness remains. There are activities happening in Trinidad that over the next few years could mean some slight uptick on supply there. But we don't see a meaningful change to the situation we're in, which is a one plant operation. And right now, we're operating one plant at full gas supply. So even if there were more gas available today, certainly, we wouldn't expect that a restart of Atlas or anything like that would make sense. There just isn't enough gas to go around today for all the downstream. So our situation will be focused on the next round of discussions for the current gas supply. We don't have a turnaround for Titan for some time. So that's our main focus and we're in discussions with the NGC. Ben Isaacson: And if I can just do a quick follow-up. Rich, you talked about kind of recontracting some of the OCI book. Can you just talk about that? What was the existing OCI book like and why does there need to be some recontracting now? Rich Sumner: Yes. I think one thing to note is we did increase our sales. So you would have seen from Q2 to Q3, we increased sales by about 350,000 tonnes, which is about 1.4 million tonnes on an annualized basis. The assets are running extremely well. And so when you've got the production there, there could be some recontracting that we need to do for next year, certainly, we're in those discussions. In the near term, we'll take that into our supply chain. We'll actually flex as much as we can within our existing sales contracts. So we have flexibility to increase sales there. And then we'll be working if we had to do short-term contracts to the end of the year, we don't see that being significant. What you should expect though is in the fourth quarter, we will have higher sales than we did in the third quarter. And you should expect next year, the quarterly average sales to be higher than they were in the third quarter as well as we recontract for next year. Operator: Our next question comes from the line of Joel Jackson with BMO Capital Markets. Joel Jackson: I'm going to ask 2, but I'll do one by one. Can you maybe give us an idea, could you quantify like if -- I mean, accounting you're able to -- if you do the Q4 accounting in Q3, what would have been the EBITDA like boost in Q3? Basically, how much is earnings hit by the accounting treatment the first month-and-a-half of Beaumont? Rich Sumner: I think -- thanks, Joel. I think the way to think about it is that we had 1.9 million tonnes of equity production coming through sales. When we look at our production in the third quarter as well as into the fourth quarter, we now are at a point where we've got the asset base with the newly acquired assets closer to what we would say is our run rate with our new strengthened asset portfolio, which we think is really something that is going to -- we're working on is consistently demonstrating this performance. So when we think what is that run rate number, if we gave, when we introduced the OCI transaction, is about $9.5 million, a little bit more than that per annum of equity tonnes, including ammonia. So what should be coming through is about 2.4 million to 2.5 million tonnes. That's a delta of 500,000 to 600,000 tonnes versus Q3. So that's where the main earnings difference is coming from, which is a meaningful -- that's a meaningful increase in EBITDA. And that's what we're expecting when we get into the fourth quarter is that sales of produced product is going to look more like our equity run rate. So that's why we're kind of guiding to a meaningful uplift as we move into the fourth quarter. We're not at $350 per tonne, but we're close. So it should be setting up to be a strong quarter. Joel Jackson: Second question, just first, there were some news this week that maybe Natgas, the plant lost some gas or it was down. Tackle that for a second. And then I know you talked about before about turnarounds, maybe being able to do turnarounds maybe a year later than usual, looking at some of the [indiscernible] you have. Can you speak about that? And then I imagine Beaumont, Natgas, G3 wouldn't have to have turnarounds anytime soon. Also [indiscernible] Beaumont and Natgas probably wouldn't? Rich Sumner: Yes. First on the Natgas point. I think there may be some interpretation from gas monitoring around the operations in Natgasoline. We don't really comment on kind of daily gas reports where I think where this has been picked up. Nothing should be read into that, that there's any significant issues happening at Natgasoline based on any of that information. So probably I'll end it there on that one. But on the turnarounds, we have guided to about $150 million in CapEx per year, and that's 2 to 3 turnarounds a year. I think that's good guidance. We're always looking at ways that we can optimize around maintenance without sacrificing safety and reliability. And that's something that our team is consistently looking at. Within the $150 million, there's a good -- there's a meaningful amount of capital for the new assets, that's something we're looking at closer. But we're going to -- we would stick with the guidance of around $150 million on average and something we're always looking to further optimize. Operator: Our next question comes from the line of Jeff Zekauskas with JPMorgan. Jeffrey Zekauskas: You ran Beaumont and Natgasoline at high rates, you expect to run them at high rates. Where is the methanol going? Are these going to North American customers or offshore customers? And if they're going to offshore customers, what kinds of customers are they? What products are they making? Rich Sumner: Yes. I mean when we -- so when we introduced the OCI acquisition, what we had said was a large percentage of the contracted business we would expect would be in North America and Europe, and that's largely where we're selling the product. Obviously, the assets are running really well. And so there's some small uncontracted tonnes, which then we will increase the flexibility in our existing assets, our existing customer base as well as having to place some of those tonnes. That's a short-term basis. What our commercial -- global commercial team is working on now is looking at 2026 recontracting. And I think you can -- we give guidance about what our regional allocations look like on a percentage basis, and we would say those are the regional allocations to think about our global portfolio for next year. In terms of which applications we sell into, we sell into -- we have diversified set of customers. So you can think of our sales portfolio as almost a representation of the breakdown of global methanol markets. And that's pretty much what it will look like next year, a well-diversified sales portfolio into different derivatives with a similar global allocation that we guide to in our investor deck. Jeffrey Zekauskas: Just maybe if I could try it one more time. Global methanol demand isn't really growing very much, if it's growing at all, and you've got extra production. So whose tonnes are you squeezing out? Rich Sumner: Well, these tonnes were existent before we had them. So we're not squeezing out any tonnes. There is some incremental production over what we might have modeled. So we're talking about 200,000 tonnes in a 100 million tonne market, which isn't meaningful. So we're not worried about placing those tonnes. And methanol markets year-over-year, we would say, are growing -- it's growing about 2% to 3%. 2% to 3% is really being driven by China and Asia, where it represents 70% to 80% of global methanol demand. That's on the back of export manufacturing and strength in those markets as well as energy derivatives mainly in China. So the market is not growing at strong rates. The Atlantic and other markets generally flat. But we don't think that the market is in retreat and supply continues to be constrained, right? So we have a constrained methanol market with -- when we look at gas being either in mature gas basins or gas being redirected into LNG. Existing supply continues to be tight. So we're not concerned about having higher operating rates. Quite frankly, it's the opposite. We've got our assets in low-cost basins and it's highly profitable to have this production in our system. Operator: Your next question comes from the line of Nelson Ng with RBC Capital Markets. Nelson Ng: First question just relates to capital allocation. I think, Rich, you talked about paying down the Term Loan A gradually. So from your perspective, would the balance sheet be in the right place after you fully repay the Term Loan A and obviously have a reasonable cash buffer on -- in place in your balance sheet? Would that be -- would you be done deleveraging at that point? Rich Sumner: No, we won't be done deleveraging. But we do think the focus doesn't need to be entirely to deleveraging. We are -- our main focus in the near term is paying down the initial tranche, like you said. And if you look at the Term Loan A facility balance that we have, also consider that we've got excess cash on hand. We think we've got about $350 million left to go there, which is our primary focus. And really, our primary focus is we continuing to deliver what we're doing right now and what we've done through the third quarter and really focusing on conversion to cash for shareholders. Beyond the $350 million, we -- our debt target gets us back to our 3x debt to EBITDA. Our target has always been 2.5x to 3x, and we've got a debt tranche coming due -- a bond coming due in '27, which we wouldn't want to fully refinance. Having said that, we believe we've got a really strong asset base with competitively -- stronger, more competitive asset base. And so the strength of the free cash flows is there that we can continue to deleverage and focus on the balance sheet. We don't have a significant growth capital, and there could be some room there as well for shareholder returns. But that's what we want to -- first, we want to get there and the focus on that is the $350 million that's in front of us. And it's really -- that's the primary focus today. Nelson Ng: My next question is just in terms of, you talked about how you've started on the 18-month integration strategy. And obviously, it's still early days. But do you -- in terms of the -- I think it's roughly $30 million of anticipated synergies that you expect to realize. Can you give a bit more color in terms of where most of those benefits will come from? Rich Sumner: Yes. So the $30 million is primarily IT-related, insurance related, logistics, which means terminals and other optimization around logistics. So it's -- those are relatively hard synergies, and we plan to be realizing those on an 18 -- it's more like almost a year period now, but 18 month -- 12- to 18-month period. Some of those are easier to get at in the near term than others. IT will take a little longer. The other elements of the deal, I think, is that we're really focused on is getting above deal value results. And when we look at that, we focus on the assets. We model these assets at a certain operating rate as well as annual capital and maintenance capital. And I think today, we're achieving above those results. So our goal is to replicate that. And obviously, we're still early, and we're really focused on working with the teams, understanding the assets, how they operate the safe and reliable assets and be able to deliver and replicate this going forward. So that's the primary focus. Operator: Your next question comes from the line of Josh Spector with UBS. James Cannon: This is James Cannon on for Josh. I wanted to ask on New Zealand because I think last quarter, you guided to about 400 kt out of that unit this year. It seems you're tracking decently above that, but you held the overall guide relatively stable. Is there anywhere else in the portfolio you're seeing maybe weaker-than-expected results? Rich Sumner: Yes. I mean, I guess I'll kind of caution around New Zealand. Right now, we've got the asset running at 60% to 70% rates through the third quarter on the one Motunui plant. That gas balance is, we're really tight on gas. The country is tight on gas and our gas allocation is allowing us to operate at minimum operating rates today. So it's still something we're really focused on. The 400,000 tonne sort of assumes that for part of the year, we would be shut in. But at the end of the day, we're really focused on how we maintain that 400,000 tonne based on gas supply today. So we're working closely with gas suppliers. When you look at the other assets in the portfolio, everything is pretty much on the guidance. Egypt today, we're at full rates. We've come off the summer where we were at 80%, which is actually a very good result relative to the -- a lot of the -- that's usually where the demands on the grid are the highest. So today, Egypt is probably above. We've got 2 plants operating in Chile. So that run rate assumes the average for the year. So we're a bit above there. And then the other assets, we're pretty close. So things are going well right now. I think we need to think about that backdrop against how our newly acquired assets are running. And it sets up really well for us to demonstrate the strong free cash flow generation that we expect from the investments we've made, have P3 fully operating and really, I would say, the strength of the portfolio enhancement we've made with these assets. So that's our focus right now is continue to replicate that and focus on free cash flow conversion for shareholders. Operator: [Operator Instructions] And your next question comes from the line of Laurence Alexander with Jefferies. Laurence Alexander: So can you give a sense for what's going on in terms of the global industry utilization rate and what you're seeing in terms of demand, in particular in Asia for DME and MTO applications? And then secondly, can you speak to how the IMO decision to defer the flex fuel mandate might affect the cadence of demand for methanol over the next couple of years? Rich Sumner: Thanks, Laurence. Yes, from industry operating rates, Q2 and Q3 period tend to be the highest. And I would say across the industry, we've operated high. And what do I mean by that is if you look -- these are round numbers, but the Atlantic is operating at 80% operating rates. The Pacific, ex-China, is operating at 75% rates, and China is operating at 70% rates. Those may not seem high. But if you back out capacity that's permanently idled or gas feedstock that has been redirected or issues around, geopolitical issues that's constraining supply, the effective utilization is much higher than that. So we would say that we're at very high operating rates and there's not a lot of latent capacity, especially when Iran is operating at 70% rates, which is seasonally high there. So notwithstanding that, we did see some build during the quarter in coastal markets in China. But as that built up, we've now seen MTO operating rates moving up above 90% and that meant that inventories are now moderating in the coastal markets in China. So I think everything there tells us that even when everything is working, the market actually is relatively in balance. And then when we move into the Q4, Q1 period, supply gets restricted. And there actually isn't enough supply to meet all demand today, which is -- we would say this is a constructive market from that perspective. When you ask about MTO and DME demand, DME has been -- that demand is relatively flat. There's no -- it does go up or down a bit between 3.5 million and 4 million tonnes based on operating rates, but it's not really a move around the demand side. MTO moves up or down based on availability in the market as well as affordability there. And we've seen MTO continuing to operate now at high rates as we move into the fourth quarter. We would expect that might come under pressure as Iran gets restricted and there's less import supply availability. So hopefully, that answers the first question. On the IMO, we -- first, on the marine side, that is the big upside for methanol and a new application. Obviously, 400 ships should be in the water between -- dual fuel vessels between now and the end of the decade, represents a big demand potential. The IMO, obviously, we were watching closely what the IMO would do around the adoption of the net zero framework. Really what that would have done if it were adopted and some of the guidelines that they were proposing were adopted, it would have enhanced the competitiveness of low-carbon methanol as a fuel to meet those regulations. So the deferral by -- it has been deferred by 1 year. It came up against meaningful political opposition. We think that 1 year deferral allows the IMO to line out their guidelines and spell those out more, which was a big pushback during the meeting, but the opposition is a big hurdle. So that's something we're going to closely watch. The marine industry continues to support the net zero framework. There's been a lot of invested capital by shipping companies on investing incremental capital on dual fuel ships to meet low carbon regulations in the future. So something we're going to continue to watch. Our Low Carbon Solutions team will be working really closely with the marine sector on how that goes forward. Operator: Our final question comes from the line of Jeff Zekauskas with JPMorgan. Jeffrey Zekauskas: How have you fared in buying gas forward for your new assets that you've acquired? And that gas prices have been pretty low from the time you bought it, but they've moved up. Are you hedged yet or do you have more to go? Or where do you stand? Rich Sumner: Thanks for the question. The gas situation, when we acquired the assets, the OCI assets came to us largely unhedged. We already had our North American exposure. At least in the near term, we were hedged at around a 70% level on our existing book of assets. Where that puts us today is, I'll start, in the near term, we have hedged a little bit up. So we're closer to the 70% level to the end of the year across our total North American exposure. Into '26 and '27, the number gets closer to 50% to 60% hedged. We opportunistically enter the market if there's attractive pricing. Today, we wouldn't be looking to hedge at today's price. We will be seeking if the pricing drops below $3.50 as an example, we'll look to put in more. Today, we're comfortable with that open exposure and we'll opportunistically enter the market to layer more in when the pricing allows for that. Interestingly, the near end of the curve isn't priced that way, but the longer end of the curve actually is priced lower, and we did some contracts below $3.50 on a nominal basis out beyond 2030 recently, not big contracts, but -- so we're always looking to seek competitively priced gas for us that's really favorable for our North American exposure. Jeffrey Zekauskas: So in terms of hedging near term, it might be that you wait until the spring before you really try to lift your purchases again. Is that a base case? Rich Sumner: I mean it will be market determined. Of course, if we see the forward curve drop off for any reason and it's attractive, then we'll enter the market. I understand what you mean. Typically, we'll see some softening when inventories start to build so much as the gas market trades off of how inventories are trading. But we'll wait and see. And obviously, we've got a team that's reviewing these things daily and managing our exposure for us. Operator: And with no further questions in the queue, I will now turn the call over to Mr. Rich Sumner. Rich Sumner: Okay. Thanks again for joining the call this morning and for your questions and interest in our company. We hope you'll join us on November 13th for our Investor Day presentations and Q&A. Operator: Thank you for your questions. And this concludes today's conference call. You may now disconnect.
Operator: Welcome to the Xerox Holdings Corporation Third Quarter 2025 Earnings Release Conference Call [Operator Instructions] At this time, I would like to turn the meeting over to Mr. Greg Stein, Vice President and Head of Investor Relations. Greg Stein: Good morning, everyone. I am Greg Stein, Vice President and Head of Investor Relations at Xerox Holdings Corporation. Welcome to the Xerox Holdings Corporation Third Quarter 2025 Earnings Release Conference Call hosted by Steve Bandrowczak, Chief Executive Officer. He is joined by Louis Pastor, President and Chief Operating Officer; and Mirlanda Gecaj, Chief Financial Officer. At the request of Xerox Holdings Corporation, today's conference call is being recorded. Other recording and/or rebroadcasting of this call are prohibited without the expressed permission of Xerox. During this call, Xerox executives will refer to slides that are available on the web at www.xerox.com/investor and will make comments that contain forward-looking statements, which, by their nature, address matters that are in the future and are uncertain. Actual future financial results may be materially different than those expressed herein. At this time, I'd like to turn the meeting over to Mr. Bandrowczak. Steven Bandrowczak: Good morning, and thank you for joining our Q3 2025 earnings conference call. It has been 4 months since the Lexmark acquisition closed, and I am extremely pleased with the progress both the Xerox and Lexmark teams have made in planning and executing the integration. Their efforts have positioned the combined company for long-term success by harnessing the strengths of both organizations, offerings and sales approaches. As part of this progress, we have appointed several Lexmark executives in key leadership roles such as product development, business services and IT. This blend of legacy Xerox and Lexmark leaders across the company has fostered a collaborative mindset towards synergy realization, uncovering numerous new opportunities for value creation. As a result, in just the first 100 days post closing, we have already identified an additional $50 million of synergy opportunities, some of which we expect will be realized in 2026. I am, however, disappointed with Q3 results. Macroeconomic challenges weighed on top line performance. Revenue of $1.96 billion was up roughly 28% in actual currency and 27% in constant currency, reflecting the inorganic benefits of the Lexmark and ITsavvy acquisition. Pro forma for these acquisitions, revenue declined approximately 8%. Adjusted operating income margin of 3.3% was lower year-over-year by 190 basis points. Free cash flow was $131 million, an increase of $24 million over the prior year, and adjusted earnings per share of $0.20 decreased $0.05 year-over-year. This quarter, we experienced continued disruption associated with tariff and government-funded relating uncertainty, which primarily affected transactional print equipment revenues and to a lesser extent, supplies revenue. Throughout the quarter, we observed continued delays in purchasing decisions among clients, particularly those reliant on federal, state and local government funding. General economic uncertainty also resulted in delays in purchasing among our commercial client base and distributors. However, page volume trends remain consistent and branded supply usage was in line with expectations, both of which indicate unchanged demand for printed pages. Therefore, we expect delays in equipment purchases to materialize in future periods as tariff policies and government funding decisions become more clear and the macroeconomic environment becomes more stable. Economic uncertainty did not slow the progress of our IT Solutions business, which grew pro forma revenue by double digits in the quarter, supported by a balanced portfolio of offerings that address clients' most pressing IT infrastructure needs and ongoing initiatives designed to further penetrate Xerox's existing print client base. As our attention increasingly turns to the integration of Lexmark, we remain focused on the balanced execution of 3 strategic priorities: execute reinvention, realize acquisition benefits and balance sheet strength. I will provide an update on each. Starting with the execution of reinvention and commercial optimization. We have several new product launches across print and IT Solutions over the next 18 months. Two weeks ago, we announced the largest set of enhancements to our production print portfolio since last year's decision to stop manufacturing certain high-end production equipment. At PRINTING United, a leading industry event, Xerox debuted 3 new production printing presses, the IJP900, which marks the return of Xerox to the growing mid-volume inkjet market and 2 new products under the Proficio family name, which comprise our next generation of digital color presses, serving the entry color production mid and high markets. We expect this and future launches to provide incremental revenue next year. These new products are an integral part of our leading end-to-end production ecosystem, which uses AI-driven workflows, personalization and advanced analytics to make the print jobs of our most demanding production print clients more efficient and profitable. As the Lexmark integration planning work progresses, we are carefully analyzing the optimal approach to serving the more than 200,000 combined Xerox and Lexmark clients with an enhanced portfolio of print, IT and digital services as efficiently as possible. This work has revealed an opportunity to more cost effectively serve legacy Xerox clients by expanding our presence with key distribution partners, an approach Lexmark has successfully deployed to drive better operating efficiencies and higher operating margins. We recently took this approach in parts of upper Midwestern United States, where we announced an agreement with Loffler Companies to transfer the servicing and sales coverage for small and midsized businesses in the region. Further underscoring our commitment to sales efficiency and productivity, last quarter, we advanced our inside sales strategy with the opening of a new office in San Antonio with plans to scale to 180 specialists at the facility over the next several years. This model enables us to reach more clients efficiently and at scale, while AI-driven insights helps us analyze each stage of the sales cycle, identify process bottlenecks and implement targeted actions to improve performance. While currently a small part of ESR, these initiatives are already delivering results with the 27,000 accounts transitioned into inside sales showing greater than 30% ESR growth year-over-year. Early integration work from the Lexmark acquisition has also contributed to the acceleration of our ongoing operational simplification efforts. This quarter, we consolidated best practices from the 2 companies' legacy global business service organizations to create a streamlined and more comprehensive set of centralized operating processes. Managed by GBS and supported by a unified technology stack, integrated data architecture and a captive offshore labor model, which Louis will discuss in more detail, the structure provides the optimum foundation for scaling AI-driven operational efficiencies and enhancing our cash conversion cycle. In anticipation of future AI-driven savings, this quarter, we launched an AI center of excellence to design and distribute best practices around the adoption of enterprise AI tools and develop business plans for rapid adoption of function-specific AI-enabled operational enhancements. While still early days, we expect AI productivity solutions to derisk, if not add to existing synergy savings opportunities. Moving to acquisition benefits. As noted in the prior quarter, the ITsavvy integration is largely complete. This quarter, the IT Solutions team seamlessly transitioned legacy Xerox IT Solutions, ERPs and CRMs in the U.S. to legacy ITsaavvy's technology platforms, a crucial enabler of future cross-sales activities and sales acceleration more generally. Even prior to this transition, we continue to see strong progress in cross-sell pipeline build and conversion activities. In the third quarter, year-to-date sales activity of new IT Solutions sales to Xerox Print clients exceeded $50 million across more than 150 clients with an in-quarter conversion to bookings of roughly $15 million. We took the initial step towards realizing material Lexmark-related synergies this month with the elimination of more than 1,200 roles. This action and other nonlabor savings are expected to result in run rate gross cost savings of more than $125 million by the end of this year. Finally, balance sheet strength. As a reminder, the Lexmark acquisition resulted in an increase in total debt but was immediately delevering. When the expected $300 million in synergies are included in our pro forma LTM EBITDA, gross debt leverage is currently a manageable 4.3x. This quarter, we returned to positive free cash flow and took net debt down by $226 million. With the Lexmark acquisition now closed, we expect most, if not all, free cash flow to be used to repay debt. Our goal remains to target 3x total debt to EBITDA. I'll now hand the call over to Louie Pastor, who was recently named President and Chief Operating Officer, succeeding John Bruno. Louie has been with Xerox for 7 years, holding increasingly senior positions within the organization, including most recently Chief Administration Officer and Global Head of Operations. In that role, Louie played an integral part in helping design and execute the core components of reinvention, making him the ideal successor to John Bruno as we continue into the next phase of reinvention. Louie Pastor: Thank you, Steve. I am honored to take on the role of President and Chief Operating Officer. Over the last 7 years, I have helped orchestrate significant change at Xerox, change to our corporate structure, our operating model and more recently, our asset base. In each case, these changes were well thought out, deliberately executed and designed to ensure Xerox, a company with more than 100 years of history, thrives as a leading provider of services-led software-enabled workplace solutions. Reinvention has been a long and sometimes uneven path. But with the ITsavvy and Lexmark acquisitions completed, we have now executed on the core strategic components of this journey, which means we now control the levers required to deliver the expected financial outcomes of reinvention and can focus fully and completely on execution of the core operational and commercial components of reinvention. Operationally, we are focused on combining the best-in-class capabilities of both legacy Xerox and Lexmark, optimizing our labor strategy and standardizing the consolidated enterprise on key platforms for growth that combine people, process and technology. For example, as part of our shift from a geographic operating model to a business unit operating model in early 2024, we launched a global business services organization to centralize, standardize and streamline the company's support and operational functions across regions, business units and service lines, thereby lowering operating costs, improving quality and enabling continuous improvement. We are now accelerating our progress by adopting best practices and proven capabilities from Lexmark's award-winning GBS organization that was built and refined over multiple decades. These best practices include things like unified data governance to enable real-time insights and automation, while the proven capabilities include an integrated network of global capability centers with agile delivery models. These global capability centers, when combined with changes we previously made when establishing GBS, unlock significant opportunities for Xerox. For instance, in 2024, as part of the establishment of GBS, we negotiated new commercial agreements with our outsourced labor providers, giving us greater control and flexibility. With Lexmark's captive offshore and nearshore centers now available to the entire combined organization, we are taking full advantage of this control and flexibility to consolidate operations, reduce costs, improve performance and deliver better client, partner and employee experiences. In August, less than 60 days after closing on the acquisition, I traveled to Lexmark's largest global capability center in the Philippines, where we were recently ranked as a top 5 IT employer by the Philippine Daily Inquirer. I had the privilege of meeting and spending time with many of the 1,800-plus team members based there working across engineering, IT, cybersecurity, sales operations and service delivery, among other functions. Their talent, professionalism and pride in their work were truly inspiring. The genuine care for what they do and their shared sense of purpose came through in every interaction. I can't wait to meet with our teams in the global capability centers in Hungary, India and beyond in the coming quarters. Our ability to leverage these centers is only possible because of the operating model shift we executed in early 2024, and their creation was always part of Xerox's GBS road map. But with Lexmark's assets, capabilities and continuity of leadership, we are now able to advance the progress of GBS by orders of time and magnitude, a key contributor to our increased synergy expectations. Technology is fundamental to enabling the benefits of a more robust GBS organization. To that end, we made the decision this quarter to adopt and enhance Lexmark's existing technology stack rather than continue working toward consolidating Xerox on a net new build. The technology transition will take several years to implement in full across the globe. But by leveraging an existing system that already delivers better operational outcomes together with in-house development expertise, the business benefits are irrefutable. The change management is more streamlined and the implementation process is greatly derisked. Commercially, within PRINT, we are focused on evolving our offerings in several critical ways. From a services perspective, we are focused on improving the value proposition and reducing the cost of providing managed print services. And from a technology perspective, we are focused on leveraging Lexmark's A3 platform as well as developing new high-end OEM partnerships like the recent partnership we announced with Kyocera to improve our competitive position. This quarter, the product development and delivery teams finalized plans to adopt Lexmark's A3 technology at Xerox, which will decrease our reliance on