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Operator: Good morning, ladies and gentlemen, and welcome to the AltaGas Ltd. Third Quarter 2025 Results Conference Call. [Operator Instructions] I would now like to turn the conference call over to Aaron Swanson. Please go ahead. Aaron Swanson: Good morning, and thank you for joining AltaGas' Third Quarter 2025 Results Conference Call. This call is being webcast, and we encourage following along with the supporting slides that can be found on our website. Speakers this morning will be Vern Yu, President and Chief Executive Officer; and James Harbilas, Executive Vice President and Chief Financial Officer. We are also joined in the room by Randy Toone, President of Midstream; Blue Jenkins, President of Utilities; and Jon Morrison, Senior Vice President of Corporate Development and Investor Relations. We will refer to forward-looking information on today's call. This information is subject to certain risks and uncertainties as outlined in the forward-looking information disclosure on Slide 2 in the presentation. As usual, prepared remarks will be followed by a question-and-answer session. I will now turn the call over to Vern. Dai-Chung Yu: Thanks, Aaron. Good morning, and thanks for joining us. I'm pleased to discuss our strong Q3 results and the continued advancement of our key strategic priorities. Our performance in Q3 positions us well to deliver on our 2025 guidance. I'll start by highlighting the key developments from the quarter, which include 3 new growth projects, an update on our construction progress at REEF and Pipestone II, and I'll finish by touching on the macroeconomic trends that continue to provide tailwinds for our business. James will then walk you through the details of our Q3 financial results and provide an update on our guidance and outlook. Let's start on Page 4. Our third quarter results were anchored by strong operational performance in both Midstream and Utilities. We increased throughput in Midstream with record global export volumes and continued operating cost reductions in the Utilities. We derisked our portfolio by adding additional long-term tolling agreements, systematically hedged our residual commodity exposures and made regulatory filings in Virginia and D.C. to maximize our regulatory outcomes. Our balance sheet remains strong. Continued deleveraging has expanded our investment capacity, which allows us to increase our secured growth inventory. Pipestone II has now reached mechanical completion and all of the permanent piles have now been installed at REEF and major equipment like the LPG accumulators are scheduled to be delivered over the next couple of weeks. Our actions continue to be guided by disciplined capital allocation, where we fund the best risk-adjusted returning projects to create long-term shareholder value. As shown on Slide 5, we delivered a normalized EBITDA of $268 million, slightly below Q3 2024 due to the pension settlement recorded in 2024. Excluding that item, year-over-year normalized EBITDA grew by 18%. Q3's operational performance was excellent. We achieved record global export volumes in the quarter, over 133,000 barrels per day, with year-to-date volumes up 4%. This reflects strong demand for Canadian LPGs at our open access terminals and great operational performance by our teams. We also saw robust gathering and processing activity where throughput grew by 3%. Our North Pine frac plant recorded 13% year-over-year volume growth, achieving a processing record. We continue to be very active with our regulatory actions. In D.C., we advanced our rate case, while in Virginia, we filed for new rates. We also submitted amendments to extend our ARP programs in Virginia and D.C., which reinforces our commitment to make our systems safer and more reliable. Utilities also performed well, supported by $121 million in modernization spending and a 5% reduction in O&M costs at WGL. We are very excited to announce the FID of 3 new growth projects this morning. All of these projects are underpinned by extremely strong demand by customers for our services. REEF Optimization One, or Opti 1, will add up to 25,000 barrels a day of propane export capacity with a total capital cost of $110 million, $55 million net to AltaGas. The project is expected to be in service in the second half of 2027. As a quick reminder, Canada produces around 500,000 barrels a day of LPGs, where we use half of it domestically and the balance gets exported to the U.S. and Asia. The U.S. is already long LPGs, so Canada needs to increase Asian exports to maximize the value of our product. Opti 1 is the first in a series of optimizations and expansions at REEF that will unlock significant additional global market access for Canadian LPGs. We are also excited to move forward with our Phase 1 expansion of the Dimsdale gas storage facility. The 6 Bcf expansion is backed by 2 10-year firm service contracts with Tourmaline and Gunvor. The capital cost for the project is estimated to be about $65 million with a target in-service date of year-end 2026. The project will focus on facility debottlenecking to expand capacity and will also significantly reduce our operating costs. We also continue to advance a larger Dimsdale expansion, Phase 2, which will more than double storage capacity from 21 Bcf to upwards of 70 Bcf. In Michigan, we're moving ahead with the 30-mile Keweenaw connector pipeline following regulatory approval in Q2. Keweenaw is USD 135 million project that will come online in early 2027. It will enhance system reliability for 14,000 SEMCO customers. As highlighted on Slide 7, our secured growth project inventory continues to increase. We have many more opportunities in the project hopper, and we look forward to announcing additional FIDs as these projects are sufficiently derisked. We have approximately $5 billion of investment capacity over the next 3 years, of which $3.5 billion can be dedicated to growth initiatives, which all can be executed while we live within our financial guardrails. Successful execution of these growth projects in Utilities and Midstream allows us to grow the enterprise at an average of 5% to 7% per year over the long term. Let's move to project execution. Construction on REEF continues to be on time and on budget. 