existing suppliers and reduce the overall cost of our products, ultimately providing tailwinds to longer-term gross margins. We plan to roll out the Lexmark-produced A3 product to certain partners in our Eastern European markets in Q4 with a larger global rollout planned in 2026. This platform is more profitable for Xerox on day 1 as well as over the life of the product, given Lexmark's focus on design for serviceability. As a result, we expect our new A3 platform to require far less service intensity than existing models, resulting in higher Managed Print Services margins and improved client satisfaction. As Steve mentioned, our commercial focus within reinvention is not limited to offerings. It extends to our routes to market. This quarter, we began segmenting the combined Xerox and Lexmark client bases by size and vertical, which will enable us to develop a long-term coverage model that optimizes our cost to serve and aligns our offerings for maximum traction based on the needs of specific economic buyers and end users. We will provide more details on this new coverage model in future quarters. One of the key pillars of reinvention is to drive long-term sustainable growth. While we enjoy the benefit of the contractual nature of managed print contracts, which last on average 4 to 5 years, it does limit natural opportunities to grow wallet share within those existing accounts. With our expanded IT Solutions business as a result of the ITsavvy acquisition, we now have reasons to call on our clients every single day, providing Xerox with more opportunity to cross-sell, upsell and penetrate both new and existing accounts. The acquisition of Lexmark only further expands this addressable market and enables our sales reps with a greater value proposition for our clients and partners. Lastly, I will provide an update on Lexmark synergies. Over the course of the first 100 days post close, we have held workshops and strategy sessions with each of the key functions responsible for delivering our synergy plans. These workshops have revealed $50 million of upside to our latest synergy plan, some of which is expected to be realized in 2026. The implementation of these synergies is managed by the same enterprise transformation office that has successfully delivered more than $500 million of reinvention-related gross savings and profit opportunities since 2023. We currently have 16 integration work streams with more than 100 initiatives and a broad cross-functional team of several hundred people across both organizations engaged in the identification and realization of these synergies. In summary, we are making meaningful progress integrating the 2 companies. As a result, we increased the Lexmark synergy forecast to at least $300 million, which firmly places expected savings from Reinvention as a whole north of $1 billion. These savings, when combined with an optimized go-to-market organization, selling offerings with greater secular demand mapped to a client base segmented by size and vertical are expected to drive revenue stabilization and a return to double-digit adjusted operating income in the next few years. I'll now turn the call over to Mirlanda to discuss this quarter's financial results in more detail. Mirlanda Gecaj: Thank you, Louie, and good morning, everyone. I'm recovering from a cold, so my voice may sound a bit raspy. Thank you for your understanding. As Steve mentioned, the third quarter reflected a continuation of the uncertain macro environment we saw earlier in the year. Despite these near-term challenges, we continue to execute with discipline and are making meaningful progress on cost savings. Further, we had another quarter of strong growth in IT Solutions. Q3 includes a full quarter of Lexmark results. For comparability purposes, we have provided pro forma comparisons for the prior year period, which assumes both ITsavvy and Lexmark had been acquired as of the third quarter 2024. These pro forma comparisons will be the focus of my prepared remarks. Revenue grew roughly 28% year-over-year, including the benefits of ITsavvy and Lexmark acquisitions. On a pro forma basis, revenue declined about 8% in actual currency. Core revenue, which excludes deliberate exits and nonstrategic reductions, declined roughly 5% this quarter on a pro forma basis, consistent with Q2, reflecting a continuation of the macroeconomic and policy-related uncertainty leading to clients deferring equipment purchases. These headwinds primarily affected the Print segment. IT Solutions showed continued strength, growing revenue double digits on a pro forma basis, led by public sector deployments, expanded cloud and networking activity and increased cross-selling momentum. Turning to profitability. Adjusted gross margin of 28.9% was down 350 basis points, reflecting higher tariff and product costs. On a pro forma basis, adjusted gross margin also declined approximately 380 basis points year-over-year. Key drivers of the declines include tariff charges, net of price mitigation, higher product costs and revenue mix. These factors were partially offset by Lexmark's contribution and Reinvention benefits. Adjusted operating margin of 3.3% was 190 basis points lower year-over-year on a reported basis and 370 basis points lower on a pro forma basis due primarily to lower gross profit, partially offset by Reinvention savings. While some Reinvention initiatives were delayed due to considerations around integration activities, we remain on track to achieve our cost reduction goals and to realize incremental Lexmark gross run rate synergy benefits ahead of schedule. Despite this delay, our continuous focus on cost reduction resulted in a decline in adjusted operating expenses. Excluding $50 million of Reinvention, transaction-related costs and Lexmark post-combination compensation expense, our operating base was down around 9% year-over-year. Adjusted other expenses net was $85 million, $52 million higher year-over-year due primarily to higher net interest expense associated with Lexmark acquisition financing. Adjusted tax rate of 235% compared to 27.7% in the same quarter last year. The current year rate reflects our geographical mix of earnings and an inability to benefit from certain current year losses and expenses. Adjusted EPS of $0.20 was $0.05 lower than the prior year, primarily due to lower adjusted operating income and higher interest expenses, partially offset by tax benefits. GAAP loss per share of $6.01 was a narrower loss of $3.70 year-over-year. The improvement primarily reflects an after-tax noncash goodwill impairment charge of around $1 billion and a tax expense charge of $161 million in the prior year quarter. Q3 2025 GAAP loss included an inventory-related purchase accounting adjustment from the acquisition of Lexmark of $85 million or $0.67 per diluted share and a tax expense charge of $467 million or $3.68 per diluted share related to the establishment of a valuation allowance against certain deferred tax assets. Let me now review segment results. For Print and Other segment, Q3 equipment sales of $383 million increased 13% in actual currency and about 12% in constant currency. Pro forma for the inclusion of Lexmark, equipment sales declined about 16% in actual currency. Excluding the effects of reinvention-related actions and other onetime items, pro forma core equipment sales declined around 12%. I'll provide additional color for each legacy organization to help contextualize this quarter's declines. Legacy Xerox equipment sales declined 14% year-over-year in constant currency or roughly 8%, excluding the impact of Reinvention-related items, which include the decision to stop manufacturing high-end equipment. This compares to a normalized decline of 3% in the prior quarter. The sequential slowdown reflects an expansion of the macroeconomic and government policy-related uncertainty, which resulted in continued delays in federal and SLED-related ordering activity as government agencies and companies relying on government funding await budget clarity as well as delayed ordering among our commercial clients and channel partners. Total equipment installations for legacy Xerox declined 24% this quarter, reflecting in part the impact of macroeconomic uncertainty and resulting delays in customer order activity. Overall, equipment revenue declined at a slower pace than installation due to a higher mix of color devices, which are also more profitable than mono and post sale and the benefits of tariff-related price actions. Lexmark's equipment sales can be more volatile quarter-to-quarter than those of Xerox as a higher proportion of Lexmark sales come from large channel and OEM partners, the purchases of which can be lumpy. Lexmark's equipment sales declined 30% in the quarter in actual currency. About 18 percentage points of the decline can be attributed to difficult backlog compares in the prior year, the timing of OEM orders from one large customer who pulled orders ahead of the first half of the year and large branded equipment order delays among channel partners driven by the timing of enterprise rollouts. The remainder of the decline is due to slower run rate activity among channel partners, reflecting macroeconomic uncertainty. Despite the challenging third quarter results for Lexmark, underlying demand trends remain healthy. Year-to-date, equipment sales for Lexmark are down 1% in constant currency year-over-year, normalizing for prior year backlog reductions and the aforementioned items. For the full year, Lexmark equipment sales are expected to be up around 2% in constant currency, normalizing for prior year backlog reductions. Total equipment installations for Lexmark declined 25% this quarter, roughly in line with revenue, reflecting the factors previously noted. Print post sale revenue of $1.36 billion increased 23% in actual currency and 22% in constant currency. Pro forma for the Lexmark acquisition, post-sale revenue declined 8% in actual currency. Excluding the effect of reinvention actions, core print post-sale revenue on a pro forma basis declined 5% in actual currency, slightly better than last quarter's pace as higher sequential declines of supplies at legacy Xerox was offset by legacy Lexmark's outperformance. Outside of supplies, post-sale revenue was largely in line with expectations, reflecting the benefits of post-sale revenue streams that are largely contracted or recurring in nature. Print and Other segment adjusted gross margin of 30% declined 330 basis points year-over-year. Pro forma for the Lexmark acquisition, gross margin declined 440 basis points year-over-year due to higher product and tariff costs, lower managed print volumes and a reduction in high-margin finance-related fees, partially offset by Reinvention savings. Print segment margin of 3.7% declined 340 basis points year-over-year due to lower revenue and gross profit, partially offset by Reinvention savings and the inclusion of Lexmark in results. Pro forma for Lexmark, Print segment margin declined 520 basis points, reflecting top line softness in the quarter. Turning to IT Solutions results. IT Solutions revenue and gross profit increased more than 150% year-over-year, reflecting the inclusion of ITsavvy in segment results. Pro forma for the ITsavvy acquisition, IT Solutions revenue grew just over 12% in actual currency. Pro forma gross billings, a reflection of business activity, increased 27% year-over-year in the third quarter compared to 12% growth year-to-date. The sequential improvement in billings growth reflects several large public sector deployments benefiting PC sale and endpoints, another quarter of double-digit growth in infrastructure and networking revenue and acceleration in advanced solutions billing, where we continue to see strong adoption of Microsoft Cloud Service Provider. Total bookings, an indication of future billings increased 11% in the third quarter, an acceleration from prior quarter's pace of 10%. We continue to see growth in sales activity for IT products and services to existing Xerox's Print clients with more than $50 million of pipeline creation year-to-date. IT Solutions gross profit was $44 million and gross margin of 19.5% expanded 320 basis points year-over-year due primarily to the inclusion of ITsavvy. Pro forma for the ITsavvy acquisition, gross margin expanded 260 basis points, reflecting benefits from platform leverage and revenue mix. Segment profit grew $18 million year-over-year, with profit margin reaching 8.1%, helped by the inclusion of ITsavvy. On a pro forma basis, segment margin grew 610 basis points due to platform leverage enabled by ITsavvy integration and synergy benefits. Operating cash flow was $159 million compared to $116 million in the prior year quarter. The improvement in operating cash flow reflects higher proceeds from the sale of finance receivables and improved working capital, partially offset by lower net income and about $25 million of transaction expenses associated with the Lexmark acquisition. Investing activity was a use of cash of $725 million, a year-over-year increase of roughly the same amount, primarily reflecting the acquisition of Lexmark. Financing activity resulted in a source of cash of $118 million compared to a use of cash in the prior year of $74 million. Current quarter net debt increase includes financing for the Lexmark acquisition, partially offset by the paydown of 2025 senior secured and quarterly amortization of other secured debt. Free cash flow was $131 million, $24 million higher year-over-year due to an increase in operating cash flow. We ended Q3 with $535 million of cash, cash equivalents and restricted cash. Total debt of $4.4 billion increased around $460 million from Q2 levels due to an increase in debt associated with the financing of the Lexmark acquisition. About $1.6 billion of the outstanding debt supports our finance assets with remaining core debt of $2.8 billion supporting the nonfinancing business. Post the Lexmark acquisition closed on July 1, total debt declined $226 million on the paydown of the 2025 senior secured and quarterly amortization of other secured debt, partially offset by ABL borrowings. As noted in prior calls, the Lexmark acquisition added debt to our balance sheet, but resulted in lower gross debt leverage levels. On a pro forma basis, gross debt leverage is 6.1x last 12 months EBITDA, roughly a 1.5 turns reduction relative to Q2 levels. Our top capital priority remains the reduction of debt, and we continue to target a gross debt leverage target of 3x last 12 months EBITDA in the medium term. Finally, I will address fiscal year 2025 guidance. Looking ahead, we have adjusted our full year outlook to reflect continued macro uncertainty and slower-than-anticipated equipment purchasing decisions, particularly the timing of the reopening of the government. We now expect 2025 revenue to grow about 13% year-over-year in constant currency with an adjusted operating margin of roughly 3.5% due to lower sales and a slower-than-expected rollout of price increases targeted at offsetting product cost increases and tariffs. Free cash flow guidance was reduced from $250 million to $150 million. Roughly $25 million of the reduction relates to post-acquisition transaction costs classified as operating in purchase accounting with no impact ending cash. The remaining balance is a result of lower revenue and profit as well as onetime cost to achieve integration synergies at the high end of the previously provided range due to larger cost actions. Moving to 2026. We will issue formal 2026 guidance during the Q4 2025 earnings call. In the meantime, I will build on commentary provided last quarter, providing additional color around certain expenses that are expected to partially offset gross cost savings. As we look to next year, we see meaningful opportunity for recovery once funding and tariff policies stabilize. Delayed projects are expected to convert into orders, while IT Solutions is expected to continue to outpace its markets. Consistent with our view last quarter, legacy Xerox is expected to perform in line with the broader print market, which we expect to decline low to mid-single digits with legacy Lexmark revenue expected to be roughly flat to down low single digits. IT Solutions is expected to grow above the rate of its underlying markets, which we estimate to be 7% to 8%. Moving to adjusted operating income. As Steve and Louie mentioned, integration planning work this quarter revealed incremental upside to Lexmark synergies. Of the $50 million of incremental synergies, we expect to realize about $25 million of that amount in 2026, resulting in total expected in-year gross integration synergy and Reinvention savings of between $250 million and $300 million. Offsetting these savings, we expect $60 million of profit headwinds associated with the continued wind down of our finance receivable portfolio and around $100 million of profit headwind from incremental tariff and product cost increases. We continue to target select areas for price increases and expect to fully cover the impact of incremental product costs over time. Moving below operating income, we expect interest expense to be around $290 million. Finally, free cash flow. We continue to expect around $400 million of cash from the reduction of our finance receivable balance. With that, I will now turn the call back to the operator to open up the line for questions. Operator: [Operator Instructions] Our first question comes from Ananda Baruah with Loop Capital. Ananda Baruah: A few, if I could. Just on top line impact to equipment sales, any way to discern, I guess, of the land that you talked about, it sounded like adjusted 500 more basis points of growth decline relative to last quarter, the 8% versus the 3%. Any way to discern like government impact? I guess maybe there's sort of however you want to parse this, government versus commercial, which I guess commercial is probably more macro, government sounds like it's more shutdown. And then I would imagine tariffs layer into at least macro, I'd imagine. Does that layer into government as well? And how should we think about of the incremental, the 8% versus the 3% last quarter, parse that between kind of commercial and government? And I have a follow-up. Steven Bandrowczak: Ananda, this is Steve. A couple of things. First of all, the 2 strategic acquisitions we made are absolutely leading us in knowing that the strategy is going to sustain long-term growth and profitability. If you look at ITsavvy, right, grew billings now 3 quarters in a row, bookings 3 quarters in a row. We're now penetrating our existing customer base on the Xerox side. Operating profit grew. The 2 companies, ITsavvy and IT Solutions, fully integrated and completely integrated going forward, enhancing their operating profit growth. In that sector, specifically, what we're seeing is actually growth and less -- less of an impact from the macroeconomics, both in terms of government shutdown and in terms of tariffs for a couple of reasons. One, strategically, we're aligning to where IT is making investments to drive productivity to offset some of the cost pressures that they're seeing. So I want to bifurcate and segment this out a little bit. ITsavvy, IT Solutions, clearly growing, clearly see that growing in the future. You will see more activity in our areas in terms of SaaS and moving towards solutions, right? On the Lex integration, the Lex acquisition, we've seen a couple of things. One, we obviously see acceleration in our synergies over the first 100 days. We're now increasing our synergies by $50 million. What are we seeing there? We saw some slowdown with our partners in there trying to understand what was happening with the acquisition, the 2 companies coming together. But we also saw any clients that were impacted or could be impacted by either federal or the tariffs was pausing, right? So we haven't seen a pace decline. We haven't seen a slowdown in activity. What we've seen is the hesitation specifically in the ESR growing. And so what we're looking at there is now that we're going to get certainty going forward as the government opens up, as tariff opens up, we expect that business and that volume to come back. Lastly, as we think about the cross-sell opportunities, which is really important, we now can take our IT Solutions, our production solutions, take it into the Lexmark client base and take it to the Lexmark partners, which allows us to further accelerate our revenue synergies. So it's a tale of a couple of stories there. When we talk about the government shutdown, IT Solutions growing. We see pieces and pockets of opportunity even as part of the Lex acquisition. We haven't talked about Asia expansion, which is on the table for us. So the federal government is slowing down, some of our buying from our clients and from our partners, we expect that to come back as we go forward. Any other comment, Mirlanda? Mirlanda Gecaj: Yes. Thank you, Steve. And yes, and the weakness, Steve really explained it well. On the ESR, this is where we saw top line client just slowing demand. And as it relates to post sale, the trends are very similar to Q2. Ananda Baruah: That's really good description, guys. That's super helpful. And then on the savings, the increased savings from integration, I guess this is really an overall savings question. Is there any way yet to discern what portion could ultimately go to the bottom line? Mirlanda Gecaj: Ananda, we're thinking about the increased saving, the $50 million that we upped our synergy targets for Lexmark acquisition from $250 million to $300 million. We expect about half of that to flow through in 2026 and the rest in 2027, 2028. So I would say half of it. Ananda Baruah: And is that to OP income? Or is that recognized gross? I guess what I'm getting at... Mirlanda Gecaj: Yes, it's a mix. Gross profit, gross margin and operating margin will benefit. Steven Bandrowczak: Yes. And the other thing I'll highlight is, look, we're 100 days into this, right? We've accelerated and found another $50 million. We've got multiple work streams that we're looking at, and we will see continued expansion of our synergy savings as we start to roll out and get deeper into those activities. So we're not done. We talked about the $300 million plus. There are more work streams and activities. We will see more synergy savings from those activities. Operator: Our next question comes from Eric Woodring with Morgan Stanley. Maya Neuman: This is Maya on for Eric. Last quarter, you sized the tariff headwind at about $30 million to $35 million for 2025. Maybe if we put the impact from delayed purchases at the top line level aside, you noted tariffs as one of the underlying reasons for the reduction in adjusted operating margin guidance for the full year. How would you size this headwind now? What has really changed, I guess, in the last 90 days? And you also mentioned a little -- it took a little bit longer to flow through price increases. Are there more price increases to come in response to tariffs? Or have those kind of fully flowed through now? Mirlanda Gecaj: Thanks, Maya. With respect to tariffs, last quarter, we provided a range, as you mentioned, $30 million to $35 million. Right now, we see that being on the high end of the range. We expect about $35 million net impact from tariffs in 2025, and that is included in our guidance. We are continuing with price increases, but have been very measured because we are talking to our customers. We're looking at the demand and impact it has. And given the softness because of all the reasons that we discussed in our prepared remarks, we are taking a step back and looking at case by case as we apply these price increases. We still expect to continue to offset the impact of tariffs in future periods with price increases and changes to our supply chain. But for now, again, 2025 has about $35 million of tariff impact in our guidance. Operator: [Operator Instructions] Our next question comes from Asiya Merchant with Citi. Asiya Merchant: Two, if I may. One, just if you could unpack -- I think you talked about the various levels of government softness that you were seeing on the equipment side of things, on the print side of things. But on the -- at the same point, you talked about ITsavvy doing better. So if you could just talk about the weakness that you saw in the government across the different levels between those 2 segments, federal, state, local, that would be great. And then you talked about free cash flow improvements into next year. I get 400 basis -- about $400 million, sorry, from finance receivables flowing through. Just if you can walk us through how we should think about sort of some of the other items that could impact free cash flow into next year. Clearly, better income. So how should we kind of think about free cash flow into next year versus the $150 million that you guys are guiding to for '25? Steven Bandrowczak: Yes. Thank you. This is Steve. I'll take the first part of it. So when you think about the federal shutdown, it impacts the ecosystem. You think about their suppliers, you think about the contractors, you think about state and local who require funding from the federal government. And so we see a brand overall impact on spending. However, when you think about priorities in IT spend, there are pockets and areas that they will invest. So for example, if you're going to invest in AI infrastructure so that you can accelerate productivity and take advantage of using of AI, you could take advantage of looking at how do you move more towards a captive and more into the cloud, how do you think about Network as a Service, cybersecurity, et cetera. So we are seeing pockets where they continue to invest to drive productivity based on prioritizing their IT spend. And that's where ITsavvy is taking advantage of the spending that's happening out there that is, in fact, less -- less impacted by the federal shutdown because IT organizations are prioritizing certain areas that we're actually playing in, and we're taking advantage of that. The other aspect of it is what we're seeing is, so as you start to think about the trickle down, there's a little bit of uncertainty in terms of profitability for the company. So they're pulling back capital in general. And when you think about the print infrastructure, sweating the assets and not putting in new equipment is where we're seeing the biggest input. So we're seeing page volumes okay. We're seeing supplies okay, but we're not seeing the turn on equipment that we anticipate in terms of buying new equipment, which reduces our ESR. We anticipate that coming back once we see certainty when the federal government opens and once we see certainty in budgets and when that will start to flow. Do you want to take a look at cash flow? Mirlanda Gecaj: Yes. Thanks, Steve. So we'll provide official guidance when we report our earnings -- Q4 earnings, but some guidelines to consider. So yes, we expect $400 million of proceeds from the continued reduction in finance receivables. We expect about $50 million in onetime costs associated with synergy savings. And then when we think about working capital, we expect to have a more normalized working capital, higher operating income, which is net of incremental expenses, which will contribute to an improved conversion of free cash flow from adjusted operating income in 2026. Asiya Merchant: Great. And just can I -- if you don't mind, if I could ask one more on just the competitive dynamics. I think you talked about the ESRs seeing impact from all the shutdowns and the lack of clarity, et cetera. Is this -- when you talk about some of this coming back, what's the clarity? Should we expect like competitively, your market share as you kind of see it has remained stable. And so this is more of an industry-wide shutdown? Or is there anything else from a competitive standpoint that we should consider? Steven Bandrowczak: No, we don't see losing share. We're holding share. And so from a competitiveness, we don't see anything unique that we're not competitive in this space. We're seeing a basic pullback across the board. Operator: I would now like to turn the call back over to Steve Bandrowczak for any closing remarks. Steven Bandrowczak: Thank you. While the near-term environment remains complex and our strategic priorities are clear and unchanged, execute the Lexmark integration to capture both revenue and cost synergies faster than initially planned, drive profitable growth in IT Solutions through advanced infrastructure, networking and advanced solutions, maintain financial discipline with debt reduction remaining our top capital priority and a clear path to reach 3x gross leverage ratio over the medium term. We recognize there is still more to do, but we're confident that the actions we are taking are positioning Xerox for long-term sustainable profitability. I want to thank our employees, clients and partners for their continued dedication and support. I wish everyone a great day. Operator: Thank you. This concludes the conference. Thank you for your participation. You may now disconnect.
Jens Montanana: Good morning, and welcome to our FY '26 interim first half results. As per our usual format, I'll be providing a summary followed by the CFO's presentation on the financial results and then followed by my operational review of the divisions and finally, the concluding slides. Our results summary. Slide 4. We had an exceptionally strong H1 performance. All the group's divisions delivered strong year-over-year increases with higher profits, better margins and good working capital management. These results translated into a staircase of improvement down the P&L with strong operational leverage. Gross sales grew by 9%, gross profit close to 12%, adjusted EBITDA by 22% and underlying earnings per share jumped by 43%. The strong profit improvement and enhanced dividend payout ratio from last year led to a significant increase in our interim dividend, up from USD 0.043 to USD 0.10, an increase of 133%. As seen with the reporting of many tech companies, an AI-led generational upgrade to more advanced computing is beginning. It is hard to predict how long this will take or what impact it will have. But if is like previous technology cycles, it will be evolutionary and take time to mature. The ubiquity of AI will eventually augment all uses of technology and will drive faster networking, distributed data centers, more local computing and increased cyber threats. If we can continue to adapt and operate in the right areas of our industry, then the future is very bright for all our businesses. The profitable progress across our divisions is well anchored and the fundamentals are strong and sustainable. A remarkable transformation in our business mix. Not so many years ago, the vast majority of what we sold was mainly hardware with attached services driving just over 10% of the total sales. Today, that ratio has completely turned around with over 70% of our total sales or gross invoice income derived from software and services, while the vast majority of that is also recurring. As the businesses grow in a predictable way, so do the margins and profits as the leverage rises. We believe we are very well placed to continue to ride the core technology trends that we have long been associated with. I will hand over now to Ivan to go through the financial section. Ivan Dittrich: Thank you, Jens, and good morning, everyone. We are very happy to present another set of excellent results with continued strong operational execution. As we indicated in our trading update issued earlier this month, with effect from this financial year, we have changed the definition of underlying earnings per share to further align to our adjusted EBITDA definition and to also align with peer reporting. Underlying earnings per share now exclude IFRS 2 or share-based payment charges. The comparatives have accordingly been recalculated. Slide 8, the P&L. Revenues continue to be impacted by an increasing portion of software and services being accounted for on a net basis, including as a result of the accounting policy change in Westcon in the prior year. Revenue from sales arrangements where the company acts as an agent is accounted for on a net basis and the commission or gross profit earned on the transaction is recognized as revenue. Where the company acts as a principal in the transaction, the revenue is recognized on a gross basis. To get a sense of the real growth in the business, we therefore now show gross invoiced income or gross sales, which is not an IFRS term. Gross invoiced income grew by 9.4%, but more importantly, absolute gross profit grew by 11.7%. We had strong operating leverage with adjusted EBITDA growing by 22%. Reported EBITDA grew by 36% and included $15 million of settled tax litigation credits in Westcon, which are excluded from adjusted EBITDA. Finance costs were significantly lower than the prior year due to lower rates and efficient working capital management. Our quality of earnings down the P&L continued to improve. Our PBT or profit before tax increased by 92% with an increase of 43% in underlying earnings per share and HEPS more than doubled. Slide 9 shows the segmental income statement. This shows very pleasing improvements in gross profit to EBITDA conversion ratios in both the Logicalis businesses with a steady state in Westcon. All 3 divisions had solid operational execution during the period. Slide 10. The geographic mix of our businesses has remained relatively stable year-on-year with Europe representing about half of the group. We have once again seen an increased contribution from Asia Pacific. Fundamentally, our business involves selling U.S. technology complemented by local services. Over 90% of our business is outside the U.S. Slide 11. Software and services continued to grow, driven by growth in annuity business. This analysis is presented on a gross invoiced income basis. Slide 12, the group balance sheet. The balance sheet remains strong. Net debt reduced significantly from the first half last year, driven by tight working capital management with large reductions, especially in the 2 Logicalis businesses. Equity reduced due to a $73 million debit cash flow hedge reserve in Westcon. This resulted from Westcon's hedge accounting program and is due to the much weaker U.S. dollar prevailing during the first half. Slide 13 shows the divisional balance sheet and all the divisions have healthy balance sheets with strong liquidity. Slide 14, the cash flow statement. Despite the high growth during the period and resulting increased working capital requirements, especially in Westcon, operating cash generation improved over the prior year. Cash interest payments reduced, and we saw an increase in cash and cash equivalents compared to the prior year's first half. We have declared an interim dividend of USD 0.10 in line with our dividend policy. I will now hand over to Jens to cover the remainder of the presentation. Jens Montanana: Thank you, Ivan. Starting with the Westcon International division, Slide 17. All regions had robust sales growth. Demand for cybersecurity continues to climb in a continually increasing threat landscape environment. The strong financial performance and working capital management is delivering good cash upstreaming to the parent. Operational execution remains excellent, and the levels of service to customers and employee satisfaction are very high. The company has been certified in 27 countries by the Great Place to Work organization. Gross invoiced income or total sales grew by close to 10%. This healthy improvement came with continuing faster growth from recurring revenues, which grew by over 17%. The trend of growing recurring sales continues as hardware as a percentage of the total sales is now below 30%. Illustrating this point is the greater proportion of software in the mix. This shows that while gross invoiced income continues to rise, so does the element of net accounting. There was healthy volume growth in all regions reflected by growth invoiced income, while reported revenues remained similar. Asia Pacific and the Middle East and Africa had the highest growth rates. Gross invoiced income analysis. Both business units grew. The C store Cisco segment grew by 2%, while other technology sales from mainly cybersecurity vendors represented by the Westcon brand grew by 14%. The main customer base of SMB value-added resellers remains the majority of the business and has been very constant. There was an increase in sales to large global major telco service providers. All technology categories grew in absolute terms, but cybersecurity continues to grow the fastest and now drives more than half of the total sales. The cybersecurity category grew by 16% year-over-year. Software and services now represents over 60% of the mix and hardware less than 30%. This is a significant change to the segment sales mix and a complete reversal from a few years ago. Gross profit. Gross profit grew by 14%, significantly more than the increase in gross invoice income. This was almost entirely due to the release of various tax claim provisions that had been held previously. Adjusted EBITDA, this represents the true underlying trading picture and grew by 7.3%. In the early part of H1, there was a fairly abrupt weakening of the dollar. On a translated basis, this raised the U.S. dollar stated fixed cost base, especially in Europe, where all the costs are in euros and pounds. The impact of this was offset by good EBITDA growth in Asia Pacific and the Middle East. Europe continues to drive the majority of the total EBITDA. Reported EBITDA was boosted by the unwinding of previously accumulated tax provisions. The company has always taken a conservative approach in this regard and creates a buffer for potential tax claims, if likely. EBITDA increased by $20 million or almost 30% overall to $90 million. Working capital management. Overall, net working capital days fell slightly since year-end, but more significantly compared to the prior half year. Payables outstanding and payables days rose, driven by the strong top line growth and longer managed creditors arrangements. This flexibility helps drive business opportunities and reduces the working capital. Debt cycle. The working capital movements are represented graphically in this monthly chart, which shows the last 3 years of debt cycles. Debt falls at the end of financial quarters and especially at the half and full year-end, but then rises in between these periods with January being the peak. The plotted average of this over the past 3 years has been net debt of approximately $260 million. The environment remains robust with the business locked on to multiple positive themes across all its markets. Many technology areas are being fueled by accelerated AI demand. Cybersecurity remains one of the fastest-growing segments, while a new generation of networks is evolving to provide connectivity to vast hyperscaler communities. While there may be challenges to global trade from tariff imbalances and supply chain lead times, this appears to be a little consequence to technology demand, which remains very vibrant. Moving on to the Logicalis segment. And firstly, Logicalis International, Slide 30. Good top line and revenue growth. There was a strong order book with good momentum with multiyear contracts. Growth in higher-margin recurring sales and much better profitability, cash conversion and reducing debt. Overall, the leverage in the business model is coming through. Gross invoiced income. There was strong growth in gross invoiced income as total sales grew by over $100 million or 11%. As a percentage of the total sales value, the recurring element is now over 60% of the total. The increases in gross invoiced income and reported revenues were spread across all regions. Europe and the U.S. are similar in size. However, the U.S. has a greater net accounted software and vendor resold maintenance proportion. This explains the delta to reported revenue. Cloud-delivered and hybrid solutions requiring managed services were the fastest-growing segments. The segmental analysis at the top line shows all service types combined are now over 70% of the mix and annuity managed services forms approximately half of that. Managed services grew by 17% to become 35% of the total mix and cloud-derived sales grew 17% to represent close to 1/4 of the gross invoice income. Gross profit. The gross profit percentage increase was slightly higher than the rise in gross invoiced income, resulting in another uptick in gross margins to close to 30%. These best-in-class margins reflect the multiyear transition from what was mainly a product supply business to now a technology and managed services provider. Adjusted EBITDA. The expanding margin dynamic, coupled with controlled operating expenses drove a big jump in adjusted EBITDA of 36%. We are approaching the high end of the EBITDA margin zone targets we set out a few years ago, and we are now targeting gross profit to adjusted EBITDA conversion of over 30% from the 29% today. Reported EBITDA mirrored adjusted EBITDA rising 37%. All regions had strong growth with the U.S. driving the largest contribution of around 50% of the EBITDA mix. EBITDA margins still have the potential to go higher as previous loss-making or low-profit countries such as the U.K. and South Africa are performing better now and with much improved profit trajectories. Inventory is structurally lower, driven mainly by less hardware and more software in the mix. Strong sales growth in the period increased accounts payable. Good collections on the debtor side kept accounts receivable at a constant level. The overall cash generation was strong, leading to a big drop in net debt to $24.9 million. Cybersecurity is becoming an increasingly important area of focus and growth opportunity. The path of networking is increasingly interwoven with cybersecurity, for example, Cisco's recent purchase of Splunk and Palo Alto's acquisition of CyberArk just illustrate how these major technology areas are overlapping. AI will fuel more of this and is also driving a resurgence in enterprise computing with many more hybrid cloud solutions being adopted. All of this is driving more software and services. Lastly, Logicalis Latin America, Slide 40. Finally, a positive pivot for the business after a few years of poor performance and necessary reorganization. Areas of concern remain such as Mexico. Overall, the region has done better with Brazil, the largest market leading the way and with recent improvements also in Argentina and Chile. Better gross margins, lower operating expenses and improved cash generation resulted in a much better quality of EBITDA and profits. Gross invoiced income. Gross invoiced income was flat year-over-year. However, within that, the recurring element grew by 20% and is approaching half of the total sales value. This shift has occurred with a growing and more diverse customer base and with an increase in multiyear managed services contracts. The region of NOLA, Northern Latin America was poor, mainly dragged down by Mexico and Colombia. Tariff uncertainties and execution issues have been more impactful in that region. Brazil and Southern Latin America, SOLA performed much better and combined were almost 90% of the total revenue. The growth in reported revenues came from the increased annuity managed services contracts, which are gross reported. Managed annuity services have risen faster than anything else and are a reflection of more longer duration contracts. Overall, hardware and software sales remains pretty similar. There was good growth in the small but growing cloud segment. Gross profit. The quality of gross profit improved mainly from Brazil to $51 million in total. The gross margin percentage ticked up slightly from 22% to 23%. Adjusted EBITDA, a very pleasing result down the P&L. Adjusted EBITDA doubled to $12 million, a meaningful bounce back from the past 2 years' poor performance. The combination of better gross margins and lower operating expenses provided the leverage. Reported EBITDA. At a reported level, EBITDA also rose to $12 million. The prior year's base was slightly higher due to the inclusion of positive tax items. Working capital management. The more diversified business model has grown the number of enterprise customers and is less reliant on large telco clients. The result is a better balance of diversified receivables with less lumpy revenue streams. The working capital management was excellent and led to a modest positive net cash position at the half year-end close. Overall, a very pleasing set of results. Many things are getting better, but a lot still has to be done. The focus on diversifying the business is starting to work with better margins, longer-term contracts and improving cash flows. Mexico needs to recover and attention is being focused there. We have confidence that the overall execution will continue to improve. Additions to the executive team are having a positive impact. And finally, just moving on to some closing remarks. To summarize, we expect the robustness of the first half to contribute well to the full year. We seasonally have a stronger performance in the second half. The AI momentum underpinning the rebuild and upgrades for technology infrastructure is no longer just focused on hyperscalers, but increasingly moving to enterprises and most businesses. We remain focused on maximizing the value to shareholders and for the benefit of all our stakeholders. Thank you very much, and I'll hand over now to any questions. Sharne Prozesky: We've got our first question from Katherine Thompson from Edison. You mentioned better GP to EBITDA conversion in Logicalis International. Could you summarize the target for each division or group for this metric? Jens Montanana: Yes. Okay, I can take that. I mean, obviously, we operate in a universe of other publicly traded comparables. So this is not necessarily just a benchmarking for our AM driven from our own extrapolations. And we think to get to the right balance between growth, EBITDA conversion and absolute EBITDA dollars that these ratios should be in the low 30s, in the low to mid-30s. They're slightly higher in the distribution business, where the operations are less people intensive and in Logicalis and the broader IT services universe, best-in-class competitors are generally around 30% or mid-30s. And by the way, on that point, the gross profit to EBITDA conversion, it's become -- it's always been an area of focus, but it's something we report on because obviously, the changing top line with the way that we IFRS revenue... Ivan Dittrich: And the way that we report revenue and with sort of more revenues being net account and net accounted, your EBITDA margin becomes less and less relevant, and it's more sort of the absolute gross profit that you generate, i.e., the dollars you bring in the door and then how much of that converts into EBITDA, which demonstrates the operating leverage. Sharne Prozesky: We have next -- another follow-up question from Katherine Thompson. Could you give a bit more detail on the Logicalis International multiyear contracts, verticals, geo and type of business? Jens Montanana: The -- well, we have managed service contracts. There's no -- they're not geographic. They're spread -- this trend towards more managed services in Logicalis is not country specific. So it's most probably similar in most regions. There is a slight difference in the amount of software that's sold in some regions versus other regions. And in the U.S., for example, there's a higher mix of vendor resell maintenance. So you see the difference between gross invoice income or, let's call it, top line sales and reported revenues, that difference is greater in the U.S. than in other markets. But other than that, there's not -- there are not any particular sectorial or geo reasons for managed services growth. It's really more. The driving factor is customers are increasingly looking towards their IT provider to provide them with both infrastructure and the service of that infrastructure on an ongoing basis of OpEx versus CapEx. That's the big driver. Sharne Prozesky: Next question from Ruan Koch, Coronation Fund Managers. Do you expect further improvements in the working capital cycle across any of the segments as mix changes? What impact will that have on your free cash flow generation? Ivan Dittrich: Yes. So Ruan, I think the sort of the most important thing here is sort of with the move towards more software, you will have less inventory, less physical inventory. So that clearly sort of has some working capital benefits, especially in the Westcon business, which is our most working capital-intensive business. That said, as a distribution business and a channel intermediary, Westcon is still a major credit provider in that supply chain. And typically, with the distribution business, when the business grows strongly, you typically have sort of large cash outflows as you invest in your working capital. But I would say, in general, the quality of our working capital management has improved significantly compared to previous years. It's a lot more efficient. And you can also see that from looking at the operating cash flows that we had during the 6 months period that we're reporting on now because despite the very strong growth, we still had a very decent operating cash performance. In the Logicalis businesses, which are generally less working capital intensive, one would expect that the bulk of your operating cash would essentially -- so the bulk of your operating profits would essentially convert into cash. Sharne Prozesky: Okay. Next question from Mike Steere. Do you expect the increased share of software and services to continue? Or do we eventually see a hardware refresh cycle? Jens Montanana: Yes, good question. Look, there is a hardware refresh. There's 2 sides to this. There's going to continue to be a relentless rise of more software and services in the reported mix. But the reality of the hardware that's being shipped when measured in hardware processing capacity or other physical metric is going up as well. What's changing is the value that's apportioned to the hardware is going down and the value that's apportioned to the software or the intellectual property is going up. So that's changing our invoice value mix, the hardware. And we're seeing -- to be honest, we're seeing a bit of a resurgence in hardware in the numbers that we're reporting, and this is what you hear about all the time in terms of the AI infrastructure boom and so on. That's ongoing, and we think that's going to be a multiyear play from here on in or here on out. Sharne Prozesky: Next question is from Katherine Thompson again. Should we expect your M&A strategy to continue to be focused on small bolt-ons rather than anything more transformative? Jens Montanana: Yes. We haven't done much M&A in any of our main divisions in the last in almost the last 10 years actually. And where we do, do M&A, we look to basically augment our fairly -- our mature businesses normally through skills acquisition or there's an area or domain, the technology domain where we think we can advance faster through M&A versus doing it organically. I must also point out that since our results in good results in May and continuing, we continue to be inundated with bankers and would be investors with inbound inquiries, selling, buying. So it can tell you -- it just tells you the environment at the moment has bounced back quite a bit in terms of M&A activity. And of course, we think that will most probably continue to fuel things going forward. Sharne Prozesky: There are currently no other questions. Jens Montanana: Great. Okay. Well, thank you very much for everyone for attending online here, and we look forward to seeing you or talking to you rather, sorry, at the full year results in May. Thank you very much.
Operator: Ladies and gentlemen, welcome to the Analyst and Investor Update Call Q3 2025. I'm Serge, the Chorus Call operator. [Operator Instructions] The conference is being recorded. [Operator Instructions] At this time, it's my pleasure to hand over to Rob Smith. Please go ahead. You can go ahead, Mr. Smith. Richard Smith: Serge, It's Rob. I lost your introduction. Maybe you've you got to switch line now? Operator: You can go ahead, Mr. Smith. Richard Smith: Operator? Operator: Can you hear us, Mr. Smith? We lost connection to the speakers. Please stay on the line. Richard Smith: [Technical Difficulty] Shanghai, China, where KION is at the CeMAT trade fair, which is currently taking place here in Shanghai. But I'll tell you more about that later. Please look for our update presentation on the IR website for today's call. I'm going to start with a summary of our third quarter 2025 results and several exciting business highlights. And then, Christian will update you on the efficiency program before taking you through the detailed Q3 financials and our updated outlook for 2025. And then, I'll be back for our key takeaways before we open the line for questions and answers. Starting, please, on Page 3. The third quarter was another solid quarter, in line with our expectations. Group order intake was EUR 2.7 billion, a 10% increase compared to the prior year. Revenue was flat at the KION level with the increase in Supply Chain Solutions compensating for the anticipated decline in the ITS segment. Adjusted EBIT was EUR 190 million, corresponding to an adjusted EBIT margin of 7%. Year-over-year, while the SCS continued to improve its profitability, profitability in ITS reflected the expected negative impact of lower volumes. Both operating segments improved their adjusted EBIT margin sequentially. Free cash flow was a strong positive EUR 231 million. And earnings per share was EUR 0.87, an increase of nearly 60%. On Page 4, I'll share with you some recent business highlights. In September, Linde Material Handling announced its partnership with the European aircraft manufacturer, Airbus, for the deployment of automated logistics solutions on the Jean-Luc Lagardere site in Toulouse, where the aircrafts of the A320 family are assembled. A range of robotic solutions designed to help optimize the efficiency and safety of Airbus' logistics processes have been commissioned. These innovations include the R-MATIC trucks, retractable mast autonomous guided vehicles, or AGVs, for a much more reliable material flow management and improved working conditions, helping Airbus build the 320 family. Also in September, KION Group received the highest award, which is a Platinum rating, from EcoVadis for the first time. This places KION among the top 1% of the more than 150,000 companies rated by EcoVadis. KION joined its well-established brands, Linde Material Handling and STILL, which were awarded the Platinum award from EcoVadis again in 2025. This positive group-wide development highlights KION's steadfast commitment to our sustainability strategy. And here at the CeMAT in Shanghai, China, KION is showcasing an advanced physical AI-powered Omniverse solution as part of the large-scale collaboration with NVIDIA and Accenture to reinvent industrial automation. CeMAT fair visitors are experiencing how AI-driven industrial trucks and digital twins can transform supply chain operations. The showcase is a milestone on KION's path to an adaptive autonomous material handling standard for customers worldwide. And Dematic unveiled the first demonstration of the FD system, showcasing its end-to-end workflow and innovative evolution of Dematic's multi-shuttle technology. It's ideal for a wide range of industries, including third-party logistics, supermarkets, e-commerce, apparel, pharmaceuticals and electronics. CeMAT is a truly inspiring experience for us: for me, personally inspiring, for our Board members, for our teams. I'd like to share with you our mutual impression of an atmosphere that's very powerful here. Our supply chain solutions industry is an industry of the future, and we are all in the middle of the beginning of this future at this point with lots of excitement still to come. CeMAT is a strong manifestation of the trends we at KION identified that are driving our business and our own innovation, especially electrification, the increased demand for warehouse trucks, e-commerce, automation and robotics. Yesterday, at the CeMAT, we signed 7 ecosystem strategic partnerships with highly innovative players that are outstanding in their respective fields of the supply chain solutions industry. With win-win partnerships like these, KION is enhancing its ecosystem focus on innovation, advanced robotics and automation technologies. With all what we've seen during these recent days, I'm very convinced KION is well positioned to shape the supply chains of the future. I'll hand now over to Christian, and he will take you through an update on the efficiency program, our detailed Q3 financials and our updated outlook for 2025. Christian Harm: Yes. Thank you, Rob. As promised over the last months, we are providing you now with an update on the efficiency program that we announced in February of this year to achieve a sustainable annual cost saving of around EUR 140 million to EUR 160 million from 2026 onwards. For the implementation of those cost-saving measures, nonrecurring items of approximately minus EUR 240 million to minus EUR 260 million were initially expected. I'm sure, you have all seen our announcement last week. Following the constructive and effective teamwork with our works council labor representatives, we have made substantial progress in the negotiations in most jurisdictions, particularly in Germany, giving us a better view on program instruments, financials and timings. We still have some jurisdictions in which we are still negotiating, which is why we don't have a final number yet. But we can now more precisely quantify the expected expenses, and we are now able to lower them to between EUR 170 million and EUR 190 million in 2025. The savings target remains largely unchanged at between EUR 140 million and EUR 150 million. We are able to achieve almost the same savings with much lower expenses, mainly because many employees accepted our voluntary redundancy package. As a consequence, we don't need additional redundancy schemes. We expect the savings to start impacting the bottom line already in the fourth quarter '25 with a small amount and anticipate the majority of the savings to become effective in 2026 and the remaining will then support earnings in outer years. Of the EUR 197 million efficiency program-related expenses recorded in the first half of 2025, we were able to release approximately EUR 34 million in the third quarter. Many leavers have, for personal tax reasons, opted for the severance payment to be paid out in the first quarter '26 rather than at the end of this year. Accordingly, this will shift a significant portion of the lower-than-initially-expected cash out for the efficiency program from the fourth quarter to the first quarter of next year. Let's go now to Slide 7 for the key financials of the ITS segment. Order intake reached 60,000 units in the third quarter, which is a sequential decrease of 14%, a pretty normal seasonal development in the third quarter. Year-over-year, the increase was 17%, an acceleration of the growth rate seen in the first 2 quarters, which is also due to the lower prior year base. New orders in value terms increased 8% year-on-year, driven by a 17% increase in the new truck business. The service business also showed continued growth at 1%. The order book reflects ongoing lead time normalization, and its margin quality is in line with our expectations, as reflected in our outlook. Revenue declined by 3% year-over-year to EUR 1.9 billion. The 3% growth in service partially compensated for the expected 9% decline in the new truck business. Again, remember that in 2024, the new truck business revenue significantly benefited from the tailwind of a high order backlog. Adjusted EBIT at EUR 171 million and the corresponding adjusted EBIT margin at 8.8% reflected the expected impact from lower volumes, resulting in lower fixed cost absorption in a year-over-year comparison. The sequential improvement in the adjusted EBIT margin, despite the usually weaker summer quarter, is supported by a slightly higher gross margin. We will now continue on Page 8, which summarizes the key financials for SCS. Following the record order intake in the second quarter, which was also impacted by the favorable timing of some order signings, orders in the third quarter declined by approximately 50% sequentially but still representing a 16% increase year-over-year. This year-over-year growth was once again driven by a 46% increase in business solutions orders, while the order intake in customer services was down 12% on a strong prior year quarter. Remember, we had flagged in the second quarter update call to not extrapolate the record order number for every quarter going forward. While we may have passed the trough, we are still in a lumpy recovery trajectory, and we are also likely to see the next quarter below the EUR 1 billion mark again. While last quarter's increase in order intake was very much driven by the pure-play e-commerce vertical, their share in this quarter's business solutions orders was 24%, meaning that the growth was fueled by customer in other verticals. As a result of the growth in order intake, the order book increased 16% year-over-year, and that year-over-year increase would have shown an even higher growth rate of 22% without the adverse foreign exchange translation effects. Overall, revenue increased both sequentially and year-on-year and is starting to benefit from the recovery in the order intake, which increased the business solutions revenue by 15% year-over-year in the quarter. The adjusted EBIT improved strongly year-on-year to EUR 48 million, with adjusted EBIT margin increasing to 6.2%, following higher revenues and improved project execution. Let's quickly run through the key financials for the group now on Page 9. Order intake benefited from the improvement in demand in the new business in both operating segments. The order book reflects the increased demand in SCS, partially offset by the continued lead time normalization in ITS and FX translation losses in SCS. Revenue in SCS is starting to benefit from the order intake recovery since the beginning of 2025, offset by the expected revenue decline in the ITS new truck business. Adjusted EBIT at EUR 190 million and the adjusted EBIT margin at 7% was impacted mainly by the lower fixed cost absorption in ITS and the normalized EBIT in the Corporate Services Consolidation segment, which was partially compensated by the strong earnings improvement in SCS. Now Page 10 shows the reconciliation from the adjusted EBITDA to group net income. Nonrecurring items in the quarter included approximately EUR 34 million release of provisions for the efficiency program. Please note that due to the overall lower-than-initially-expected expenses for the efficiency program, we have revised our full year 2025 expectations for nonrecurring items to between minus EUR 210 million and minus EUR 230 million from between minus EUR 240 million and minus EUR 275 million. You will find this information on the housekeeping slide in the appendix. In this quarter, [ PPA ] items were at the usual quarterly level. Net financial expenses improved year-over-year, mainly due to the positive impact from the fair value of interest derivatives and the lower net interest expenses from lease and short-term rental business. We have also adjusted our expectations for full year 2025 net financial expenses to between minus EUR 140 million and EUR 160 million from previously between minus EUR 170 million and EUR 190 million. Pretax earnings grew 9% to EUR 142 million in the quarter. Tax expenses of only EUR 23 million in the quarter corresponded to a tax rate of 16%, significantly lower than in the prior year quarter. The main driver for the lower tax expenses in the quarter resulted from a revaluation of the deferred tax liabilities amounting to EUR 38 million, following a June 2025 resolution of the German government on the lowering of the federal corporate tax rate from 2028 onwards. And then, the net income attributable to shareholders increased disproportionately by 58% to EUR 114 million, corresponding to earnings per share of EUR 0.87. Now, let's continue with the free cash flow statement on Page 11. Free cash flow in the quarter reached positive EUR 231 million, substantially driven by an improvement in net working capital in ITS. In contrast to the prior 2 years, we had a EUR 50 million cash out in -- sorry, where we had a EUR 50 million cash out in the fourth quarter for additional pension funding, we funded [ EUR 50 million ] in the second quarter and EUR 35 million in the third quarter. Page 12 shows the development of net financial debt and our leverage ratios. We had a solid decrease in net debt to EUR 818 million at the end of the third quarter 2025. Consequently, the leverage ratios improved across both net debt definitions by 0.1x compared to the end of June 2025. Our leverage ratios continue to remain slightly lower than the level last seen post our December 2020 capital increase. But this time, we achieved the improvement entirely through self-help measures. Slide 14 now lays out our updated guidance for the fiscal year 2025. I will quickly walk you through it. Based on the 3 solid quarters -- the first 3 solid quarters and our visibility for the fourth quarter, we have narrowed the guidance range for ITS. For SCS, the good year-to-date performance, including the growth in order intake since the beginning of the year, allows us to increase the lower end of both the revenue and adjusted EBIT guidance. In addition to the above, the narrowed group guidance range reflects our expectations of more negative adjusted EBIT contribution from the Corporate [ Services ] Consolidation line. This difference is around EUR 10 million in the midpoint, driven by higher expenses for long-term incentive programs, resulting from the increased share price and for strategic projects. And finally, as outlined earlier in this presentation, we expect lower expenses and related cash out for the efficiency program in addition to a significant portion of that cash out shifting from the fourth quarter '25 to the first quarter '26. Accordingly, our free cash flow guidance increased substantially to between EUR 600 million and EUR 700 million from previously EUR 400 million to EUR 550 million. As always, you will find the slide on the housekeeping items in the appendix. And with that, now, I hand back to Rob for our key takeaways. Richard Smith: Thank you, Christian. Let's move to Page 15, where we have our key takeaways. KION achieved another solid quarter, completing the first 9 months of 2025 in line with our expectations. Both the industrial truck market, as well as the warehouse automation market, have passed through their troughs and are on a recovery path amongst geopolitical challenges. KION is growing order intake in both operating segments. Following the constructive and effective teamwork with our works council labor representatives, we have made significant progress in implementing the efficiency program. With most jurisdictions having completed their negotiations, we're able to reduce our expected costs for the efficiency program meaningfully, while delivering the targeted savings. A significant portion of the associated cash out is shifting from the fourth quarter of '25 to the first quarter of '26, preserving cash in 2025. With 9 months of 2025 behind us and increased visibility on the fourth quarter, we have narrowed our guidance ranges for revenue and adjusted EBIT. We've also increased our outlook on free cash flow for fiscal year 2025 due to the lower expenses for the efficiency program and the shift of the related cash out. Our outlook remains subject to no significant disruptions to supply chains as a result of trade barriers, especially tariffs and restrictions on access to critical commodities. This does conclude our presentation. Thank you for your interest so far. We look forward to taking your good questions. Back to you, Serge. Let's open the line. Operator: Thank you, Mr. Smith. Can you hear me? [Operator Instructions] Richard Smith: Serge, we can't hear you. Operator: Can you hear me, Mr. Smith? Richard Smith: Nor can we hear [indiscernible]. Operator: [Technical Difficulty] Ladies and gentlemen, please hold the line. We will continue with the Q&A shortly. Richard Smith: I trust everyone has heard Christian and me for the last 15 minutes, but we don't hear any... Operator: Can you hear me, Mr. Smith? Richard Smith: [ Haven't ] put on the other line yet. Operator: Do you hear me now, Mr. Smith? Christian Harm: Okay. Raj is writing us the question and we're answering to that. Richard Smith: It's an outstanding solution. Operator: Okay. We'll start with the Q&A. The first question comes from Sven Weier. Sven Weier: I hope you can hear me, Rob and Christian. Operator: Please ask the question. We will forward it, Sven. It will take a bit. Richard Smith: Actually, now, I do hear you. Sven Weier: You can hear me? Okay. Great. So I have 2 questions, please. The first one is a more short-term question. And obviously, you had a great order intake development on the truck side in Q3 against what were, I guess, tough economic circumstances in Europe. So wondering if you could see a continuation of that also in the fourth quarter so far? That's the first one. Richard Smith: I'm sorry, I hear your voice, and there was some feedback on the line. If you would be so kind just to repeat that, maybe we'll get a better chance the second time. Sven Weier: Of course. Yes. I hope you can... Christian Harm: [indiscernible] will order intake continue like this in the fourth quarter? Richard Smith: Yes, sure. Let's talk about that, Sven. I mean, maybe we look at both segments. Historically, the fourth quarter is a very strong segment, probably the strongest segment for order intake in the ITS segment. Seasonally, the third quarter is usually a little lighter and the fourth quarter is a strong fourth quarter. I anticipate that will be a similar situation this year, no reason not to think it would. And as we say in both segments, we're past the trough. We're in a growing -- we're back into growth mode in the markets, and our order intake is certainly in growth mode. We have expected we got a better third quarter this year than we did last year in SCS. And as we described, we expect certainly a stronger second half this year than the second half last year. And we're looking for a good fourth quarter here. Sven, I trust that answers your first question. Sven Weier: Yes, and I could hear you really well. So that's fine. The second question is a little bit more looking forward on the... Richard Smith: So, you had a second question as well, Sven? Sven Weier: Yes. Can you hear me? Can you hear me, Rob? Operator, can you pass it on? Operator: Please ask your second question, and we will forward it to Mr. Smith. Sven Weier: Yes. So the second question is around the general sentiment among your clients, both in ITS and in SCS, in terms of their investment plans going forward. Do you sense they want to grow CapEx and it's just politics preventing them to do so, meaning that if there was any clearance on the political side, that this investment is released? Or what's the kind of general investment sentiment among both client segments? Richard Smith: The general sentiment, Sven? There we go. How about that? General sentiment among clients in ITS and SCS. Do we sense they want to grow CapEx and our geo -- let's talk about that. I think it's pretty exciting. I think everybody thinks it's exciting that President Xi and Trump came together today, shook hands, and it looks like there's a significant de-escalation of tensions there. And no one has seen any effect of that yet, but I do feel that that's a very good step in the right direction, and I think all our customers are going to feel that way, too, in all markets. I think it was positive. I think it was already priced into the markets, but I think it will be a positive thing for our customers, especially on the SCS side. The Fed has reduced the rates now again. So with 2% in Europe and the lowest rate in America over the last 3 years, that has to be a positive thing. And our customers have been very active with us in the pipeline. And it's just a matter of going through and converting those into orders now. We've talked about that being lumpy. But the trough is behind us. We're in an upward slope. And we're expecting to have a second half stronger than the second half last year. And we think we'll have a seasonal adjusted good fourth quarter as usual on the ITS side. So I think the sentiment is clearly much more positive post the meeting with Trump and Xi today than has been in the lead up to that over the last several months. Operator: Ladines and gentlemen, please shorten a bit your questions since we're forwarding them to Mr. Smith. The next question comes from Akash Gupta from JPMorgan. Akash Gupta: I have 2 as well. My first one is on the phasing of savings. So I think if you look at the savings, it translates to EUR 35 million to EUR 37 million per quarter, and you want to achieve fully in 2026. So maybe if you can give us some indication on how we shall think about phasing and by when do you expect the full run rate to be achieved? The second question is on lower interest rates from lease and short-term rentals. Christian Harm: Okay. So the question was on the phasing of the savings for the efficiency program, right? Let me take this one. So, as I said, right, we will have a small part of the savings already in the fourth quarter of this year, and then the far majority of the savings then in 2026 and actually very much sort of forward-loaded in the year. And there will be a small remainder potentially in the following year. So we will have a small part right now and the majority in the beginning of 2026. Akash Gupta: And my second question is on lower interest rates -- lower interest from lease and short-term rentals. I mean, your rental revenues were up 2% in the quarter. So maybe if you can elaborate what is driving this lower interest from lease and short term. Is this due to lower interest rates, or something changed in the way how you do business? And what shall we expect going forward in terms of the sustainable interest from lease and short-term rentals? Christian Harm: That's actually a consequence of the lower negative interest that we had against the prior year. We don't change the way we do the lease business. There is no structural change in how we perform the lease business or the short-term rental business. We have actually just a lower negative -- a lower interest against the prior year, and that's the consequence of that. Well, I mean, that will -- so, that sort of will potentially continue in the fourth quarter as a development. But then, sort of over next year, that effect will then actually disappear as the rates actually align themselves again. Operator: Next question comes from Tore Fangmann from Bank of America. Tore Fangmann: Perfect. Trust, operator, you can hear me. One question would just be what is the reason for cutting down the upper end of the savings range from EUR 160 million to EUR 150 million? And I'll take the second question afterwards. Christian Harm: Okay. Yes. Well, okay. So I think cutting down the upper end is a pretty harsh wording actually on the adjustment, right? When we defined the efficiency program, we basically targeted the entire EMEA region and all the countries in the setup. Now, the EMEA region actually has not a consistent level of personnel costs, nor do sort of individual jobs and functions have all the same personnel costs. So, on the implementation, now, as we are sort of finishing sort of the execution of the program, the mix that we have between countries and between functions, as we have come to the end of that, is slightly different to the mix that we had planned initially. So that's the background of that slight adjustment, I would call that rather. Tore Fangmann: Understood. Second question would be on the higher gross margin in IT&S. Is this a question of mix? Or is there some pricing in there? Or is it just more efficient production? Christian Harm: So the question on the gross margin in ITS, it's basically a mix. I mean, we did not have issues in production throughout the year. We have been reporting in the past that production is actually running overall quite well. So there was no impact on that. So when we look at the gross margin impact there, that's mainly mix. Operator: The next question comes from Martin Wilkie from Citi. Martin Wilkie: It's Martin from Citi. My question was on the pipeline in Supply Chain Solutions. There's a lot of debate across the industry as to whether the interest rate environment has prevented some projects going ahead, and we are now seeing rates coming down. Richard Smith: I appreciate the question. And you're asking on what's the pipeline in our Dematic business, our Supply Chain Solutions business. Very healthy pipeline, continued very active discussion with our customers. And I've been sharing that. It's stayed healthy. It stayed quite active pipeline. And now, as we've been talking for the last couple of quarters, customers are coming in and starting those projects. So the difference, I think, now to previous times is, we see ourselves and the market is clearly with the trough behind us and on an upwards order intake trajectory now. So the pipeline is good. The pipelines continue to be good, and it's very active with our customers. Operator: The next question comes from Gael de-Bray from Deutsche Bank. Gael de-Bray: My question relates to SCS. And I was wondering why the gross margin was down so much sequentially in Q3? I think it was down 300 bps. Christian Harm: So the question was on SCS. Why is the gross margin down sequentially? So as we -- I mean, we have been talking about closing out the legacy projects over the recent months, right? Closing out legacy projects, as we close them, still comes with the cost, right? We had some costs in the third quarter that we had to reflect for the legacy projects in the business solutions margin, right? And that's reflected here in the gross margin development sequentially for SCS. Now, on the legacy projects, maybe just overall, right, we are -- as I've said, we are continuously closing out those projects. Also in the fourth quarter, we will have a further closing out of legacy projects. There will be a very small number remaining for the next year. And again, as a reminder, that's also not new. There will be one large project that we have that will last into 2027. But we are closing the legacy projects out as we speak. And at times, that comes with costs. We had to reflect some in the third quarter. Gael de-Bray: Could you perhaps quantify this cost in -- I mean, in Q3 and maybe in the first 9 months so far? Christian Harm: Quantify the cost of the -- separate out the legacy cost development in the first 9 months. Operator: The next question comes from Lasse Stueben from Berenberg. Lasse Stueben: Could you please share the verticals and regions in SCS that are driving the orders from the non-e-commerce side? Richard Smith: Sure, Lasse. Let me -- why don't I try it a little bit differently because orders are up well year-on-year in all 3 regions. What I'd call out is, if you want to talk verticals, the order intake in SCS, some good growth in the non-e-commerce verticals of third-party logistics, also food and beverage. And we also had [Audio Gap] in durable manufacturing. So those 3 really stood out. Operator: [Technical Difficulty] Ladies and gentlemen, please hold the line. We lost the connection with the speakers. We'll shortly continue with the conference. Ladies and gentlemen, please hold the line. The conference will shortly continue. Richard Smith: Can you hear us now? Operator: Mr. Lasse , you can ask your question now. Richard Smith: [indiscernible] answering your question again. You were asking where are the pickup year-on-year in non-e-commerce. A matter of fact, all 3 regions are having good growth on a year-on-year basis. The strongest is in the Americas, but all 3 are making good year-on-year growth. And the verticals that are non-e-commerce pure-play verticals that are picking up in a good way would be the third party, the 3PL vertical. Food and beverage has a good pickup and durable manufacturing as well. I hope you caught all that. Operator: The next question comes from Timothy Lee from Barclays. Timothy Lee: So I just want to ask about the guidance for ITS. So the full year guidance is reduced in terms of range. And if we look at the midpoint of the guidance for the revenue number for ITS, that would imply, in the fourth quarter, revenue number could be down quite a bit, something like 8% if we take the midpoint of the full year guidance as a reference. That is a bigger decline compared to the previous quarter. Is that something you see to be fair? Or you're probably a bit conservative on your guidance for ITS revenue? Christian Harm: So the question is, whether the midpoint Q4 for ITS implies lower year-on-year, is that fair? Well, I mean, we had this development for 3 quarters now in a year, right? Also the fourth quarter will not be an exception to that, right? I said we will have small impacts from the efficiency program kicking in the fourth quarter, but that will not be sufficient to reverse that trend -- that will not be sufficient to reverse the trend already. So therefore, the fourth quarter, in that respect, has to be seen in the context of the entire year. And so, yes, we consider that actually fair. Operator: The last question comes from Alexander Hauenstein from DZ Bank. Ladies and gentlemen, there are no more questions at this time. I would now like to turn the conference back over to Rob Smith for any closing remarks. Richard Smith: Serge, thank you for helping us do the best that we could in the Q&A session and thank everyone for your patience during the Q&A session and your interest during our call. We're looking forward to continuing this dialogue with our investor conferences in November and early December. We'll be back in February for our full year results and our guidance for 2026 at the end of February. Obviously, the Q&A session wasn't as easy as we expected it would be and as it normally is. And so, our IR team will be clearly available to everybody that has a question they'd like to get a little bit more detail and depth on in rest of today and the days to come to make sure that the messages that we've got are well understood and the results that we've brought are well appreciated. So thank you for your interest, and we wish you all a good weekend. Goodbye now. Operator: Ladies and gentlemen, the conference is now over. Thank you for choosing Chorus Call, and thank you for participating in the conference. You may now disconnect your lines. Goodbye.
Operator: Good morning, and welcome to the Crocs, Inc. Third Quarter 2025 Earnings Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Erinn Murphy, Senior Vice President of Investor Relations and Strategy. Please go ahead. Erinn Murphy: Good morning, and thank you for joining us to discuss Crocs Inc. third quarter results. With me today are Andrew Rees, Chief Executive Officer; and Patraic Reagan, Executive Vice President and Chief Financial Officer. Following their prepared remarks, we will open the call for your questions, which we ask that you limit to one per caller. Before we begin, I would like to remind you that some of the information provided on this call is forward-looking and accordingly, is subject to the safe harbor provisions of the federal securities laws. These statements involve known and unknown risks, uncertainties and other factors, which may cause our actual results, performance or achievements to differ materially. Please refer to our most recent annual report on Form 10-K, quarterly report on Form 10-Q and other reports filed with the SEC for more information on these risks and uncertainties. Certain financial metrics that we refer to as adjusted or non-GAAP are non-GAAP measures. A reconciliation of these amounts to their GAAP counterparts is contained in the press release we issued earlier this morning. All revenue growth rates will be cited on a constant currency basis unless otherwise stated. At this time, I'll turn the call over to Andrew Rees, Crocs, Inc. Chief Executive Officer. Andrew Rees: Thank you, Erinn, and good morning, everyone. Thank you for joining us today. Before we discuss the quarter, I would like to start by welcoming our Chief Financial Officer, Patraic Reagan, to his first Crocs Inc. earnings call. Our third quarter performance was driven by managing both of our brands in a disciplined fashion, streamlining our cost structure and controlling our inventory in the marketplace. We delivered very strong profitability and cash flow, which enabled us to repurchase 2.4 million of our outstanding shares and pay down $63 million of debt. These are fundamental levers of our value creation model. While our results came in ahead of our expectations, I acknowledge that this performance is not up to the standards that we expect for ourselves. We are working to regain momentum in the marketplace, and our teams have already begun executing against our strategies. With this in mind, I would like to begin the call today by elaborating on the progress we have made on our strategic pillars for both Crocs and HEYDUDE and the speed at which we are driving further simplicity and cost reductions across our enterprise. Patraic will then provide a more detailed overview of our financial results and outlook. Starting with the Crocs Brand. As we communicated last quarter, we elected to take 2 strategic actions to protect the long-term brand health. First, we pulled back on the breadth and depth of promotional activity across our digital channels in North America. This promotional pullback has had the greatest impact on our Classic Clog business as we work harder to protect our icon. Second, we continue to reduce receipts into the wholesale channel to better match supply to demand and ultimately drive a demand-led model. While these actions are impacting near-term sales, we expect them to enable a foundation for future growth. Further, we have seen a net positive benefit to our gross profit dollars in North America as a result of our pullback on promotions. Our return to growth in North America will be based on greater product innovation, diversification within clogs, growth within sandals and new categories. We are carefully managing our Classic Clog franchise with the desired outcome of creating clearer segmentation while leaning into innovation within new clog and sandal introductions. While improving the trajectory of North America is a top priority, we are making good progress against our 5 strategic pillars for the Crocs Brand. First, we will continue to drive brand relevance through clog iterations and innovation. During the quarter, we introduced the crafted clog starting at $60. This new franchise incorporates a non-molded comfortable upper with a Jibbitable back strap as we put personalization in the forefront of our design. We featured Lola Tung, the actress of hit show, The Summer I Turned Pretty, to bring this to market. Following our initial sell-up on TikTok Shop, we have seen strong consumer response in all channels. We're also focused on scaling existing clog franchises, including Croc Brand and Echo. Within the Echo franchise, we launched the Echo RO during the quarter and saw immediate success. Looking to 2026, we will expand our crafted franchise with new materializations, launch a new and improved Croc Brand, which is already an established fan favorite in our portfolio and introduce Echo 2.0 clog. We expect product diversification within our clog pillar to enable greater channel segmentation and drive long-term growth in our clog franchise. Second, we're focused on diversifying outside of clogs through new category expansion. Our sandals pillar outperformed the broader portfolio and took market share in this quarter with strong full price performance across our style franchise, including Brooklyn, Getaway and Miami. Retailers have continued to chase these key styles beyond the back-to-school season. As we look into 2026, these franchises paired with the reintroduction of an updated personalizable 2-strap sandal underscores our opportunity to gain further market share in this category. We are also excited with the response we have received around our new cozy franchise, the Unfurgettable, which we launched in partnership with actress Millie Bobby Brown. This style has already seen a very positive response on TikTok, resonating particularly well with the Gen Z female consumer. The Unfurgettable, along with broader newness in our cozy assortment has catalyzed our line business so far this season. Third, we will fuel consumer engagement with disruptive digital and social marketing. During the quarter, we launched a multiyear agreement with the NFL, which featured our classic and classic line clogs as well as Jibbitz. This release exceeded our expectations with particularly strong sell-through across the board, leading to multiple restocks. Other highlights in the quarter included a disruptive launch with Krispy Kreme and our newest release on Roblox. In the quarter, we launched a Pan-Asian Monsoon campaign, "Your Crocs, Your Splash." This campaign positions a Classic Clog as the footwear of choice for the rainy season and stars 2 prominent actors from South Korea and India. The campaign video generated approximately 575 million views across Instagram and YouTube. These partnerships are prime examples of how our brand excites, inspires and connects with a wide range of consumers across the globe. Fourth, we'll continue to create compelling consumer experiences across distribution. Year-to-date, we've accelerated our first-mover advantage in social commerce. We remain the #1 footwear brand on TikTok Shop in the U.S. and the growing adoption of this platform is gaining momentum with younger consumers. This month, we created further disruption in the market by live streaming both of our brands on TikTok Shop and our own dot-com throughout the month of October. Through this initiative, we have seen an uptick in our followers and influx of new consumers. In fact, Crocs was the first fashion brand to live stream 24/7 for an entire month across TikTok and dot-com. We're continuing to expand this partnership and have launched TikTok Shop in the U.K., Germany and Brazil. Fifth, we see significant opportunity to capture greater share across our international markets, many of which are still in their infancy of growth. In the third quarter, we saw broad-based strength across our Tier 1 international markets. China delivered revenue growth across all channels and was up mid-20% to prior year, outperforming the overall market handily. During the quarter, we launched a unique POP MART, China's SKULLPANDA collaboration, which included a Douyin live stream on POP MART'S page and was a smash hit in China. In addition to China, we saw strong growth in Japan and across all of our key markets in Western Europe. In summary, our priorities are clear: driving product innovation in clogs and sandals, staying agile and consumer-focused while sharpening segmentation and accelerating international growth where penetration opportunities remain. Turning now to HEYDUDE. We delivered third quarter results that came in ahead of expectations. We are encouraged by the progress we're making in stabilizing the brand in North America to return to profitable growth. Let me share more about the actions we have taken and what gives me confidence in our ability to reestablish brand growth. First, we're focused on building a community. Our recently refreshed consumer insights work underscores that we have a passionate group of brand fans, ones that identify as laid-back and no-fuss, but clearly seek the comfortable and lightweight products we have to offer. We launched our HEYDUDE Country campaign in June, which plays to our brand's affinities, including music, travel and pre and post sport and is centered around this laid-back, no-fuss consumer. Relatedly, we are encouraged to see the brands return to the top 10 preferred footwear brands among males in the Piper Sandler Taking Stock With Teens survey this fall. Second, our product direction is clear. We're building the core and thoughtfully adding more. Within our Wally and Wendy franchise, we launched the Stretch Sox and its performance has already surpassed legacy socks on a like-for-like basis. In 2026, we will launch Stretch Jersey, a sweatshirt for your feet, and retailer response to this product has been very strong as it appeals to both her and him. Outside of the core, we are seeing continued traction of our Paul franchise, which plays into the dress casual sneaker space, and we're solidly building on our slipper success again this holiday. Earlier this month, we launched our third collaboration with Jelly Roll, featuring the fan favorite Bradley Boot in 2 colorways. The initial launch on TikTok Shop drove the largest single day for HEYDUDE on the platform to date. We see this collab as serving to halo, our broader boot offering as we move into holiday. Third, we're focused on continuing to clean up channel inventory in the North America marketplace. During the third quarter, we accelerated returns and markdown allowances to our retailers to improve inventory health while elevating our brand presentation at wholesale. The nature of these cleanup actions has had an impact on revenue in the third quarter through vendor returns, and we're planning for continued markdown support in the fourth quarter. These actions have been effective in cleaning up the channel and establishing a foundation for future growth. On an enterprise basis, we're working to quickly rightsize our cost base. As we shared on our last call, we've already taken action on $50 million of gross cost savings this year and have since identified another $100 million of gross cost savings across the business to simplify the organization. While Patraic will go into more detail shortly, we expect these cost savings to generate greater flexibility across the P&L, enabling future investment to drive growth for our brands. At this time, I will turn the call over to Patraic to provide more detail around our third quarter financial performance and our fourth quarter outlook. Patraic Reagan: Thank you, Andrew, and good morning, everyone. Before I review the quarter, I'd like to say how grateful and excited I am to have the opportunity to serve as Chief Financial Officer of Crocs, Inc. This is a company I've long admired professionally and as a consumer, one whose profitable growth has been built on an enduring cultural icon. For Crocs and HEYDUDE, I see strong potential both domestically and globally, and I look forward to working with our talented teams across the world to further drive the company's strategic and financial goals. Now let's get into our results. Our third quarter revenue of approximately $1 billion were down 7% to prior year. Crocs Brand revenue of $836 million was down 3% to prior year, with wholesale down 8% and DTC up 1%. North American revenues were down 9% to last year as we continue to intentionally pull back on discounting within our digital channels during the quarter. This was partially offset by strong digital marketplace performance. These actions, in part resulted in DTC down 8%, while wholesale was down 11%. International revenue was up 4% to prior year, driven by direct-to-consumer, which was up 23%. DTC performance continues to reflect broad-based strength across both digital and retail. International wholesale was down 7% based on timing shifts we communicated last quarter. Within our Tier 1 international markets, we saw broad-based strength led by China and Japan, while Western Europe also drove strong results across the U.K., Germany and France. Now turning to HEYDUDE brand. Revenue of $160 million was down 22% to prior year, but ahead of our expectations. DTC was better than planned, down 1% to prior year. This was driven by the addition of new retail stores and strong digital marketplace performance, most notably on TikTok Shop, offset by the planned reduction in performance marketing spend as we work to enhance profitability, albeit with negative revenue impacts. Wholesale was down 39%, reflecting the previously communicated wholesale cleanup actions we took in the quarter. As a result of these actions, we started to see an improvement in wholesale sellouts, which are now in line with our inventory levels. This is an important data point as we position HEYDUDE for a return to growth. Moving back to Crocs Inc. Enterprise adjusted gross margin of 58.5% was down 110 basis points to prior year, including a 230 basis point headwind from tariffs. The tariff impact in the quarter was 60 basis points higher than we previously anticipated based on higher receipts and country mix. Excluding tariffs, our adjusted gross margin would have been up, reflecting lower negotiated product costs, higher ASPs for both brands and brand mix. Crocs brand adjusted gross margin of 61.8% was down 70 basis points to prior year, driven by tariff headwinds. HEYDUDE brand adjusted gross margin of 42.3% was down 560 basis points to prior year, driven by tariff headwinds and fixed cost to leverage, which was partially offset by higher ASPs. Importantly, the third quarter represents the ninth consecutive quarter of ASP increases for HEYDUDE. Adjusted SG&A rate was 37.7%, up 350 basis points compared to prior year. Adjusted SG&A dollars increased 3% to prior year, a notable improvement from the 15% SG&A increase in the first half of the year. This was driven by investments in talent, DTC and marketing, significantly offset by cost savings under the $50 million initiative that we announced earlier this year. Taken together, adjusted operating margin of 20.8% came in ahead of our guidance of 18% to 19%, but was down 460 basis points compared to prior year. Adjusted diluted earnings per share of $2.92 was down 19% to last year, and our non-GAAP effective tax rate was 16.9%. Moving on to inventory. At the end of Q3, our inventory balance was $397 million, up 8% to prior year, including the impact of higher tariffs and product mix. Importantly, inventory units were down low single digits to prior year. Our enterprise inventory turns were above our goal of 4x on an annualized basis as we proactively managed our inventory receipts. Our liquidity position remains strong, comprised of $154 million of cash and cash equivalents and nearly $850 million of borrowing capacity on our revolver. Our strong profitability and free cash flow enables us to return value to shareholders through buybacks and debt paydown. During the quarter, we repurchased 2.4 million shares of our common stock for a total of $203 million at an average cost of approximately $83 per share. This represented approximately 4% of our float. Year-to-date, we have repurchased 4.3 million shares of our common stock for a total of approximately $400 million. We ended the quarter with $927 million remaining on our buyback authorization. Total borrowings at quarter end of $1.3 billion included the paydown of $63 million of debt during the third quarter. Our net leverage ended the quarter at the lower end of our targeted range of 1 to 1.5x. Now turning to our fourth quarter outlook. For Q4, we expect revenues to be down approximately 8% in currency rates as of October 27. Within this, we expect the Crocs brand to be down approximately 3% with acceleration in our international business from a mid-single digit in Q3 to a low double-digit rate in Q4. North America revenue is expected to be down low double digits to prior year, reflecting a wider range of outcomes, including our view of a choiceful consumer, a highly competitive holiday season and lower inventory receipts in the wholesale channel. For HEYDUDE, we expect revenue to be down in the mid-20s range, including the impact of reducing performance marketing spend in the DTC channel and the investments we are making in wholesale marketplace cleanup. We expect adjusted operating margin to be approximately 15.5%. This excludes approximately $10 million related to cost reduction initiatives we referenced earlier. Our adjusted operating margin embeds gross margins down approximately 300 basis points, driven almost entirely by tariff headwinds. In addition, our adjusted SG&A dollars are expected to be below that of prior year as we continue to see the positive impact of our cost savings. Adjusted diluted earnings per share is expected to be in the range of $1.82 to $1.92. For the year, our capital expenditures are expected to be in the range of $70 million to $75 million. While it is too early to provide 2026 guidance, I do want to provide more context on how we are thinking about further cost savings. As Andrew mentioned, we are already benefiting from the previously actioned $50 million of gross cost savings in 2025. In addition, we have identified $100 million of incremental gross cost savings that we expect to benefit 2026. These savings include simplifying our organizational structure, deliberately reducing spend in noncritical areas and further optimizing our supply chain. It is too premature to share how much of these savings we will choose to flow to the bottom line. However, we are committed to managing our adjusted SG&A base to ensure we drive operating leverage in 2026 while creating greater flexibility across the P&L. To conclude, we have already taken several strategic and tactical actions to improve the momentum of our brands. We have also taken steps to provide flexibility in our cost structure, and we are intently focused on driving consistent profitable growth in the future. At this time, we will now turn the call back over to the operator to begin the question-and-answer portion of our call. Operator: [Operator Instructions] The first question comes from Jonathan Komp with Baird. Jonathan Komp: I want to ask first about the incremental cost savings initiatives. It looks like you're obviously preserving margin here, but are there structural deficiencies in the organization you're also trying to address when you look at the structure of the organization? And as you think about 2026 and the comment around driving operating leverage, could you achieve leverage in a scenario where revenue still is down in the first half and maybe not significantly growing for the year? Andrew Rees: Thank you, Jonathan. I'll address it to start, and Patraic will pick up anything that I missed. So what I would say in terms of the cost savings, there's several buckets we're looking at. I think number one is we've got a significant benefit from some efficiencies we've been able to drive in supply chain. We've invested quite a bit in our supply chain over the last several years, and we're now reaping some of the rewards of those efficiencies. And we've also integrated both our HEYDUDE and our crocs supply chains more fully. So that's given us some really nice benefits. Number two, we have looked at some structural key components. We've been quite thoughtful about this, where we've been able to reorganize kind of how we go to market and how we run some key parts of our business. We think that is going to give us more speed and more efficacy as well as generating a lower cost. And then we've also just been, I would say, rigorous around looking at where we're spending on vendors, outside services, et cetera, and consolidating that. And I think there's probably a small component in there is trying to use AI and some of the technological advances that we're seeing across the globe to make us more efficient and effective. In terms of the last part of your question, we will reinvest some of those savings in key areas around product innovation, around some things that we think will drive the top line. And we do believe that on an annual basis, we can absolutely provide -- we can achieve operating leverage in 2026. If revenues are down a little bit in a quarter that may be higher. But for the year, we're quite confident we can get operating leverage. Patraic Reagan: Yes. Jon, just a couple of things to add from a perspective -- from my perspective. What I would say is that our language in the prepared remarks were really intentional. So what we're trying to do is drive flexibility as we turn into 2026. And I think what's been great to see in terms of the response of the organization is that we've really been able to turn very quickly efficiently into identifying some of the areas that we're going to provide that flexibility in. And just to reiterate what Andrew said towards the end is we're clear that we need to protect product innovation and brand, brand marketing, right? It does us no good to just cut costs through the P&L at the expense of what is the core of our business. So what we'll do as we go through this is continuing to look at all areas of the organization, but product and innovation and communication to our consumers through brand is an area that we're going to ring fence. Jonathan Komp: That's really helpful. If I could sneak in one more. Can I just ask, Andrew, is portfolio management the consideration in your capital allocation strategy? And I ask in the context of coming up on the 4-year anniversary of owning HEYDUDE and still seeing significant challenges here? Andrew Rees: Yes. Thank you, Jon. No, I would say at this point, look, we believe HEYDUDE is a strong brand. It's a strong scale brand within -- particularly within the U.S. casual footwear space. We absolutely acknowledge the challenges that we have had in running and operating this brand over the last several years. But I think I feel like we're doing the right work. We've made the right decisions, and we are confident in its future trajectory. We're definitely focused on returning it to profitability, cleaning up the marketplace, making the right strategic decisions relative to promotion discount and also the amount we're investing in digital marketing. We have retooled the management team, and I'm very confident in the strength of our management team and its ability to drive the future. And so I think we're not contemplating any portfolio changes at this time. And I would say we're confident in returning HEYDUDE to the right level of profitability and also growth in the future. Operator: The next question is from Chris Nardone from Bank of America. Christopher Nardone: So just on Crocs North America, can you help identify some of the actions you're taking to help drive some improved results in this portion of the business? And in particular, it would be really great if you can elaborate on both your pipeline of new product and also how you think about the ramifications of potentially losing some of your core customers given your pullback on promotions? Andrew Rees: Yes. Thank you, Chris. So look, I would say returning the North American -- Crocs North American business to growth is a top priority for our overall company. As a reminder, some of the lack of growth or the decline in sales are based on some strategic decisions we made. One is reducing digital discounting. I think we elaborated on this in prepared remarks, but also reducing wholesale sell-in. So -- and in that, we're making sure that we're appropriately positioned to grow in the future and not eroding our brand and particularly not eroding our core iconic franchise. We do think, and that is embedded in our guidance. We do think the North American consumer is bifurcated. There is a portion of our North American consumers that are highly affluent. They're buying crocs, they're buying other high-end brands, and they are in great financial shape. But there is a large portion of consumers who are nervous. They are in less good financial shape and they're being super cautious about their spending and certainly spending closer to need. Given all of that and that -- the impact of that, I think we believe we're seeing in our business. I think others have talked about that, and that is embedded in our future expectations. But what are we doing, which I think is the core of your question? Number one, focusing on clog innovation and brand relevance. We're introduced -- we have introduced and are introducing a number of key product categories or key product franchises crafted, Echo and reintroducing Croc Brand to diversify our clog platform and allow greater segmentation across our wholesale partners, and we're quite excited about the impact that this will have. We're also continuing our diversification into new silhouettes and new categories. We had a strong sandal season in 2025, and we're -- we have a very strong pipeline of products going into '26 and are confident about continued sandal growth, continued growth in personalization. And we're in the heart of slipper season right now. And as you can see, we have a tremendous lineup of slippers and line product actually on both of our brands. And then continuing our, I would say, disruptive social and digital engagement. We're a leading brand on TikTok for Crocs, the leading brand on TikTok for Crocs, but also a close second for HEYDUDE. And you probably have seen during October, we launched a live streaming initiative where we live streamed both of our brands 24/7 for the entire month and gained -- and achieved all of our objectives from that perspective and learned a tremendous amount about how the consumer is migrating from traditional shopping to social shopping. So I think we have a well-rounded and robust strategy to return Crocs to growth in North America and are very confident in our ability to do that in short order. Operator: The next question is from Tom Nikic with Needham. Tom Nikic: I want to ask about the marketplace cleanup for HEYDUDE. I know there was quite a bit of action that happened in Q3. Should we assume that there's kind of more marketplace cleanup that has to happen in Q4? And would you think that by year-end this year, you'd be relatively clean and that we wouldn't see as much in 2026? Andrew Rees: Yes. Good. I'm glad you asked about this, Tom. So this is important. In Q3, we invested actually a considerable amount of money in terms of the marketplace cleanup. That was primarily return. So we took back aged and slow selling product from some of our large wholesale partners, and it was a substantial amount. We felt this was important to reset how the brand looks at wholesale. There is more in Q4, which is already embedded in the guidance that we provided. And that is primarily discount, that is discount support where we're looking to complete some of the cleanup activity. The majority of it will be done during 2025. I think there's some ongoing inventory health management that will happen in '26, but it will be far less impactful than we have seen in the last 2 quarters. And in fact, we've been doing this for some period of time. What I would say is as we look at the impacts of these investments we've made, I think we're quietly encouraged that sell-through is improving based on a reduction of aged inventory in the marketplace, a stronger presentation of HEYDUDE and a stronger presentation of new and current product. We particularly called out Stretch Sox. This was a franchise that we introduced earlier this year. And as the year has gone on, as our partners are more fully set on Stretch Sox and the socks product that was the precursor has sold down and has illuminated, we're really, really happy with the sell-throughs of that franchise, and it's really core and backbone franchise for the brand. Patraic Reagan: Yes. And Tom, just maybe 2 quick things that I would add is that, as you can see from prepared remarks, we highlighted that the sell-in and inventory levels are in much better line for HEYDUDE. So that's a very encouraging sign. And then secondly, we called out that for the ninth consecutive quarter, ASPs have increased with the HEYDUDE brand, which is also a key metric to watch as we continue to pivot the brand to return to growth. Tom Nikic: Very helpful. And Patraic, welcome aboard and looking forward to working with you. Operator: The next question is from Adrienne Yih with Barclays. Adrienne Yih-Tennant: Andrew, I wanted to ask about sort of some of the choicefulness that you might be seeing in the fourth quarter. We've heard from other discretionary companies generally that there's been a little bit of a weakness in the 25- to 35-year-old cohort. Back-to-school generally has been very strong and then a little bit of an exit kind of weakness coming out of the quarter. So if you can talk to that. And then Patraic, welcome aboard. A quick question on the end of quarter inventory. The spread looks like it's about 10% between dollars and units. So that seems like it's reflective of maybe the April tariff. How should we think about end of quarter inventory entering the new year. Did that then express kind of the August tariff? And how should we think about early spring, the pass-through on the gross margin? Andrew Rees: Okay. There's a lot there, Adrienne. So let me take -- let's take it in the order you asked it. I'll do the consumer and then Patraic can give you some color on inventory. I think -- look, I think you're going to hear from us essentially what you've been hearing from a lot of other people that the consumer is clearly being more cautious about spending and it's particularly -- I wouldn't categorize it by age group so much, I'd probably identify it more by socioeconomic strata. We definitely see it in our mid- to lower channels. There is less traffic to stores, right? So they're not even going to the store, right? They don't have the same level of disposable income or flexible income. So they're being more choiceful about what they're buying. They're making fewer trips to the store. And they're also shopping closer to need, right? So we expect -- we're anticipating to see that in the fourth quarter, where typically, even a constrained consumer does release the purse strings a little bit as they celebrate the holidays, whichever holidays they do celebrate, but they will shop a little closer to need. So those are the things that we're seeing. So I think it's the lower-end consumer is being more choiceful. They're being more cautious about what they spend on and they're shopping closer to need. That's how I would categorize it and think about it. Patraic Reagan: Yes. And Adrienne, thank you for asking the question about inventory. First of all, I'd start off by saying that how we manage inventory here, matching demand to supply is really a strength of the organization. And frankly, it's a competitive advantage in terms of the speed in which we can evaluate and react to consumer demand in both good times and bad. You're right, as you call out, the spread, that's directionally correct. And what you can think about is that optically, with inventory up roughly about 8% as we closed the Q3, that was almost entirely on a dollar basis driven by the impact of tariffs. What you really see is in terms of our diligence of managing inventory is on the unit side where we're actually down low single digits. So we feel really good about where we are from an inventory position as we ended Q3. We'll continue to exercise that muscle. Honestly, as we are in Q4, we're aggressively managing inventory. Like I said, it is a core competency of what we do. So we feel like as we turn into Q4, we'll continue to manage inventory from a unit standpoint similar to what we saw in Q3. And then in 2026, too early to comment really on '26, but I think you can take our history as an indicator in terms of how tightly we will continue to manage inventory and at the same time, making sure that we're serving our consumers across the globe. Operator: The next question is from Peter McGoldrick with Stifel. Peter McGoldrick: Welcome, Patraic. I'm interested in the market share in the under $100 assortment. I was curious if you could talk more about the current positioning of both of your brands and then any competitive dynamics that may be playing out as the consumer feels prices going directionally higher across the marketplace. Andrew Rees: Yes. I mean I can talk about that directionally. We don't -- we can't give you precise numbers around kind of market share. I think the strength of both of our brands is that they are extremely democratic in nature, right? They service a very broad range of consumers. Both brands attract consumers for whom this is a very -- a great value. Our brands are a great value. They also attract consumers that are -- that see these brands as aspirational. So we service a very broad consumer base. The -- I would say the vast majority of our products are under $100, right? So obviously, you're well aware that the Classic Clog essentially MSRP $50 and the majority of our HEYDUDE product is between $60 and $70. So from a price point perspective, we give the consumer excellent value. I think what you're kind of alluding to a little bit, we have seen competitive brands that sell at higher price points being pretty quick to elevate price points further and capture greater price or elevate pricing pretty quickly to compensate for tariff impact that they're seeing. We see less of that, I would say a lot less of that at the price points that we compete at. So I think the less than $100 arena remains relatively competitive. And I think the other thing that you might be alluding to is in terms of competition at these price points, we do see the athletic brands, particularly the big ones, leaning back into these price points and increasing distribution at the -- let's say, the sort of good to bad tiers of the market. Operator: The next question is from Rick Patel with Raymond James. Rakesh Patel: Congrats on the new role, Patraic. We have questions on the North America wholesale channel. First, any color on the spring wholesale order book and how that's shaping up? And second, can you point to any product or innovation wins that would give you particular confidence in being able to reinvigorate the wholesale channel as you look out to 2026? Andrew Rees: Are you looking for both brands, Rick? Or are you primarily focused on Crocs? Rakesh Patel: Primarily on the Crocs Brand. Andrew Rees: Yes. So we don't provide details on order book, as you know. But a little color we can help you with. As we look at the North American Crocs wholesale order book, there's 2 things going on. One is, number one, our retailers are planning cautiously, right? They're not expecting -- they're not seeing traffic growth and they're not expecting significant growth in the short term. And I actually don't believe they're going to plan significant growth into the early part of 2026. So they're fighting cautiously. As we talked about last time and as I just articulated a little bit to Peter's question, we do see athletic gaining some share in the good to better portions of the market. So there's some open-to-buy going to athletic. So there's pressure. We're also managing that carefully. So we would expect, I would say, continued declines in our wholesale sell-in for Crocs in North America. That is embedded in our guidance that we provided in Q4. So that's kind of the framework. And then the last part of your question was what are we doing and what product innovation that we think is going to counteract that. I would say, number one, we have a really strong lineup from our clog perspective in 2026. We just introduced Crafted, which is a clog with a materialized upper. It's a soft materialized upper. The current iterations that you can see in the marketplace have canvas uppers. There are some -- and there is also some leather uppers coming. In fact, it's a vegan leather suede coming to the market right about now. We think that franchise has a lot of legs because it makes the clog, the Classic Clog, which has a molded footbed, more approachable and more accessible to a broad group of people. Right now, Unfurgettable, which is our fuss -- our highly exaggerated fuss product and the other Lined products that we have in the marketplace, we believe are performing well -- are performing well, and we're excited about that. Next year, we're going to be introducing or reintroducing to the market Croc Brand. This is a fan favorite. I think if you look on Amazon, there's something like 200,000 4- and 5-star reviews for the Croc Brand. So we've been -- we've downplayed Croc Brand for some time deliberately to focus on classic. We're reintroducing Croc Brand. So we think that has a multiyear trajectory. And then lastly, we're bringing new Echo 2.0 to the market later next year. And I think the other piece that is important, and I mentioned already is building on sandals. Sandals were a really strong driver of growth in '25, and we have additional products and enhancements to key franchises as we think about sandals later into '26. Patraic Reagan: Yes. And Rick, just one final comment for me as we close this one out is we talked quite a bit about the wholesale channel, Andrew alluded to that and went into some great detail. I would say that we are seeing DTC accelerate as we go from Q3 to Q4. So we take that as a great sign in terms of how our products and our innovation pipeline are resonating with our consumers. So I don't want to drive past what's happening in the DTC channels. Rakesh Patel: And to clarify, you're seeing North America DTC accelerate? Patraic Reagan: That's right, yes. Operator: The next question is from Jay Sole with UBS. Jay Sole: Andrew, I want to ask about some of the actions you took on Crocs Brand in Q3, specifically with pulling back on promotions. Did you do that across the entire quarter? Or was there a moment during the quarter where you went back to promotions, whether it's peak back-to-school season just compete? And then maybe, Patraic, just on the Q3 gross margin, was there a tariff impact on the gross margin in Q3? If so, what was it? And then I think to the 300 basis points you talked about for Q4, is there any mitigation that's a part of that? Or basically, how much of the gross tariff costs are you absorbing? Andrew Rees: Yes. I'll be quick and then Patraic can get into your tariff question. So from a North American digital promotional pullback, that was across the entire quarter, right? And it didn't go to 0, obviously, but we did both have many more days that were nonpromotional and also the depth of the promotions that we run were typically substantially less than we had run previously. So it was across the entire quarter. Patraic Reagan: Yes. And then to answer the question on tariffs. So first of all, I think it's been really impressive to see all the actions that are taking place across Crocs as it relates to mitigating tariffs. And so the organization has been on the front foot in terms of identifying where we're able to mitigate where we can the impact of tariffs. Specific to Q3, roughly, we had about 230 basis points of tariff headwinds in the quarter. Obviously, we had several mitigating actions, whether it relates to negotiating with our vendors with our input costs, et cetera, in our supply chain. So we're able to mitigate a good portion of that. And as we go into Q3 -- or I'm sorry, as we go into Q4, the headwinds that you see there are almost entirely due to tariffs. And the mitigating actions will still be present, but in a slightly muted way, especially as we look at Q4 and the nature of -- kind of promotional nature of the quarter, and we alluded to that a bit in the prepared remarks is we're talking about anticipating a highly competitive selling season in Q4. Operator: The next question is from Brooke Roach with Goldman Sachs. Brooke Roach: I was hoping to follow up on Jay's question about tariff mitigation and just get your latest thoughts on pricing as you look to offset some of these tariffs, particularly given the stronger AUR results you've recently materialized. What are your plans for pricing as you move into next year? And then as a follow-up, Patraic, can you provide a little bit of color on how you see that tariff headwind directionally shaping into the first half of next year versus the 300 bps of gross margin pressure that you're forecasting for the fourth quarter? Andrew Rees: Yes. Thanks, Brooke. So pricing, so from a conceptual perspective, we don't price the cost, we price to market, right? So I think we've talked about this a lot over the years, right? What we think about from a pricing perspective, we look at both the strength of our brand, the trajectory of the brand and the competitive dynamics for products in the marketplaces in which we compete. And we do this around the world based on the local market. So what we have seen most recently, so in the back half of '25, we have actually taken select price increases on key products in some markets around the world. And we do have a number of those incrementally planned in the early part of 2026. At this point, though, we are not planning to initiate price increases, for example, on our core Classic Clog here in North America. We think that is well priced and that portion of the market is still -- is more price sensitive and more competitive. So I think we've got a great pricing framework. We're very precise and dynamic around this and -- but that's kind of where we sit at this point. Patraic Reagan: Yes. And Brooke, just building on Andrew's comments. So the nature of pricing here at Crocs is very dynamic and quite a bit of muscle built in that space. So we feel really good about how we're kind of pricing from a value standpoint to our consumers' price to value standpoint. As we turn into 2026, obviously, we're not providing any sort of guidance at this point in time. That will come in the next call. But directionally, what I can say is the large impact in tariffs for us and really any other consumer brand or footwear brand that's operating in the countries we operate in is most felt in the second half of this year. And so what you can directionally think about is that we'll continue to feel some of that pressure as we get into the first half of 2026. Operator: The next question is from Aubrey Tianello with BNP Paribas. Aubrey Tianello: I wanted to ask on stores and if you can give us an update on the store growth strategy for both brands, but especially Crocs, where there's been a pickup in store openings over the course of this year. How should we be thinking about store growth going forward? Andrew Rees: Yes. That's a great question, Aubrey. Glad you asked it. So starting with Crocs, there has been a bit of a pickup in store openings. A lot of that is driven out of our European store base, right? So we've very successfully opened a number of stores in Europe. Those are almost all outlet stores in the U.K. and France principally. And I would have to say they are performing incredibly. So we're super happy about that. Also some store openings in Asia and a small number here in North America. So as you probably know, our store base is incredibly profitable, very high sales per square foot, high margins and a very good strong flow-through. The other thing I would also highlight for those of you in New York is we did open our SoHo store earlier this year. It's performing very, very well indeed, super happy with it. And it's also, I would say, the pinnacle presentation of the brand. And you may have seen on social media that we were live streaming from that store during October. Terence Reilley, our Chief Brand Officer, did an amazing job live streaming from the store and also featuring some celebrities, including Jaxson Dart. So it's been a great investment for us. From a HEYDUDE perspective, we have also continued to open stores here in North America, again, outlet stores. I would say the one thing that we have done this year is shifted where we've opened the stores suddenly, and they're a little bit more in what we call HEYDUDE Country, the HEYDUDE Heartland. And again, those stores continue to meet our expectations. Patraic Reagan: Yes. And Aubrey, the only thing I would add and just kind of emphasize in terms of Andrew's comments are the profitability of the Crocs stores, both domestically and internationally, it's super impressive. And you can kind of see that in the cascade of the financials and something we haven't talked about as much on the Q&A portion of the call is generating the free cash flow that is just inherent into the -- in what is the strength of our financial model. And so our stores are an important part of that, and they throw off and they generate a lot of cash, which allows us then to both invest back into the business and return capital back to our shareholders. Operator: The next question is from Anna Andreeva with Piper Sandler. Anna Andreeva: Welcome to Patraic. We had a question on $100 million of savings. Just any color on how we should think about the cadence of those as we go through '26. Is the expectation that these are scaling as we go through the year or more equally divided? And what's the amount of savings we should expect for the fourth quarter? And then just as a follow-up, Patraic, you mentioned North America DTC accelerated quarter-to-date at Crocs, which is pretty impressive considering fewer promos. And I know Crocs [indiscernible] is a big deal for the business. Anything you did differently this year? Is this driven more by TikTok? Just any color you could provide on that? And what's implied in the guide for North America DTC at Crocs for 4Q? Patraic Reagan: Yes. So Anna, let me hit the cost savings first, and then we'll get into the second part of the question. So first of all, the $100 million number, that's a gross number, right? And so what we mean by gross is we have identified $100 million of savings across the entirety of our cost base, whether that's in cost of goods, SG&A, et cetera. And we are -- we've done that, number one, to make sure that we're operating as efficiently as we can, of course. But then secondly, to provide us with the flexibility to make choices as we get into 2026. And those choices could be flowing those savings to the bottom line. Those choices could be investing in areas that we see in terms of outsized growth that we're able to chase into. And so I'm not going to get into a cadence of kind of quarterly at this point. It's too early in that. We'll provide a little bit more detail on that when we get into 2026 during the Q4 call. And I think the second part of the question, Andrew is going to hit on. Andrew Rees: Yes. So just a point of clarification. We did not say that DTC accelerated during Q3, right? So we actually don't comment on trajectory within the quarter. But what we did say is we believe that DTC in North America will be stronger in Q4 than it was in Q3. Operator: This concludes our question-and-answer session. I would like to turn the conference back over to Andrew Rees, Chief Executive Officer, for any closing remarks. Andrew Rees: I just want to say thank you, everybody, for joining us today and your continued interest in Crocs Inc., and we look forward to continuing to speak to you in the future. Thank you. Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Operator: Good morning. My name is Kate. Welcome to Roblox's Third Quarter 2025 Earnings Conference Call. [Operator Instructions] Stephanie Notaney, you may now begin your conference. Stefanie Notaney: Thanks, Kate. Good morning, everyone. Thank you for joining our Q&A session to discuss Roblox's Q3 2025 results. With me today is Roblox's Co-Founder and CEO, David Baszucki; and our Chief Financial Officer, Naveen Chopra. Our shareholder letter, SEC filings, supplemental slides and a replay of today's call can be found on our Investor Relations website. Our commentary today may include forward-looking statements, which are subject to risks, uncertainties and assumptions that could cause actual results to differ materially from those described in our forward-looking statements. A description of these risks, uncertainties and assumptions are included in our SEC filings, including our most recent reports on Form 10-K and Form 10-Q. You should not rely on our forward-looking statements as predictions of future events. We disclaim any obligation to update these statements, except as required by law. During this call, we will also discuss certain non-GAAP financial measures. Reconciliations between GAAP and non-GAAP metrics can be found in our shareholder letter and supplemental slides. With that, I'll turn it over to Dave. David Baszucki: Thank you, Stefanie. Good morning and thank you for joining us today. A year ago, at RDC, we shared the goal of capturing 10% of the global gaming content market. We'd like to report that we've made tremendous progress. We estimate now that 3.2% of global gaming bookings or revenue is going through Roblox, and that's up from 2.3% last year. Our platform and our creator ecosystem is healthier than it has ever been. Similarly to Q2, in Q3, we saw strength both across the platform with both existing and new experiences on the platform. The number of experiences that have more than 10 million daily active users on the platform at some point during Q3 2025 hit 7, and that includes a lot of experiences we're all familiar with as well as 5 that were created in the last 12 months. That's Grow a Garden, Steal a Brainrot, Brookhaven, 99 Nights in the Forest, Plants Vs Brainrots, Ink Game and Blox Fruits. We believe the success on our platform continues to be driven by raw platform capabilities and performance, continued improvements in Discovery, continued improvements in our virtual economy. And complementing that, the investments we've made in infrastructure, which supported multiple groundbreaking records over the last quarter, including a 45 million peak concurrency during the weekend in August. Let's get into the financial results. In Q3, our DAUs hit 151.5 million. That's up 70% year-on-year. This was growth really across all regions, including U.S. and Canada, 32% up year-on-year; APAC up 108% year-on-year. And importantly, we see continued evolution of our age demo with 13 and over DAUs growing 89% year-on-year. Right now, 2/3 of total DAUs are 13 and up. Hours had similar strength, hitting 39.6 billion hours of engagement in Q3. That's up 91% year-on-year. Strength across all regions, U.S., and Canada, up 47% year-on-year. APAC hours of engagement up 127% year-on-year. Commensurate growth with 13 and up 107% year-on-year, 68% of our total hours are 13 and up. Q3 revenue was $1.36 billion, up 48% year-on-year. Q3 bookings was $1.92 billion, up 70% year-on-year. Once again, strong growth across regions, U.S. and Canada, bookings up 50% year-on-year. APAC bookings up 110% year-on-year. Some highlights, Japan, 125%; India, 146%. Indonesia bookings up 804% year-on-year. Our monthly unique payers continues to be strong at 35.8 million, up 88% year-on-year. And in Q3 through DevEx, we hit $427.9 million of DevEx, up 85%, a new record. I want to highlight that DevEx, which is what our creators are earning on the platform, has grown 250% from the same period 2 years ago. We continue to have strong conviction for our long-term vision, and we'll continue to be more diligent about investing in this innovation to support long-term genre expansion and growth. We've talked about genre expansion a lot over the last year. I want to do a few highlights here. We have a lot of technology that showed at RDC this year that's rolling out, including server authority and custom matchmaking, which will make Roblox more resilient and powerful for competitive genres like shooters, sports and racing. We've already showcased avatar enhancement technology that is in the pipeline that we believe is going to really expand the look and feel of Roblox to higher fidelity and more lifelike avatars and continued focus in raw performance on the platform, including tech like Harmony and SLIM, which we believe is part of the future of high fidelity gaming. And the ability of our creators to make experiences that can run both on low-end 2-gig Android as well as really nice high-end gaming to -- PCs. On Discovery, we've continued really a commitment to transparency that we also believe is good for the company. And we shared the notion that we're sharing our Discovery signals with our creators, making those transparent in their analytics dashboard. And we've highlighted that we're using play-through rates, 7-day play days per user, 7-day intentional co-play days. So our creators can see exactly what we're using to make recommendations. We continue to see Discovery highlight new hits. For example, in Indonesia, Fish It! has become extremely popular, and we believe our Discovery system has helped promote that. I would also highlight our content ecosystem continues to be strong with what have now become perennial successes like Brookhaven, Adopt Me! and Blox Fruits, which all continue to draw strong engagement. And some of our hits from last year like RIVALS and Dress To Impress continue to launch active and successful updates. Really important at RDC, we announced an 8.5% increase to the DevEx rate. Creator earnings surpassed $1 billion in the first 9 months of 2025. Also in support of our creator ecosystem, we've launched our IP platform, which we believe really is the future way to allow IP holders and creators to connect without all of the complexity of handcrafted individual one-on-one contractors or contracts. And I want to highlight IP owners like Mattel and Kodansha have joined that platform. And we recently announced and launched Roblox Moments which we believe is an additional innovative discovery surface for our creators. Now in addition to all of this, I want to make a couple of highlights on some of the areas of tech we've been really working on before I hand over to Naveen. First, really safety, which has always been a top priority for us and foundational to everything we do at Roblox. Just yesterday, we announced a partnership with the AGA, the Attorney General Alliance on a child safety coalition. Stay tuned with this. We believe there's a wonderful opportunity to share and develop what we believe is going to be the industry standard in communication for social and mobile apps, including our commitment by the end of this year to use AI-based facial age estimation to estimate the age of everyone on our platform. And to use that to gate who uses communication technology and help route who can communicate with who, even in addition to what we already do, which is filtering of all text and no image sharing on Roblox. We believe as new technology rolls out, it allows us to harvest and use this technology for continued advancements in safety and civility. We've also released over 100 innovations this year in our safety and civility group, including an announcement that we're going to be adopting IARC, an International Age Rating Coalition rating over the next few quarters. And we've raised our minimum age for restricted content to really the global standard of 18 years old. I want to highlight, we do run stricter than typical industry policies on Roblox. We believe it's an essential strategic investment to how we run the company. And as we roll out facial age estimation, we really do believe this is going to add long-term value creation for shareholders, even if there are any short-term headwinds from that rollout. On the AI side, we are now up to running over 400 AI systems inside the company. These are core within safety, discovery, and creation, highlighting a few things that we've shipped so far. Our Cube 3D model, which we shipped earlier, is really going to come to life over the next 1 to 2 quarters as this goes live in multiplayer mode for everyone on the platform. We've also open sourced the Studio MCP server, which is making Roblox Studio the ability to integrate as both a client and a server in complex AI-based workflows. Behind the scenes, our safety model for PII continues to get better all the time. And we shipped RoGuard for our safety of our LLM text-gen tech in game. Stay tuned for a lot more generative AI. I want to highlight that in addition to AI for safety and discovery, there's been a lot of chat about how much training data various people have access to. Within Roblox every day, we are moving forward to capturing, which is literally over 30,000 years of human interaction data and doing this in a PII-compliant way. This is unique data, data we have no intent of ever getting outside of our walls or selling that can really be used as we start to roll out our future vision of allowing people to play both with others as well as with NPCs and supporting unlimited creation in Roblox, not just for our creators, but for everyone. And that can mean per object with clothing, per the world you're in, per game creation and ultimately, with friends in real-time well playing. Finally, 45 million concurrent users is a really big number. And we supported this really moving towards what we think is more and more an optimal mix of our own data centers, both core data centers, edge data centers and GPU installations on our own bare metal with bursting with our cloud partners. And we did this in really a wonderful way by bursting over weekends for several hour slots when we hit peak numbers. We're going to continue to go down this route. We're investing more and more in our own bare metal for scale. Core data centers give us load balancing and efficiency. Everyone in Brazil is happy because we added a new edge data center there to reduce latency. We're going to continue doing that. And we are more and more now building out our own native bare metal GPU capability, but coupling with our cloud partners. We're going to make sizable improvements here. The big improvements we've seen in cost to serve may be harder to realize for the next few quarters, but this is all consistent with our long-term focus. With all of this excitement about innovation, we, of course, we have a lot of initiatives we work on every day to enhance our platform. We focus on the details. And with that, we're going to hand it -- I'm going to hand it over to Naveen to complement my introduction. Naveen Chopra: Great. Thanks, Dave. Good morning, everybody. I'm going to try to keep my comments relatively brief so we can get to some questions. As Dave noted, the tremendous growth that we saw in the quarter was driven by this combination of big viral hits and underlying platform growth. And so with that in mind, I want to just share a few observations regarding overall platform health, if you will. Last quarter, I highlighted the engagement growth that we were seeing in experiences outside of our top 10. Well, this quarter, the growth in engagement for these experiences, again, outside of the top 10 accelerated even further from 47% in Q2 to 58% in Q3. That's the engagement. And then on the monetization side, spending in that cohort of experiences remained north of 40% -- excuse me, spending growth remained north of 40%. We also saw healthy growth in bookings per daily active user. That was true in every region other than APAC, which I call out because very importantly, in APAC, the trend really is a function of mix shift at the country level. Payers, as Dave highlighted, grew 88% year-on-year, which is a very healthy growth rate in and of itself. But notably, it's higher than the rate of user growth, which was 70%. And we believe that this dynamic is at least in part caused by changes that we've made in our economy. Remember, we launched regional pricing for marketplace items back in June. And we think that, that helped drive higher payer penetration in markets like Southeast Asia. We did see a decline in bookings per payer on a blended basis, but similar to my comments on bookings per DAU, it's important to understand that this was really driven by geographic mix shift. So platform evolution looks healthy, and that really increases our conviction in our long-term goals. But as Dave pointed out, also underscores the importance of continuing to invest to ensure that we can deliver healthy growth over a multiyear period of time. So what does that look like financially? Well, on the top line, we see momentum in the business to continue to deliver healthy double-digit bookings growth. We think that will be aided by the launch of a number of the key technologies Dave touched on that will roll out in late Q1 and early Q2 of 2026. Many of these technologies are designed to enable genre expansion on our platform. You saw some of those demoed at RDC. From a reported growth perspective in '26, we think the adoption of these technologies will be a factor, meaning how quickly developers adopt some of these new capabilities will influence the growth rate, particularly given the tough compares that we know we'll have coming out of 2025. We're also conscious of the fact that the new safety policies we're rolling out consistent with our commitment to being the gold standard for safety may cause some short-term friction to engagement and bookings. But ultimately, we think those are a magnifier of long-term growth. And then on the expense side of the equation, we are envisioning more investments in DevEx, in infrastructure and people to support our goals around safety and genre expansion. That's the reason you're not seeing year-over-year margin expansion in Q4 based on our guidance. And it's the reason that we expect margins to decline slightly in 2026, given the combined impact of a full year of higher DevEx rates, limited cost to serve improvements around infrastructure and safety and higher growth rates in our comp and ben expense lines. There'll also be incremental CapEx starting in Q4 2025, that's incorporated in the guidance that we shared. And I would tell you to expect similar levels of CapEx in 2026, which, of course, implies that CapEx intensity next year should be lower than 2025 and but still somewhat elevated relative to 2024. So I realize probably getting a little bit into the weeds there, but let me step back for a second. I think the key takeaways here are we are way ahead of our long-term growth plans. And in fact, the reality situation is that bookings have grown faster than our ability to deploy the appropriate growth investments. And that means you're going to see some slight margin compression as we catch up over the next few quarters. But I think those investments really should give everyone even more confidence in our ability to continue to deliver sustainable long-term growth. So hopefully, that's some helpful color both on what we're seeing and what we're expecting. And with that, I think we'll open the line for questions. Operator: [Operator Instructions] We'll first go to Matthew Cost at Morgan Stanley. Matthew Cost: Dave, I want to start on AI. I mean just when I look at your infrastructure plans, clearly, you're very excited about putting GPUs and more data center power behind what you're doing. Tie that back to what the user experience or the games on Roblox are going to look like in this world that you're building towards. When you think about what Cube is capable of, what will real-time content generation and what you're calling 4D content creation mean for Roblox experiences and for engagement over the next couple of years? And then I have one for Naveen as a follow-up. David Baszucki: Matthew, great question. And this is a fun one to answer. It also highlights the -- just enormous future technical innovation we have great looking in front of us. We have shared publicly at RDC and others really a vision of what the ultimate spec for Roblox should be. And that ultimate spec should be creator decides everything from fun, anime look and feel all the way up to photorealism, anywhere from one player to 100,000 people at a concert simultaneously. The ability to use AI to do real-time modification of that world, everything from a piece of clothing to really 100,000 people with a Dungeon Master modifying the whole environment in real time, a mix of true human players, NPC players altogether doing this with a very tight eye towards efficiency and cost because we're a freemium platform. Ultimately, doing this on everything from a 2-gig RAM Android device to a high-end gaming PC. So that is an amazingly complex spec. What you're going to see coming out soon with Cube 4D is real-time generation in experience in multiplayer, not just the static objects, but of complex objects, vehicles, weapons, other types of things that user can interact with in multiplayer. More of that to come, more AI supporting the stack everywhere, but we're marching as quickly as we can to that really big visionary spec. Some of the gameplay that we will see, we do not know what it is. We've seen that historically on Roblox more and more as we both cover new and existing genres in a predictable way, along with new types of games. I would highlight Dress To Impress was an example a year ago where the raw technology we were building to support more traditional gaming allowed the creation of a whole new genre. So stay tuned both for more coverage of existing genres at higher performance as well as as of now, unthought of types of gameplay. Operator: [Operator Instructions] We'll move next to Brian Pitz with BMO Capital Markets. Brian Pitz: Dave, you mentioned increasing the DevEx rate by 8.5% putting more economics into creators hands. However, at the same time, if you look at competing UGC platforms like Fortnite, they're also offering very attractive economics to try to win over creators to build a mere UGC platform. How do you think about the need to continue driving economics towards creators to help send off any competition from other platforms that either are currently in development or could be coming in the future? David Baszucki: Great question. I do want to highlight that generally at Roblox, we run the company by looking to the future and not looking over our shoulder. I would say in this situation, there's one additional component to what is the DevEx rate, and that is the ability of a new creator or an existing creator to make enormous economic returns. And so one needs to multiply the DevEx rate by the volume of users on the platform, by the breadth of the creative tools, by the velocity that new creators can make new experiences. And in the end, that's how I believe, and we believe creators analyze the situation, not simply by the DevEx rate. We do believe for every incremental percentage within, obviously, our fiduciary duty and our balancing of earnings and DevEx and all of our other costs, that for every incremental percent, we do believe there can be some effect on the creators in making Roblox a more appealing platform. It ends up at the highest level, making us think about our company where we want our COGS to be as lean and as efficient as possible, our personnel costs to be as lean and efficient as possible, our infra trust and safety costs to never compromise and at the same time, to be run as thoughtfully as possible. And this has been one of the benefits of building out our own infrastructure. And then finally, being very thoughtful on how much we move back to our creator community relative to our own cash flow. So I think it's much bigger than kind of this one-to-one comparison. And that's -- really long term, we want to move as much money in a prudent and thoughtful way while always being responsible for trust safety and our earnings to the creators. Operator: We'll move next to Eric Sheridan with Goldman Sachs. Eric Sheridan: Can you share with us key learnings as older age cohorts continue to scale as a percentage of the mix in the business? And based on those learnings, how can you line up your investment priorities to sustain that growth and stimulate that aspect of mix in the years ahead? David Baszucki: I'll share some key learnings, and then I'll share how we are lining things up. I think one of the key learnings is Roblox has a huge ability to virally attract new users to the platform with new hits. And we've seen that both with Dress To Impress. We've seen it with Grow a Garden, where we really get user acquisition at enormous scale organically as word-of-mouth traverses these properties. We've also seen with new types of gameplay, once again, use those 2 as examples, that older players are excited and interested in that. If anything, as we look at the global gaming market space, which is estimated anywhere -- I won't make the exact estimate, but numbers between $180 billion and $200 billion. We see all of the existing genres, and we've been able to align those genres with our technical road map. As we shared before, a lot of our technology, we believe, is going to support sports. A lot of our technology will support racing. Some of the new technology we're working on is going to make RPGs better. Some of the technology we're working on now, we believe we're going to see more and more avatars on Roblox that have a much bigger diversity just as we see in the gaming ecosystem as a whole relative to what we have on Roblox. And so we can use that to guide our technical road map. But I would highlight we're not copying. We are envisioning satisfying those technical constraints while at the same time, building a platform where the exact same experience can run a 2-gig RAM Android in a very difficult networking configuration and at the same time, look absolutely amazing on a high-end gaming PC, eliminating really kind of this void between mobile and desktop and console. We also believe the future of platforms like Roblox is much more cloud integrated such that AI and generative AI is always available in the experience for all creators. So we are able to align a bit both our own vision as well as what are all of the current genres in the gaming ecosystem and make sure we line up with that. So that's -- we're optimistic there's a lot of growth ahead of us in some of these genres where we're not fully at 3% of the global gaming market right now. Operator: We'll move next to Jason Bazinet with Citigroup. Jason Bazinet: I just had a question on the shareholder letter. I think in your '23 Investor Day, you laid out 20% plus bookings growth from '25 to '27. And in the shareholder letter, you acknowledge the great results you've had so far this year. But then you say, as we look to next year, our long-term objectives have not changed. Is that essentially a soft way of saying that you think that the growth will be below 20% in '26? Is that what you're trying to say? Because I think that's what the market is trying to digest with the premarket exit in your stock. Naveen Chopra: Jason, it's Naveen. Thanks for asking to clarify that. Look, I think we are not providing any specific guidance about 2026 at this point in time. I think that would be premature. We need to land the plane on '25, and then I think we'll be able to dial in expectations for 2026 more specifically. I think what we're trying to highlight for people is that there are some important things to consider as we look at expectations for bookings growth next year. There will be tailwinds from the momentum that we are seeing in the platform today. There will be tailwinds from a lot of the tech that's going to be hitting the platform in the first half of next year. But there could also be potential headwinds, obviously, from the tough comps and then potentially from some of the new safety policies that we are going to be rolling out. We don't think any of that changes where we expect this business to be over the next several years. But I think it is too early to put any specific numbers around '26 at this point in time. Operator: We'll move next to Cory Carpenter with JPMorgan. Cory Carpenter: Maybe building on that, you did not mention advertising as a potential tailwind next year. So just curious what your early learnings have been in rewarded video. How big a push or priority do you plan to make that in 2026? Naveen Chopra: Yes. So I think consistent with some of the comments we've shared recently around advertising, we remain very bullish about the long-term opportunities there, but we are cautious about the near term because we want to make sure that we get it right. And as you've heard at RDC, we are now rolling out rewarded video on sort of a limited basis. I think we pointed out in the shareholder letter, we now have over 140 creators onboarded. What we have learned from that is that we want to be very thoughtful and diligent with those creators about how we integrate rewarded video to make sure that it works for them from an engagement and a monetization perspective, that it works for our users in terms of the experience, performance, et cetera. And that obviously, we are representing our advertisers in a high-quality way. So there's still a lot for us to do on that front and therefore, not something that we would call out as a major contributor in the short term, but something that is going to be a key part of our business as we progress over the next few years. Operator: We'll move next to Ken Gawrelski with Wells Fargo. Kenneth Gawrelski: Could you talk a little bit about the various genres? And how do you think about the recommendation engine, which has been clearly very successful in kind of surfacing new hit games? Could you talk about how you're pushing more diversity of genres and to make sure that there's enough experiences out there? And is this a concern? Are you seeing -- are you worried at all a little bit about more concentration in certain types of genre games or in certain game mechanics? David Baszucki: Great question. And part of my intro was to highlight that diversity on the platform with 7 titles over 10 million DAUs at some point during the quarter and 5 of them new. One of the way we have been thinking about Discovery, there's 2 big areas of it. One is we're not trying to optimize the short term. We are trying to optimize the long-term enterprise value of the company. And we're also trying to optimize ecosystem health in addition to what we put in front of users, which really does mean surfacing new creators and new genres side by side. The second part on our Discovery, we're moving more and more towards complete transparency of our Discovery algorithm. We're sharing the signals that we believe point to long-term health of the ecosystem. And as you correctly noted, we believe part of that long-term health is through expansion in some genres like RPGs, shooting, racing, battle, sports, and other genres on the platform. The final thing I want to highlight on the way our Discovery system is working is long term, there's really 3 prongs to Discovery on Roblox. There's our own recommendation engine. It's coupled with on the homepage sponsored tiles, which is paid Discovery by our creators. And more and more new creators who are launching a new game or bursting are using that to complement our organic Discovery. Finally, our top hits and curated sort is an additional way that we complement that with the vision on the platform. We're being very careful not to look backwards, not to burn in what has historically been big on Roblox, but instead to look forward to what we believe will be new types of gaming on the platform. So I believe relative to a year or even 2 years ago, our Discovery system is working better than it ever has, and I think we have continued improvements coming. So stay tuned. Operator: We'll move next to Benjamin Black with Deutsche Bank. Benjamin Black: So just touching on the growing number of experiences that are eclipsing 10 million users. So with the growing data set that you have on user engagement, DAU behavior, does the Discovery model just get increasingly smarter at recommending content? So I guess the question is, are you starting to have a real data moat in Discovery? And then Naveen, over the past couple of quarters, we've seen a divergence in hours engaged growth and bookings growth. Could you just help us understand sort of why this is happening? Is it easy as sort of a mix shift towards low monetizing experiences or low monetizing regions? And if so, how should the relationships between those 2 evolve from here? David Baszucki: This is a really good question. I want to put it under the umbrella of, first, privacy safety, PII safety, adherence to all local laws and all of that. And the second, I want to put it under the umbrella -- but we're not under any financial pressure and have no intent to ever release any of this Roblox data anywhere off the platform. Once we look into those 2 things, though, the data set is enormous. The data set is not simply who clicks where. The data set is real-time 3D avatar interactions. It's what areas of a certain experience are retaining more. It's what are avatars doing in any creator's experience. It's the ability to analyze that and the ability to analyze the data that makes up a 3D experience. And in addition to maybe more traditional signals for Discovery, use 3D and time-based immersion signals to help predict what may be a good experience on our platform. That goes back to an interlock with what I shared, which is every day on Roblox, there's over 30,000 years of potential 3D interaction avatar training data available for us. So the answer is yes. We will mix more content understanding, understanding of what makes experiences interesting and fun into our Discovery mechanism. And I'll kick it over to Naveen for the second part of that. Naveen Chopra: Yes. Thanks. Ben, your -- or at least the second part of your hypothesis was correct in terms of the dynamic between hours growth versus monetization growth, meaning it really is about geographic mix shift. You can see that if you look at -- in the supplementals, we have some disclosure around bookings per daily active user. I realize you were comparing monetization versus hours, but it's a very similar dynamic, i.e., if you look at this on a regional basis, very strong growth year-over-year. But the mix of hours is skewing toward regions that just do monetize at a lower level, and that's what you're seeing in the blended numbers. And as I pointed out in my remarks, even at the regional level, we see some geographic mix shift between specific countries that impacts the monetization at the entire region. So it really is all about growth in various regions. Operator: We'll move next to Omar Dessouky with Bank of America. Omar Dessouky: So you called out the tough comp in '26 and some of the dynamics there. I'm looking back at Roblox, a lot has changed, obviously, new CFO, the company has almost doubled in size over the last 2 years. And when things change, you may consider different approaches. And with '26 being such a tough comp year potentially, Roblox has never used advertising to attract users either through ad networks or otherwise. And given that -- it sounded like Dave said that the virality of your hits is the main engine for user growth in a tough comp year like '26, why wouldn't Roblox consider advertising to kind of smooth out these troughs and peaks in growth? That's my question. David Baszucki: Omar, great question. A couple of things to take a step back at. Big picture right now, we're simultaneously excited that we've nudged over 3% of the global gaming content market running on Roblox. And at the same time, there's almost 97% out there. So I continue to be enormously bullish as we roll out our tech and we expand genres, and we do this really in a new way for gaming complemented with AI. The second thing I do want to highlight is that this quarter, next quarter, we're rolling out a lot of what we shared at RDC, which supports massive expansion of the way Roblox works and the types of genres. You correctly note, Roblox got to where it is primarily based on viral growth, but we do buy traffic. I don't know if it shows up in our financial statements, but we very thoughtfully complement that with paid user acquisition. And what we are testing and starting to roll out is the notion that we can partner with the creators on our platform to help them supercharge their paid acquisition in partnership with us. And there's a future opportunity for us to expand paid acquisition where a creator may be a little hesitant to buy paid traffic and send that to Roblox because we get some benefit as well. They land in our client, that user may pay other experiences. But when we start sharing that with creators, there's an opportunity for both creators to expand paid acquisition and for us to support them and do it with them. So we already do some paid acquisition. There's an opportunity to make this a lot larger. We always do this in a financially prudent way, which is appropriate return on ad spend in the right amount of time so that we're doing this incrementally. So yes, great idea. We've got this in our sights to expand. And Naveen, I don't know if you want to complement that at all. Naveen Chopra: I think the only thing I would say is that in terms of overall scale of what we're spending on growth marketing, it is still very modest, and we rely on the tremendous organic growth that the platform still has. As Dave said, there's a lot of market white space yet for us to tackle. And we added I think close to 40 million users relative to Q2. So the organic growth engine is working really well, and that will still be, I think, the primary driver of growth. But there are some very interesting things that we can do, as Dave described, in conjunction with our devs to promote some of the content that is coming to the platform, which is consistent with our goals around genre expansion, content diversity, content velocity, et cetera. So looking forward to continuing to experiment with that. Operator: Time for one last question from Clark Lampen with BTIG. William Lampen: I'll try to make these quick ones. Dave, you talked about making the platform more attractive to the creator community. Over the last few quarters, we've obviously seen a really big spike in users. You've invested in developer exchange fees, tech, the platform. We obviously have a very good view into user growth, but a little bit less so on the developer side of the ecosystem. Has dev growth essentially held serve with users in a way where we could think about that sort of growing proportionate to DAUs? And maybe just take that a step further for Naveen, if we think about that and sort of the elasticity of growth and engagement, we've been through investment cycles in the past. This one feels a little bit different because it's AI-oriented. Is there a reason to think that like the yield on some of these investments, if we are seeing proportionate growth, could be a little bit more immediate? And is that reflected in some of the comments around '26? David Baszucki: I'll go first, and then I'll hand it over to Naveen on the yield side. At RDC, and I don't know if we published as part of this earnings, there's one spec or stat that we constantly share, which is some averages around top 10, top 100, top 1,000 devs and their year-on-year growth in bookings and engagement. And we continuously see, I would say, a flattening of that tail where the top 1,000 looks very, very healthy. So I think we're in a very healthy zone still. We continue to flatten that curve. We have many, many more creators making a living or making $1 million or making $10 million on the platform, and that all is continuing to grow. I believe we can extrapolate to the future, which is our vision of having 10% of that global gaming bookings running through our platform, and that gives a little bit of a perspective of what we would hope happens to that wide range of creators on the platform. Just one highlight on infrastructure. We continue to highlight the movement to supporting our own bare metal data centers, both for core edge and AI and complementing with burst. This has been part of the key to our efficiency, and I'll let Naveen speak on the yield of these investments as we get into that. Naveen Chopra: Yes. I think the way to think about, call it, the payback period on these investments is that there are a variety of things that we are doing that we will start to see the fruit relatively quickly. There are others that are more long term in nature. The AI stuff, in particular, there's a lot of AI investment that we've already made. You heard Dave talk about some of the benefits we're already seeing around Discovery, economy, et cetera. So I view those as having relatively near-term payback. There are others that are going to be longer term. And quite frankly, it's going to take us a little while to roll out the CapEx to train and ultimately deploy these models to move them on to our own metal, as you heard Dave describe. So those are not necessarily going to have as immediate of a payback. But I think it's fair to say we're already getting benefit from a number of the investments that have been made on this front, call it, in 2025 and increasingly in '26 and beyond. I think that's our last question. So thank you all for joining. And then I will turn it back to Dave for any closing comments. David Baszucki: I just want to once again thank you all for your support and your insightful questions today. We look forward to continuing to innovate in our quest to have 10% of global gaming on the platform. Thank you all. Operator: Thank you. And that concludes today's conference call. Thank you for your participation. You may now disconnect.
Operator: Thank you for standing by. My name is Rebecca, and I will be your conference operator today. At this time, I would like to welcome everyone to the WEX Third Quarter 2025 Earnings Call. [Operator Instructions] I would like to turn the call over to Steve Elder. Please begin. Steven Elder: Thank you, operator, and good morning, everyone. With me today is Melissa Smith, our Chair and CEO; and Jagtar Narula, our CFO. The press release and supplemental materials issued yesterday and a slide deck to walk through prepared remarks have been posted to the Investor Relations section of our website at wexinc.com. A copy of the press release and supplemental materials have been included in an 8-K filed with the SEC yesterday afternoon. As a reminder, we will be discussing non-GAAP metrics, specifically adjusted net income, which we sometimes refer to as ANI, adjusted net income per diluted share, adjusted operating income and related margin as well as adjusted free cash flow during our call. Please see Exhibit 1 of the press release for an explanation and reconciliation of these non-GAAP measures. The company provides revenue guidance on a GAAP basis and earnings guidance on a non-GAAP basis due to the uncertainty and the indeterminate amount of certain elements that are included in reported GAAP earnings. I would also like to remind you that we will discuss forward-looking statements under the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from these forward-looking statements as a result of various factors, including those discussed in the press release, the supplemental materials and the risk factors identified in the most recently filed annual report on Form 10-K and subsequent quarterly reports on Form 10-Q and other subsequent SEC filings. While we may update forward-looking statements in the future, we disclaim any obligations to do so. You should not place undue reliance on these forward-looking statements, all of which speak only as of today. With that, I'll turn the call over to Melissa. Melissa Smith: Thank you, Steve, and good morning, everyone. We appreciate you joining us. Today, I'll provide an overview of our financial results and then share key takeaways from our annual strategic planning process, which included a deeper assessment of our portfolio and segments. Q3 marked a turning point with acceleration in revenue growth. We're excited about the path ahead and confident in our abilities to deliver sustainable growth in the markets we serve, expand profitability and generate strong free cash flow. I'll start with our third quarter results. I'm pleased to report that we delivered strong performance delivered primarily by the Mobility segment, with both revenue and adjusted EPS exceeding the high end of our guidance range. Revenue for the third quarter was $691.8 million, an increase of 3.9% year-over-year. Excluding the impact of fluctuations in fuel prices and foreign exchange rates, revenue was up 4.4%. This return to growth reflects the actions we've taken over the past few quarters, the strength of the underlying business and moving past the OTA customer headwind in Corporate Payments. With our actions translating into improved top line performance, we have our sights set on our long-term revenue growth targets of 5% to 10%. And importantly, we're also focused on expanding margin through efficiencies, which will be further supported as volume returns. Adjusted net income per diluted share was $4.59, an increase of 5.5% year-over-year. Excluding the impact of fluctuations in fuel prices and foreign exchange rates, Q3 adjusted EPS grew 7.2%. We remain committed to delivering double-digit long-term adjusted EPS growth. Although the macro backdrop remains dynamic, we're now moving past the headwind from the OTA transition and our strategic investments are already yielding results. We've been laying the foundation for this return to growth, and we are confident that the uptick we showed in Q3, particularly in Corporate Payments, sets us up well as we finish out 2025 and beyond. With that, I'd like to spend a few minutes on our strategy as well as how our businesses work together, the opportunities ahead and the pillars guiding us forward. Our purpose is clear: to simplify the business of running business. By delivering a differentiated value proposition to our customers, we believe we can generate above-market revenue growth, sustainable profitability, robust free cash flow and long-term value for our shareholders. Our strategy comprises 3 strategic pillars. These guide our people, their efforts and how we allocate capital. First, we are amplifying our core by continuing to strengthen our leadership positions and deepen customer loyalty with targeted investments, best-in-class sales execution and operational discipline. Second, we're expanding our reach by extending our platform into adjacent workflows and new use cases, unlocking additional growth vectors while building customer value. Finally, we're accelerating innovation, allowing us to get more productivity out of our investments and delivering operating leverage in our model. Our approach to capital allocation is grounded in our strategy, and we will remain disciplined as we balance investments in growth with a sharp focus on efficiency, free cash flow generation and returns. As we execute our strategy and position WEX for the future, we are leveraging AI to reimagine how we operate and serve our customers. Our use of AI in customer discovery, prototyping, coding, QA, infrastructure management and security has helped drive a 20% increase in product innovation velocity. We're also using AI to harness our proprietary data to make smarter, faster decisions from fraud prevention and credit management to claims processing and customer support. Our use of AI creates direct value for our customers and differentiates our product. In our Benefits segment, AI has reduced claims processing time from days to minutes. In customer service, human in the loop, generative AI is boosting productivity and lowering our cost to serve. In Q3, we introduced AI insights in field service management, pioneering a shift from reports to real-time intelligence and action, helping customers get the answers they need. With AI increasingly embedded across our platforms and operations, we believe it will help us scale the business, accelerate innovation and strengthen WEX's long-term competitive advantage. Let me now move to our portfolio review and outcomes. On our last call, I spoke about the unique strengths of our 3 segments. Each year, we review these segments and update our enterprise strategy as part of our planning process. This year, the Board also conducted a comprehensive portfolio assessment drawing on both internal expertise in 2 independent top-tier global investment banks, Bank of America and JPMorgan. This was a rigorous process guided by our responsibility to be thoughtful stewards of shareholder capital and our commitment to pursue the most value-accretive opportunities. As part of this process, we took a hard look at our portfolio to ensure each business we own meets our criteria for returns, margins and strategic focus. Based on this comprehensive assessment, we have determined that our businesses are stronger together. Collectively, our Mobility, Benefits and Corporate Payments segments give us an exposure to large, growing and operationally complex markets where we believe our scale, payments intelligence and proprietary data provide us with a strong competitive advantage. We also benefit from cross-selling various products, and we can point to more than 200 discrete examples so far this year. Our businesses provide necessary balance supporting financial resilience through different macroeconomic cycles. Importantly, they all share a common backbone, including WEX Bank, a global compliance function, risk and regulatory management, intelligent spend controls, our technology infrastructure and advanced fraud prevention, which creates operating leverage, lowers unit costs and accelerates innovation across segments. We believe each of our segments will contribute meaningfully to our growth and profitability over the long term and that our unified platform will maximize shareholder value. We are also always open to considering alternative approaches to strategy and business configuration that advance this goal, and we'll continue to evaluate opportunities to refine the portfolio. With that, I'd like to outline our 4 foundational competencies that enable us to execute against our strategic pillars and are the engine behind our competitive advantage. They extend across our portfolio, are difficult to replicate and power our customer value proposition. The first core competency is payment intelligence. We integrate payments, proprietary data and banking services to deliver actionable insights that help customers make faster, better informed decisions. This is not easy to do, but WEX excels at managing complexity. For example, in Mobility, the insights we provide enable real-time fleet management, helping customers control spend, optimize routing and improve efficiency across millions of daily transactions. Our second core competency is workflow optimization. WEX has a long history of combining payments and workflow to create differentiated customer value. For example, in Benefits, we offer a complete platform that integrates payments into the broader workflows that employers and employees rely on daily. This is a key differentiator, deepening our role within customers' operations. Our third core competency is scale and infrastructure. We leverage our global scale, proprietary technology and risk and compliance expertise to reduce friction, offer enhanced control and deliver measurable efficiency gains. For example, in Corporate Payments, our global infrastructure enables us to process high volumes of virtual card transactions securely and seamlessly across markets delivering reliability, speed and compliance that sets the industry standard. Finally, our fourth core competency is industry expertise. We have established ourselves as experts within the markets we serve, and we apply our deep industry expertise to our customers' toughest challenges, developing customized solutions that address their needs. With that, I'll shift gears and review our Q3 segment results, beginning with Mobility. Mobility remains our largest segment, representing roughly half of revenue. Its competitive strengths come from our closed-loop network, which directly connects fuel buyers and sellers and from our scale, which allows us to serve the largest and most complex organizations. This is demonstrated by our BP win last quarter. Our data-rich solutions are deeply embedded in our customers' daily operations, delivering functional value and creating long-term stickiness. Our global fraud, credit and compliance capabilities underpin our offerings, benefiting businesses ranging from local contractors to major oil companies. Excluding the benefit from higher fuel prices, Q3 results for the Mobility segment were in line with our expectations. Transaction levels were down slightly from the prior year, consistent with the overall market trends. We continue to operate in a challenging macroeconomic environment with same-store sales in the over-the-road market softening during Q3, while North American mobility same-store sales mirrored trends seen earlier this year. Amid the dynamic macro, we're focused on maintaining our high retention rates and gaining market share while operating efficiently. One market where we see opportunity to expand share is small businesses, which we define as fleets with 25 or fewer vehicles. These businesses have historically relied on general-purpose credit cards, but by using our fuel card, they can save on fuel costs, access discounts, manage fraud and better control their expenses. Small businesses have been a core customer segment since WEX's founding, and we believe this segment of the market has tremendous value potential. Year-to-date, our targeted marketing investments here have resulted in a 12% year-over-year increase in new small business customers. At the same time, we're building on our differentiated offerings to extend our reach and bring in new opportunities, including the BP win we announced last quarter. The conversion of the existing BP portfolio continues to be on track for sometime next year with sales to new customers beginning at the end of this year. We're also broadening our opportunity set in Mobility through innovation. An example of this is the 10-4 by WEX app, which is designed to help small trucking businesses, a large but underserved part of the market. This year, those customers have saved more than $300 per month in fuel costs on average by using our app. We're excited to expand our technological reach through our new partnership with Trucker Path, a leading mobile app used by more than 1 million professional truck drivers, which we announced earlier this week. We're also excited about the trajectory of Payzer acquired in November 2023 in which we recently rebranded as WEX Field Service Management or WEX FSM. Although it took longer than we planned to establish momentum, revenue grew a healthy double digits in Q3, and we remain energized by this opportunity as we deepen our position in this attractive adjacent market. Overall, Mobility continues to generate strong free cash flow and will remain a consistent growth engine for WEX as we drive expanded and new value-added product and service offerings to customers. Turning now to Benefits, which simplifies the complex world of employee benefits administration. For the past decade, the business has grown consistently, now representing approximately 30% of company revenue. Its products and services are deeply embedded in our customers' administration processes, creating strong customer retention and predictable SaaS and custodial revenue streams. Overall, SaaS account growth was 6% in the quarter with HSA accounts on our platform up 7% in Q3, bringing us to more than 8.8 million HSA accounts. This represents more than 20% of all HSA accounts in the country. We're currently in our open enrollment sales cycle and the pipeline remains strong. According to the 2025 Devenir midyear report, WEX retained its position as the fifth largest HSA custodian in the market. Notably, we serve as a technology partner to 7 of the top 10 custodians listed in the report. Over the long term, we will continue to drive volume by elevating awareness of HSAs across the industry, including through leadership and national HSA awareness programs. We remain well positioned for continued growth in the evolving HSA landscape, which offers an expanding TAM. As we discussed last quarter, we see an opportunity in 2026 with new legislation, which will expand HSA eligibility across public health exchanges for the first time in more than a decade. We estimate this could expand the TAM by 3 million to 4 million new accounts and believe we are well positioned to benefit given our unique partner-focused distribution approach. Our strategy and benefits is to continue to outpace market growth by delivering a compelling product portfolio. WEX Bank provides a distinct advantage here, allowing us to generate higher yields on custodial balances, which supports targeted investments in customer relationships and new business opportunities. Finally, let me discuss Corporate Payments, which represents approximately 20% of our revenue and includes 2 major offerings, embedded payments and direct accounts payable solutions. Embedded payments offers high operating leverage with incremental volumes largely falling to the bottom line due to our scalable technology platform and global compliance infrastructure. We're seeing broad-based adoption across industries, including tech companies offering AP automation, health care payments and expense management. Our direct AP solution, which leverages our corporate payments platform is focused on the underserved mid-market and continues to deliver outsized growth with Q3 volumes up more than 20% year-over-year. Customers in industries such as construction, retail, manufacturing and health care choose WEX for our in-house supplier enablement capabilities, which allows us to deliver virtual card adoption with detailed reconciliation data. As we anticipated, Corporate Payments returned to revenue growth in Q3 as underlying market performance has improved, and we have largely lapped the large OTA transition. Our enhanced platform and disciplined investments in sales are resonating in the market, driving a robust pipeline of new customer opportunities. We're now focused on converting that pipeline into spend volume, which will support sustained growth into 2026 and beyond. From a strategic perspective, we're building on our leadership in embedded payments, which is anchored by our travel customers and driven by our industry-leading virtual card issuing engine and expanding into new use cases and markets. At the same time, we're scaling direct AP as a central part of our investment plan, tapping into a large expanding addressable market where we're still in the early innings. Before I hand the call over to Jagtar, yesterday, we announced the appointment of Dave Foss to our Board of Directors effective November 3. This is the result of an extensive search process with the assistance of a leading independent recruiting firm. Dave serves as President of Jack Henry from 2014 to 2022 and Chief Executive Officer from 2016 until his retirement from the role in 2024. In addition, he's a Director at CNO Financial, where he chairs the Governance and Nominating Committee, his experience across financial services and technology, coupled with his tenure as a public company executive and Board Director, will be invaluable as we enter our next phase of profitable growth. We're confident that the expertise and fresh perspective that Dave brings will yield immediate contributions to our Board and company. On behalf of WEX, I want to extend a warm welcome to Dave. Across the business, our teams are executing with discipline, extending our competitive advantages and converting our targeted investments into tangible results. Q3 marked a turning point with acceleration in revenue growth, and we are confident in the opportunities ahead. Our focus remains on delivering sustainable growth, strong margins, attractive returns and robust free cash flow while creating long-term value. With that, I'll turn it over to Jagtar to walk you through our financial performance and updated outlook in more detail. Jagtar? Jagtar Narula: Thank you, Melissa, and good morning, everyone. As a reminder, in an effort to provide greater transparency into our business and segments, we began publishing a supplemental materials deck this year, which can be accessed on the IR section of our website. Also, comparisons are year-over-year unless otherwise noted. Total revenue in the quarter was $691.8 million, up 3.9% -- the impact of foreign exchange rates and fuel prices decreased revenue growth by 0.5%. Revenue was above the top end of the guidance range we provided last quarter. Adjusted earnings per share was $4.59, an increase of 5.5%, partially offset by a decrease of 1.6% related to lower fuel prices and foreign exchange rates. Adjusted EPS was also above the high end of the guidance range we provided in July. Although fuel prices were lower than last year, they were higher than our guidance assumed, contributing most of the outperformance in addition to some underlying expense benefits. In our Mobility segment, revenue increased 1% despite a drag of 1.4% related to lower fuel prices and foreign exchange rates. Our payment processing rate was 1.33%, an increase of 2 basis points sequentially. The sequential increase in the net interchange rate is due primarily to merchant pricing and mix. In our Benefits segment, total revenue was $198.1 million, which rose 9.2%. SaaS account growth of 6% was consistent with the performance in the first half of this year, contributing the majority of the revenue growth. Custodial investment revenue, which represents the interest we earned on custodial cash balances increased 14.9% to $61.7 million. Earned interest yield increased 15 basis points year-over-year. The Benefits segment continues to capitalize on both the scale we have built and the value derived from our investment portfolio at WEX Bank, which allows us to deliver industry-leading returns on our HSA assets. Finally, in Corporate Payments, revenue of $132.8 million increased 4.7%. Purchase volume in Corporate Payments declined 0.9% on a year-over-year basis, a notable sequential improvement. The decline in volume was more than offset by an increase in the net interchange rate leading to the revenue growth. We have largely lapped the headwind created by the large OTA customer transitioning to a new operating model with us and we will fully lap this impact in Q4. In addition, there was a substantial volume decrease for our legacy non-travel embedded payments customer where we are now earning contractual minimums. Despite the recent volume pressures, the scale of our Corporate Payments segment continues to support a strong margin profile for the business. With that, let me transition to the balance sheet. Our business operates at attractive margins as a result of the scale and competitive advantages that Melissa talked about earlier. WEX is a business that generates strong recurring revenue, which in turn produces reliable free cash flow. This is a strength in all periods, but especially in periods of economic uncertainty and gives us significant capital deployment optionality. In deploying capital, our approach is guided by 2 core principles. First, we are committed to maintaining a strong balance sheet and ensuring we have the right resources to operate effectively under both normal and stressed conditions, which we do by maintaining appropriate leverage. We ended Q3 with a leverage ratio of 3.25x, down from 3.5x at the end of Q1 and within our long-term range of 2.5x to 3.5x. We have historically reduced leverage by about 0.5 turn per year, and we'll continue to focus on debt reduction. Following that, our priority is to strategically invest in our core businesses by targeting investments where we can fortify our competitive positioning, deliver attractive returns and capture growth. After addressing these 2 core priorities, we evaluate deploying our remaining capital towards accretive M&A opportunities, which must meet strict financial and strategic criteria or returning capital to shareholders through share repurchases. Every step of our disciplined capital allocation process is grounded by a clear objective to maximize long-term shareholder value. Now let's move to earnings guidance for the fourth quarter and the full year. In Q4, we expect to generate revenue in the range of $646 million to $666 million. We expect adjusted net income EPS to be between $3.76 and $3.96 per diluted share. For the full year, we expect to report revenue in the range of $2.63 billion to $2.65 billion. We expect adjusted net income EPS to be between $15.76 and $15.96 per diluted share. Compared to the midpoint of the previous ranges, these represent increases of $19 million in revenue and $0.29 in EPS. The increase represents the outperformance in Q3, a continuation of the positive revenue trends and expense savings we have seen over the past 2 quarters and a higher fuel price assumption. Before I conclude my prepared remarks, let me take a moment to share my perspective on the business today. Despite a challenging macro environment, especially in our Mobility segment, combined with the short-term customer transition headwinds in Corporate Payments, our business continues to demonstrate resiliency and we are seeing sequential improvements. This momentum has helped offset headwinds from ongoing softness in certain markets, specifically trucking. As we approach 2026, we remain cognizant of the macro uncertainty, but are encouraged by the building blocks we've established this year. In Corporate Payments, we're excited to move past the customer headwind. In Mobility, where we currently expect the sluggish trends to persist in the near term, we believe our targeted sales and marketing efforts, including the recent BP win, will contribute to improved results in 2026 and beyond. Finally, we continue to win new business and benefits and enter the open enrollment period from a position of strength. While it is too early to forecast account growth for 2026, we expect payment processing revenue and interest income, excluding changes in the rate environment, to again outpace account growth as they have historically. Through strategically investing to amplify our core and expand our reach, we are well positioned to continue to drive growth and further benefit from the eventual turn in the macro environment. In closing, our third quarter results underscore the strength of our diversified model and the discipline of our execution. We remain focused on executing our strategy to deliver results that drive sustainable long-term shareholder value. With that, operator, please open the line for questions. Operator: [Operator Instructions] Your first question comes from the line of Sanjay Sakhrani with KBW. Sanjay Sakhrani: Melissa, I appreciate all the commentary at the beginning about the review that you guys did. And I can't say I disagree that the businesses work well together. I'm just curious sort of what the conclusion was with the stock and sort of how to get investors to sort of appreciate how all of those factors come together. Was that part of the analysis? Melissa Smith: Yes. Thanks for the question. Yes, we talked for the fact that the Board has gone through a strategic review annually. This year, we went even deeper, and we brought in 2 independent investment banks. I talked about that in the call, but both Bank of America and JPMorgan. Part of that work was to really dig in and look at each of our segments and understand the businesses with their view from an independence perspective. I think that the Board conducted this really thoughtfully with discipline, with objectivity. And say, well, look through that, it really the focus came out of continuing to deliver and execute against our strategic plan. We talked about the pillars that we have in our plan, and we're now beyond this period of time where we're lapping the OTA transition, which has had a pretty heavy impact on the stock. So we're excited about how we are growing the business, how we're coming out of the third quarter and how that positions us in the future. And that was really the counsel that we had from the investment banks as well. Sanjay Sakhrani: Got it. Okay. Great. And then just a follow-up question on Mobility. I think, Melissa, you mentioned over-the-road saw some softening during Q3. Could you just talk a little bit about that and sort of how that sets up relative to your expectations? Because I do think you guys were talking a little bit about a pull forward, but is the deterioration a little bit more than expected? And then just another one on the financing fee rates that kind of went up. Was there a price in there or something else? Melissa Smith: I'll take the first. So just from a macro perspective in our Mobility business, I'll talk about both the impact to over-the-road and in the rest of the business. And the over-the-road business, which is, as you know, 30% of the business, we saw a pull forward related to the tariffs at the beginning of the year and then some softening in the second and the third quarter. When I say it got worse, it got about 0.5 point worse in the third quarter, so not significant. But what we are seeing within that part of the marketplace, it's been in a rolling recession for a number of the years. Our sales teams have done an amazing job of selling through that, and we continue to do that this year. We're focused on sales. We're focused on retention and think of this as a transient issue that will work its way through eventually. And then with the rest of the business, what we have seen, we believe, relates to the uncertainty that's happened, and it's related to the tariffs where we've seen about negative 4% same-store sales within our local business. That's been pretty consistent in the course of the year. It got maybe a pitch worse in the course of the year. But I would say it's been a bit of a slog. I think to actually use that word, getting through this year. And again, we've done a really strong job of selling through that. We've talked about the incremental investments we've made in marketing. We've got 10% more new accounts that have come through that small business channel this year, which is directly related to those investments. And we are really focused on new customer retention. And again, expect this to be transient. We don't know exactly when it's going to turn. But in our history, we go through these periods of time, and as long as we focus on retaining the customer and building the portfolio, then that works its way through eventually. And then on top of that, we know next year, we've got the conversion of BP that's happening at some point in the year, and that will add between 0.5 to 1 point in revenue in the 12 months after that. So we have a lot of things that we're working on where we feel like we're pulling levers of things that we can affect waiting for the macro to evolve. Jagtar Narula: And then Sanjay, on your question regarding the financing fee rates. So rates this quarter were pretty comparable to what we've been seeing in the last couple of quarters. It's a big bump when you look at it year-over-year. And there's a couple of reasons for that. So one, we did make some pricing changes last year that went into this year. So that was part of the bump in the rate. And also, I'd remind you that this quarter last year, you'll recall that there was kind of a onetime event that brought down the financing fee number and the rate as a result. So when you look at the year-over-year compare, that looks a little odd. But if you look over the last couple of quarters sequentially, you'll see that we're kind of in line with where we've been. Operator: Your next question comes from the line of Darrin Peller with Wolfe Research. Darrin Peller: Can we touch a little more on the trends in Corporate Payments for a minute, just given -- I know we're now kind of lapping, as you said, some of the headwinds we've been dealing with, which is great to see. But in terms of the overall underlying drivers, anything you're seeing that surprised you in either direction around volumes across travel or B2B? And maybe we could just stand by and reiterate again what you see that business doing and performing really over the next 18 months when we think about the opportunity there because it does look like it's someone that should truly reaccelerate as we exit the year again. Melissa Smith: Yes. Thank you for the question. So if you look at our core payments business, we're excited about hitting this inflection point. It was important to us to return that segment of the business to growth. We've largely lapped the OTA business model transition in the third quarter. So we've largely got that behind us. On top of that, we're seeing really good momentum. A couple of places that we have made investments are extending the product capability across embedded payments. So extending the capability of what we're doing in travel and applying it to other industries, that has gone really well in the marketplace. We're selling -- we're onboarding. It's a slower onboarding cycle. And so it's good and bad because it gives us visibility into next year, but it takes a little bit of time to move those customers on to our portfolio. But we feel really good about how the products are resonating in the marketplace, how they're selling, the customer signings and how they're onboarding. And also in our AP direct product offering, we talked about the fact we had ramped our salespeople there. That has been just a beautiful model where as we've added people, we've actually seen strong production and more than 20% volume growth in this last quarter. So those 2 things give us a lot of confidence as we think about the growth trajectory going forward. About half the business is travel. So we know that could be some of the growth over time. We should be able to grow through that because travel has become a smaller part of the model. But as we think about that segment, we've talked about our long-term range of 5% to 10%, and we're feeling really good about where we are right now. Darrin Peller: Okay. That's helpful. Maybe just my quick follow-up would be on -- when I think about the Benefit side and the OBBBA and whether that can accelerate benefits in '26, maybe just help us understand your thought process around potentially trying to gain some of those 3 million to 4 million incremental HSA accounts we might see. Melissa Smith: Yes. We think of it as a really nice long-term tailwind. These are customers or potential customers that are largely getting access through the public exchanges with a little over 7 million people, which we think is about 3 million to 4 million accounts. We have access to those customers largely through our partner channel, which we think of it as a distinct advantage for us because we're going into the marketplace, not just directly, but through financial institutions and TPAs and people who are health insurance companies as well that sit in that portfolio. And so we believe that we will get our fair share of that. It's going to happen over time. We don't think it's all going to happen immediately. And the nice thing about this is there's nothing we have to do. The platform itself is ready. This is more education and onboarding. Operator: Your next question comes from the line of Mihir Bhatia with Bank of America. Mihir Bhatia: I wanted to start with maybe the Mobility segment and the trucking backdrop. Melissa, you mentioned it remains quite challenged. At the same time, you are investing in marketing and growing in that segment. So maybe just spend a few minutes just talking about the underwriting, how you're thinking about underwriting, how you're managing that underwriting? Are you tightening, reducing days to pay, things like that? Just trying to understand how you keep credit in check in that segment. And if you have any concerns about maybe bankruptcy rising same-store sales trends don't start improving? Melissa Smith: Yes. Thanks again. So if you go across that segment, 30% is over-the-road business, which you're largely talking about there. We actually had tightened credit standards a while ago. We've been in this rolling recession for quite some time. And over that period of time, we've spent a lot of time and investment around our risk models. We feel as we've seen the benefit of that work so that as we're making credit decisions, we're making them in an even more informed way. It's a lot of where we had our initial applications of AI within the company. So, so far, we've seen really good performance in our mobility business, even though we've seen that weakness that's happened over the last few years. The asset quality continues to look good as well. So we feel really comfortable about the fact that we're extending the right amount of credit to the right customers. And we've done more work around also introducing new payment options, particularly in our North America Mobility business that allows us to have access to customers on more of a prepaid basis, which is part of why we're seeing some success bringing on smaller businesses. So if you look across this, I would say I don't feel like we're -- that we're changing the credit quality. We're just being thoughtful about where we're adding new customers, and that's largely because of how we've refined our models. The investments that we've made have been in the North American Mobility business, which has a very strong LTV to CAC. We're seeing that come through right now. We've talked about the fact that over the 2 years following the investments, we earned back 4x what we spend in terms of revenue. And so far, that's holding through. Mihir Bhatia: Okay. And maybe just switching a little bit for a second to just fuel and interest rate sensitivity, Jagtar, maybe you can just comment a little bit on the -- remind us of the fuel price sensitivity of the business, both on the top and bottom line? And just how quickly does that come through? Does the -- you mean we talked about the financing pricing changes earlier in response to Sanjay's question. Does that impact that fuel price sensitivity? And also just the sensitivity of the business to interest rates as interest rates decline over the next year? Jagtar Narula: Yes. So on the fuel prices, I'd just remind you, we put a supplemental deck beginning of this year, and we update that sensitivity on a quarterly basis. So that's another area you can look for it. Roughly speaking, for fuel prices, that one hasn't changed since the beginning of this year. A $0.10 change per gallon in fuel prices on an annualized basis, up or down would be at $20 million of revenue up or down, and that would translate to about $0.35 of EPS. In terms of speed there, that would be a pretty quick flow-through to both revenue and EPS because that sort of directly affects interchange in finance fees that we earn. And that would flow through both the processing line as well as the finance fee line because our finance fees to some degree, are dependent on the size of the bill, which does fluctuate with fuel prices. On interest rates, that one has moved a little bit, but still within close to the range that we had talked about last quarter. So 100 basis point change in interest rates up or down would move revenue plus or minus $40 million with a $100 million increase increasing revenue $40 million, again, on an annualized basis and a 100 basis point decrease decreasing revenue $40 million on an annualized basis. The difference here is when you get to EPS, it actually flips because of the liabilities in our balance sheet. So $100 million increase in interest rates would decrease EPS by about $0.30 and minus 100 million basis -- 100 basis points on interest rate would actually increase EPS by $0.35. Operator: Your next question comes from the line of David Koning with Baird. David Koning: Nice job. A couple of questions on Mobility. One is, I know you had a tougher comp in Q3 '24 or basically a tough comp this quarter because Q3 '24, I think you had a couple of extra days and yet you still accelerated underlying growth. So I guess, a, are you seeing really pretty good underlying momentum in Mobility? And b, was your comment about better growth going forward, do you mean better organic growth in '26 than '25? Melissa Smith: I'll answer the second part. [ I'm sure ] you can take the first part of that, too. On the second part, yes, from an organic growth perspective next year, I'm going to put aside macro because -- and say we know that we're operating in a difficult macro environment, particularly in our Mobility business right now. And we also know that we are having a very strong sales year this year and overall retention rates look comparable to the prior year. And so all of those things are a positive as you think about rolling into your next year because you get the benefit typically of those sales or these are long-term investments that we're making, and it does take time for that to actually show up in our P&L. So we do think that, that's going to create some momentum as you go into next year. Jagtar Narula: Dave, I'll address your first question on the comp. So looking at '24 to '25, days fueling was actually pretty comparable. I know when we went back to '24, the '24 to '23 compare had some days, fueling days noise in it. This year, it's actually pretty comparable year-to-year. I'd also kind of remind you what I said, I think it was in response to Sanjay or Darrin's question around we had some onetime remediation last year, a onetime event that impacted the numbers a little bit. And that made it an easier compare this year that added roughly 1 point to 2 of growth WEX fuel. David Koning: Got you. Yes. That makes sense. And then I guess for my follow-up, you talked a lot about corporate revenues. Obviously, that's hitting a much easier comp. But on a sequential basis, historically, volume has been down sequentially as people don't travel quite as much in Q4, but yield has been up sequentially and revenues have been -- ended up flat sequentially in most historic Q4s. Are we back to that sort of cadence? Is that kind of how to think of it? Jagtar Narula: Yes. I think we're back to the cadence where volumes will be down because of travel. We will see interchange processing rates up. Part of that is mix and part of that is we typically have revenue recognition when we hit certain thresholds related to schemes with associations, and we'd expect that in the fourth quarter as well. I wouldn't say revenues are flat quarter-over-quarter sequentially. We do typically tend to see some decrease in the Corporate Payments segment from Q3 to Q4. David Koning: Okay, great. Well, nice job guys. Operator: Your next question comes from the line of James Faucette with Morgan Stanley. Michael Infante: It's Michael Infante on for James. I just wanted to ask about your perspective on the implications of Visa's new commercial enhanced data program and how you think about the interchange and data implications associated with that. Melissa Smith: So great question. As you know, that we actually use both schemes. So in our Mobility business, it's our own proprietary network. With our Mobility business where we've extended our scheme, it's been through Mastercard and then in Corporate Payments, and Benefits, there's a blend of both that are used. From a acceptance standpoint, we think of each of those schemes is there's something that's beneficial about each in the different markets and nuances that we use, and we'll continue to think about that going forward with any new product rollouts that are happening. Michael Infante: That's helpful. And maybe, Jagtar, just a quick housekeeping one for you on the Benefits SaaS ARPU side. It looks like the year-over-year trend there continues to improve. But how are you thinking about the exit rate for this year and the potential for that line item to inflect positively in '26? Jagtar Narula: Yes. I would say that ARPU -- so when you do the math, go to the supplemental schedule for modeling and make sure you're backing out interest that's showing up on the account servicing line to look at kind of ARPU. ARPU has been basically flat, I think, quarter-over-quarter. I would expect it to roughly remain the same. It will depended somewhat on mix and what we end up selling during selling season. But from a modeling standpoint, I wouldn't expect significant increases going into '26 at this point. Operator: Your next question comes from the line of Nate Svensson with Deutsche Bank. Christopher Svensson: Accelerated trading across the business is very encouraging to see. But I did want to ask again about the end health in the U.S. trucking sector maybe in a little different light. I wanted to know where we're at in terms of the overall capacity reduction across the sector and how you're maybe thinking about the potential impact of the removal of certain CDL holders, which I know has been a big piece of discussion in the media recently. Melissa Smith: Yes. Well, actually, when you think about what's happened in the over-the-road space, there has been -- there was a huge oversupply that came from the pandemic, and they've been working through that oversupply issue for the last several years. You can still see, if you look at some of the broader indexes like the cash rate and ATA Truck Tonnage, they're still showing year-over-year volume pressure. So to the extent that you're going to see some of the -- some of that supply continue to come out of the marketplace for that reason or honestly, other reasons, I think that the market still needs that to happen to get to more of a normalized rate. We haven't seen any dramatic shift in terms of volume or volume activity. As I said, we went down about 0.5 point in terms of same-store sales from Q2 to Q3. And I think everybody in this marketplace has been wanting this to change and it hoped it would. What happened from a tariff perspective, at least within our portfolio, put a little bit more pressure, not a lot more, but only about 9% of goods that are moved in the United States are coming from outside the United States, but we've seen some softness in quarters, particularly from Canada to the U.S. And so you've got a couple of things that are combined, I think this year. You've got the oversupply issue with some tariff noise added on top of that. So continued reduction in supply, I think, is a benefit to the space. Christopher Svensson: That's super helpful, Melissa. I appreciate it. I did want to follow up with maybe a 2-parter on Corporate Payments. So -- the first is, I know last quarter, we talked about a large public fintech company in embedded payments that you signed. Just wondering any update on the ramping there, any early learnings or takeaways from that relationship? And then the other question, just on the direct account volume, still strong at 20%, I think I saw, but it did decelerate a little bit from 25% last quarter. I know it's been a big focus area for your investments in your sales force. So just wondering if there's anything going on with macro or underlying trends that might explain the slowdown relative to the increased investments? Melissa Smith: Sure. So on both of those things, first, the new customer is onboarded. They're in the process of ramping right now. And so a large amount of that was already in the third quarter, but there's a little bit more as it continues to ramp through the end of the year, which we've assumed in our guidance. Relating to your second question was... Christopher Svensson: Direct... Melissa Smith: Direct. Yes, actually, the direct business did what we thought it was going to do in this quarter. As we have continued to add salespeople, it's been remarkably consistent with what we've seen for output from that sales organization. And so anything that's happening there is not related to sales activity. We are seeing a little bit of same-store sales softness within that base customers. It's just a few points. But I would say similar trends that we're seeing in some of the mobility customer base. There's just a little bit less spending year-over-year. Jagtar Narula: And then I would say that we look at cohort by cohort, how customers are ramping and how that volume goes and is it moving like expectations. So to Melissa's point, I think things are going as expected. And there might be some noise quarter-to-quarter, but we're not seeing any deceleration from expectations. Operator: Your next question comes from the line of Rayna Kumar with Oppenheimer. Rayna Kumar: Can you provide any color on expectations for adjusted operating margin for the rest of the year? And now assuming a stable macro, should we anticipate margins to expand next year? Jagtar Narula: Rayna, yes. So by the rest of the year, I mean I'm assuming you mean Q4. So what I'd say is if you look at kind of year-over-year, Q3 this year versus last year, operating margins were down, call it, on the order of 400 basis points. There was a couple of pieces for that. We had kind of a tough credit loss comp compared to last year because last year was a very good credit loss year. And then there's the sales and marketing and product investments that Melissa has talked about. The credit loss piece that compare was probably on the order of 200 basis points of the comp. So I would expect that to improve as we go into Q4. So Q4 is typically a lower operating income margin because of the drop in Corporate Payments in the travel business. But in terms of thinking about the year-over-year comparison, whereas this quarter was kind of a 400 basis point, that 200 basis point credit loss impact should go away. And then... Rayna Kumar: Yes. And sorry, on '26, if you can comment. Jagtar Narula: Yes. I mean it's a little too early for me to give a guide in '26. What I'd say is, as Melissa talked about, we feel good about revenue right now. We will have the lapping of some of the investments that we've made, kind of the full year impact of those. So at this point, I would say operating income next year, operating income margins will trend similarly to this year, but we're still budgeting. Operator: I will now turn the call back over to Melissa Smith for closing remarks. Melissa Smith: In closing, we're focused on delivering shareholder value. We're executing our strategy and taking actions to deliver accelerated and sustainable profitable growth in the markets we serve. Recognizing the dynamic and challenging macro environment, we've continued to manage expenses while investing strategically to capture future growth and efficiencies. We're encouraged by our Q3 results and look forward to driving momentum as we close out 2025 and turn the page to 2026. Thank you for your interest in WEX. Operator: Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.
Øyvind Paaske: Good afternoon, and welcome to the presentation of Akastor's third quarter results. My name is Oyvind Paaske, CFO, and I'm joined today by our CEO, Mr. Karl Erik Kjelstad. We are also pleased to have HMH with us from Houston, represented today by Eirik Bergsvik, CEO; and David Bratton, SVP Finance. As usual, Karl will begin with some key highlights, followed by Eirik and team, who will present the HMH update. I will then take you through Akastor's consolidated financials before handing it back to Karl. Toward the end, we'll open for questions through the web-based Q&A solution where you can post questions at any time. With that, I'll turn it over to Karl. Karl Kjelstad: Thank you, Oyvind, and good afternoon and good morning to our U.S. participants, and thank you so much for joining us for this earnings call. Let us start on Slide 2 with the key highlights for the third quarter. Akastor continued to be in a solid financial state. We have a positive net cash position and no draw on our corporate RCF. With this, we are very pleased to announce another cash distribution to our shareholders, this time, NOK 0.4 per share, supported by the realization of our holding in Odfjell Drilling. This is aligned with our strategy to return excess capital to shareholders while maintaining a sound capital structure. Turning to HMH. The company continues to deliver robust financial performance and demonstrate resilience even in a challenging offshore drilling market. Despite headwinds affecting service activity and spare part sales, HMH achieved adjusted EBITDA of USD 42 million, a solid quarter with a margin of 19%. Importantly, the company also delivered a strong cash flow, underscoring the quality of its operation and its ability to generate value also in a demanding environment. The value of our shareholding in HMH now represents 77% of our total net capital employed with a book value of NOK 3.4 billion at the end of this quarter -- of the third quarter or NOK 12.5 per Akastor share, somewhat higher than last quarter due to positive earnings in the period. Then AKOFS Offshore. AKOFS Santos vessel was formally awarded the 4-year MPSV contract in the quarter, expected to commence in January 2027, safeguarding long-term earnings for AKOFS. AKOFS' earnings for the quarter were impacted by the planned 45-day yard stay required to complete the 5-year classing of the AKOFS Seafarer vessel. Except for this scheduled yard stay, all vessels, including Seafarer, delivered strong operational performance. It's again worth noting that our current book value of AKOFS, where the value related to our equity holding in the third quarter was reduced in nil, reflects a conservative measure driven by historic cost and the company's negative earnings to date. This does not, in any way, fully capture the underlying asset value of AKOFS. We continue to see significant upside potential and remain focused on ensuring this value is increasingly recognized and understood. DDW Offshore, all vessels recorded 100% revenue utilization through the quarter, delivering an EBITDA of NOK 43 million. The book value of our investment in DDW Offshore stood at NOK 1.2 per Akastor share based on an average book value per vessel of $11 million. Finally, the third quarter, we completed the sale of our remaining shares in Odfjell Drilling in line with Akastor strategy of realizing assets to enable capital distribution to shareholders. This transaction generated proceeds of NOK 118 million in September bringing the total proceeds from the sale of Odfjell shares during 2025 to NOK 222 million. Slide 2. I would like to have a few more comments on the Odfjell investment. Back in 2018, we in Akastor made initial investment of USD 75 million in Odfjell Drilling through a preference shares and warrant agreement structure, supporting the acquisition of Stena MidMax that today is called Deepsea Nordkapp. In November 2022, we sold the preference shares back to Odfjell Drilling for $95 million, while we retained the warrants. In May 2024, we exercised these warrants and received just over 3 million ordinary shares and during the second and third quarter '25, we realized these shares generating, as mentioned, NOK 222 million. All in all, these investments have delivered a total return of about NOK 750 million, corresponding to 2.2x multiple or an IRR of about 19% in Norwegian kroner terms. Needless to say, we are pleased with the outcome of this investment and also a bit sad to sell the shares as we see -- as we have great belief in Odfjell Drilling going forward, but we are pleased to be have been able to yet another distribution to our shareholders following the realization. With that, I'm pleased to introduce HMH's CEO, Eirik Bergsvik, that will take us through HMH's third quarter results. So Eirik, the word is yours. Eirik Bergsvik: Thank you, Karl Erik. Good day, everyone, and thank you for joining us on the call. I'll begin by sharing a summary of our third quarter highlights and then provide some perspective on our current market conditions. After that, David will take us through the financials in greater detail. Starting with our results for the third quarter. We reported revenue of $217 million, which is up 3% year-on-year. Our EBITDA for the quarter came in at $42 million, representing a decrease of 8% compared to the same period last year, but up 16% versus prior quarter. This resulted in an EBITDA margin of 19.3%. Our performance this quarter on cash was strong. We generated $35 million in unlevered free cash flow this quarter, primarily driven by improvements in working capital management and the collection of project milestone payments. Order intake for the quarter totaled $171 million, down versus last year as expected as offshore activity works through the current white space. I want to take a moment to thank the global HMH team. Our team continues to work hard to advance our strategic initiatives focused on strengthening margins and driving operational efficiency. This is positioning us well for the continued growth in the future. Now turning to current market conditions. We are seeing continued signs of stabilization and improvement in broader contracting and utilization trends with deepwater offshore markets, benefiting both our customers and HMH. Speaking with our customers, despite the pipeline for early 2026 jobs still being limited, they are seeing significant opportunities for contract activity in mid-2026 and early 2027. Provided oil prices remain reasonably stable, our customers are anticipating a gradual move toward a tighter market with improved backlog as we approach the inflection point sometime in 2026. With that, I'll hand it over to David to walk through the financials in more detail. David Bratton: Thanks, Eirik. I'll begin with the total company results and then move into the segment details. Revenue for the quarter was $217 million, up 3% year-on-year and up 7% quarter-on-quarter, primarily due to aftermarket services, partly offset by a decrease in projects and products. Adjusted EBITDA in the quarter was $42 million, down 8% year-on-year, primarily due to spares and product volume, partly offset by an increase in contract services and increased 16% quarter-on-quarter, driven by contract services and a rebound in spares from prior quarter, partially offset by a decrease in projects. The adjusted EBITDA rate was 19.3% in the quarter. Orders for the quarter were $171 million, down 12% year-on-year and down 1% quarter-on-quarter, driven by a reduction in projects and spare parts due to the continued white space in the offshore market. This was partially offset by an increase in service orders. Finally, on cash flow, unlevered free cash flow in the quarter was positive $35 million in the quarter, driven by project milestone collections and strong working capital management. We ended the quarter with $57 million in cash and cash equivalents on hand. Next, I'll walk you through the product line results in more detail. In aftermarket services, revenue was $105 million in the quarter, up 26% year-on-year and up 14% quarter-on-quarter, driven by contract services. Aftermarket service order intake was $99 million in the quarter, up 42% year-on-year, mainly driven by contract services, partially offset by lower field service and repair activity. Quarter-on-quarter order intake increased 25%, supported by digital technology orders and contract services with some offset from field service and repair activity. Spares revenue was $58 million in the quarter, down 6% year-on-year, driven by softer global offshore activity, but up 12% quarter-on-quarter due to higher output of our topside spares volume compared with the prior quarter. Spares order intake was $56 million, down 18% year-on-year and down 13% quarter-on-quarter, driven again by the lower offshore spares order volume partially offset by an increase in international land spares activity. In Projects, Product and Other, revenue in the quarter was $54 million, down 16% year-on-year, driven by lower product volume and down 8% quarter-on-quarter, driven by a decrease in projects, partially offset by increased product volume. Lastly, moving to net interest-bearing debt. We ended the quarter with $57 million in cash and cash equivalents and a net debt of $144 million. Overall, as Erik said, we're proud of the team's performance this quarter and continue to advance strategic initiatives to strengthen our margins and improve operational efficiency. And with that, I'll turn the call back over to the team in Oslo. Øyvind Paaske: Thank you, David. I will then take you through the Akastor's financials, starting on this Slide 10 with our net capital employed. The carrying value of HMH, where Akastor's net capital employed corresponds then to 50% of the book equity value in the company increased by NOK 54 million compared to Q2, driven by positive net profit in the period. The net capital employed related to NES remained stable, while [ DDW ] declined somewhat in the period, driven by lower net working capital, which was turned to cash in the period. The net capital employed of AKOFS was reduced to 0 in Q3, as Karl mentioned, down from NOK 79 million in Q2, reflecting our share of the net loss for the third quarter. As Karl noted, continued losses have gradually reduced our book value, which by the end of Q3 then stood at 0. This means we now carry no value of our equity holding in AKOFS in our books. Again, we emphasize that this outcome is driven by accounting principles based on our historical cost and does not reflect the underlying asset values. We do carry the shareholder loans provided to AKOFS Offshore totaling NOK 418 million at the end of the period. These loans are included in our reported net interest-bearing debt. The value of our listed holdings, which per end of Q3 included ABL and Maha Capital decreased by a total of NOK 134 million in the period related then to the sale of Odfjell Drilling, partly mitigated by increased share price in Maha. The negative value of other, which includes smaller financial investments, pension accruals and other provisions was reduced by NOK 20 million in the quarter, and the balance here mainly relates to pension obligations. In total, our net capital employed decreased by NOK 209 million in Q3, primarily driven by the sale of Odfjell as well as the net losses in AKOFS Offshore. Then over to our net cash position and an overview of development in the period. In Q3, our total net cash increased by NOK 134 million, reaching NOK 279 million at the end of the period. This improvement was primarily driven by the divestment of Odfjell Drilling shares and positive operational cash flow in DDW, partly offset by the dividend of NOK 0.35 per share, which we paid out in July. The Q3 net cash position includes a net debt position of NOK 169 million in DDW Offshore, improved from NOK 228 million last quarter due to positive cash flow during the period. Total net interest-bearing debt at quarter end stood at a net cash position of NOK 970 million, which includes interest-bearing positions towards AKOFS Offshore and HMH as well as the remaining seller credit to Mitsui of NOK 39 million, which are to be settled in Q4. Looking ahead, the cash balance in Q4 will be impacted by the seller credit payment as well as the approved dividend payment totaling about NOK 110 million scheduled for payment in November. Our external financing facilities remained largely unchanged from last quarter, except for a cancellation of an undrawn NOK 70 million share financing facility following the divestment of Odfjell Drilling. The DDW term loan was reduced to approximately $24 million after scheduled installment during the period. We are in discussion to refinance this term loan and expect completion of this in Q4. Our corporate RCF remained fully available and undrawn at the end of Q3, and we have agreed with our banks to extend this facility to June 2027 with only final documentations remaining. At quarter end, total available liquidity was NOK 816 million, including NOK 69 million of cash held through DDW. That then includes the undrawn RCF with NOK 300 million. Then our consolidated P&L. As a reminder, most of our holdings are not consolidated in our group financials. Therefore, the consolidated revenue and EBITDA represent a small portion of our total investments. DDW Offshore delivered revenues of NOK 128 million for the quarter with all vessels on contract throughout the period. EBITDA was NOK 43 million, up year-on-year and quarter-on-quarter, driven by higher fleet utilization. EBITDA was, however, impacted by some FX effects and certain nonrecurring vessel costs. Other revenues were NOK 2 million, while other EBITDA was negative NOK 16 million. As a result, consolidated revenue and EBITDA for the quarter ended at NOK 130 million and NOK 27 million, respectively. Our net financials contributed positively by NOK 54 million, driven by value increases across most holding, including the Odfjell Drilling and Maha Capital. FX accounting effects were negative NOK 23 million, reflecting a smaller weakening of the U.S. dollar versus the Norwegian kroner. Net interest and other financial income added NOK 4 million, bringing total net financial items to a positive NOK 38 million for the quarter. Share of net profit from equity accounted investments was neutral overall with AKOFS contributing negatively by NOK 81 million, while HMH contributed positively by the same amount. And with that, I'll pass the word back to Karl for the last section. Karl Kjelstad: Thanks, Oyvind. Let me round off this presentation with some ownership agenda reflections. Firstly, on Slide 16, our investment portfolio was in the quarter reduced from 9 investments to 8 following the mentioned exit from Odfjell Drilling. Let us then move to Slide 17, covering HMH, been already covered by Eirik to some extent, but let me anyhow add some few reflections as HMH owner. First of all, our ownership agenda for HMH remains firm. It is to expand the business through organic growth and also do value-adding acquisitions. It is to maintain a leading market position and also continue to target to make HMH investment liquid at some point in time. We remain somewhat cautious regarding the short-term outlook for the drilling market. That said, and also, as Eirik stated, we do see encouraging signs when looking further ahead. 2026, 2027 show signs of becoming a start of a new offshore rigs up cycle, driven by the deepwater offshore development. Regarding the listing process, there is no concrete news at this point, but HMH is steadily keeping its S-1 registration filing updated and is as such, continuing to prepare for a listing. Timing of possible public offering is subject to a variety of factors and difficult to comment at this time. Let us move to Slide 18 and covering NES Fircroft. NES Fircroft continues to deliver solid results with both revenue and EBITDA increasing by 5% compared to the third fiscal quarter of 2024, despite a continued somewhat challenging environment for recruitment. As mentioned earlier, the company is exit ready. And together with the main owner, AEA Investors, we have, for some time, been exploring several alternatives for an exit. There is nothing specific to report at this stage, and we will revert with an update when there is more clarity on this. In addition to our focus on making this investment liquid, a key priority is to continue growing the company, both organically and also through M&A to enhance value for all shareholders. Slide 19, covering AKOFS Offshore. As mentioned, all AKOFS vessels remain on contract through the quarter. Aker Wayfarer achieved a revenue utilization of 97%, while AKOFS Santos delivered 94% revenue utilization in the quarter. As noted last quarter, AKOFS Seafarer earnings was impacted by its scheduled 5-year class renewal survey, resulting in a 45 days off hire. We are pleased to see that the survey was completed in line with budget and on planned time, but it led to a revenue utilization of 49% for the period due to this. The total revenues for AKOFS [indiscernible] were USD 28 million with an EBITDA of USD 3 million. Looking ahead, Seafarer will transition to a new contract terms late in the fourth quarter. This will increase the running rate earnings. We were also pleased to see that AKOFS formally awarded the new 4-year MPSV contract with Petrobras commencing in January 2027. And this contract value, as previously disclosed, will further strengthen AKOFS' earnings and cash flow once it commenced. During the third quarter, we also reached an agreement with our co-owner MOL to restructure Santos financing, addressing historical, what I would call, misalignment from the shareholder loan structure and fully aligning ownership interest. As a part of this, Santos senior debt will be extended by 1 year to first quarter 2027 with commitments in place. Then DDW Offshore. All 3 vessels remain on contract in Australia throughout the third quarter, delivering 100% revenue utilization. EBITDA for the quarter was NOK 43 million, impacted by certain nonrecurring vessel costs. Scandi Emerald's contract with Petrofac ended in late October and the vessel has since demobilized to Singapore, where it's currently on a short-term contract before entering to the spot market ahead of its scheduled classing -- 5-year classing early next year. Looking ahead, our focus remains on maximizing fleet utilization, supported by solid contract backlog that provides operational and financial visibility. Our ultimate target is unchanged, and we continue to actively assess secondhand market opportunities for potential sale of all 3 vessels. Then finally, let's look at Slide 21 regarding some key priorities for Akastor going forward. Our strategy remains firm in place. Our core objective is to develop the companies in our portfolio and when timing and values are right to execute value-enhancing exits. With a strong net cash position and no drawn on corporate facilities, we are well positioned to maximize values when opportunities arise at the right time. Today, we are pleased to announce our second ever dividend of NOK 0.40 per share, marking another important milestone in our commitment to return value to our shareholders. So I believe that concludes the formal part of this presentation, and we will move over to a Q&A session and take a brief pause to allow you to submit questions. There are already some questions on the screen here. So Oyvind, can you please facilitate that session. Øyvind Paaske: Yes. Thank you, Karl. I guess we can go right to the questions. So first, a question for you, Karl. With the current liquidity position of Akastor, would you be able to pay a Q4 dividend from existing resources? Or do you attempt to maintain the policy of distributing proceeds from asset realizations only? I'll hand that over to you. Karl Kjelstad: Yes. Thank you. No, as I said, we are committed to distribute the value to shareholders, but the future distributions will be when we do transactions when we -- because we also want to maintain a solid financial state with flexibility to act in the most optimal way when it comes to realize our assets. Øyvind Paaske: Thank you. Then we have a few questions on the same topic. So I'll take one of them regarding HMH, so I'll pass that over to Eirik. So Eirik, this is a question from the audience. Do you see potential for increased revenues related to reactivations of some of the rigs that are now experiencing white space? And it's commented that you might have the BOP for a few of the Noble and Valaris rigs currently idle with contracts commencing in late 2026. So I'll pass that question to you, Eirik. Eirik Bergsvik: Yes, thanks. Well, limited what I can say about that. But if you look at what we've been hearing from our clients, from the drillers, what we've been seeing and have been presenting on the various events this autumn, it looks very clear that we could expect some reactivations because of utilization becoming as high as, I would say, never been before, according to what the driller says. So yes, we look positive on that -- those possibilities. And yes, that I think is what I can say about that right now. Øyvind Paaske: Thank you, Eirik. Then I guess lastly, there's also a few questions on the same topic, but I'll pass that to you, Karl, even though you commented on it briefly. But given the appetite for IPOs, do you see an opportunity to list NES Fircroft? And is the company ready for an IPO? Karl Kjelstad: The company is ready for an IPO. So that's, of course, an option to make the investment liquid or any other alternative is to do a trade sale of the company. So all options are on the table is what I can say. Øyvind Paaske: Thank you. And with that, I think we are actually through the questions. And we'll just then like to thank you all for your attention and welcome you back for our presentation of the fourth quarter results on February 12 next year. Thank you very much.