77% of the project's costs have either been incurred or committed with nearly 70% of the capital under fixed-price EPC contracts, significantly derisking the project's cost. Off-site manufactured equipment has started to arrive at Ridley Island, with the first of 3 LPG accumulators, along with the butane and propane bullets expected to arrive over the next couple of weeks. Fabrication in Asia is progressing to plan with the remaining 2 accumulators 95% complete. Steady construction is advancing, and we're now 60% complete. All of the permanent piles are in place. Five out of the 12 platforms are now ready for topside work, and we have begun installing the prefabricated pipeline [ thrusts ]. We've also made strong progress on the rail loop, on-site roads and the utilities corridor. Slide 9 highlights some of our recent construction progress. As shown on Slide 10, we're pleased to announce that Pipestone II has reached mechanical completion with commissioning underway, and we remain on track to be fully operational by late 2025. I want to congratulate the team on their strong project execution and safety performance. They worked over 420,000 project hours without serious injury, having up to 450 workers on-site at peak times with no quality regulatory environmental issues during construction. Moving to Slide 11. We want to highlight some of the key macro drivers that support our Midstream business. Canadian gas production is positioned to continue to grow and be led by strong economics in the Montney, and LNG demand pull over the long term. With 3 Canadian LNG projects now operational or under construction and another 3 at various stages of pre-FID, Canada is positioned to export upwards of 7 Bcf per day by 2030. This highlights why we've made considerable infrastructure investments in the Montney over the past decade. More than half of our G&P and fractionation assets are positioned in this region to service the growing demand for gas processing, liquids handling, fractionation and global export connectivity. As highlighted on Slide 12, the macroeconomic outlook for our Utilities is equally robust. U.S. energy demand continues to rise with all roads leading back to natural gas as the most scalable, reliable, affordable and environmentally-friendly energy solution. These fundamentals support our modernization investments, where we have long-term plans to replace vulnerable pipelines to enhance our system safety and reliability. These investments will allow us to deliver the most affordable and reliable energy to our customers for decades to come. As you see on the top of the chart, the delivered cost of electricity is more than 3x higher than natural gas across D.C., Maryland and Virginia and even higher in Michigan, but the delivered cost of electricity is over 5x greater than natural gas. Affordable, reliable energy is essential to economic growth in our franchise areas, and it's our responsibility to deliver it. It's becoming increasingly evident that we're operating in a period of growing energy in security, particularly in the PJM market, where concerns about power capacity shortfalls are accelerating. We are seeing a massive increase in the gas generation backlog across the U.S. And in PJM alone, the region has 16 gigawatts of gas-fired power generation backlog. To meet rising demand, U.S. electric utilities are increasing capital spending. 2025 spending is up 25% over 2024. Between 2025 and 2027, nearly $700 billion of capital is expected to be invested to support robust power demand and the need to replace aging electric infrastructure. This level of investment will likely put further upward pressure on electricity rates, further enhancing the affordability advantage of natural gas. AltaGas is well positioned to benefit from these macro tailwinds that support continued growth in our businesses. We will remain disciplined in how we operate and allocate capital to ensure that we deliver long-term value for all of our stakeholders. And with that, I'll turn it over to James. D. James Harbilas: Thanks, Vern, and good morning, everyone. We're pleased with our strong third quarter performance, continued operational execution across the platform and the progress we've made on our strategic priorities. I'll start with a detailed review of our financial results from each segment, provide an update on the Mountain Valley Pipeline, its growth projects and our monetization process, discuss our 2025 outlook and close with our value proposition. Let's start with the Midstream business on Slide 13. Segment delivered a solid quarter, supported by strong execution across our integrated value chain. Normalized EBITDA for the second quarter was $204 million, up 13% from $181 million in the same period last year. This performance was supported by record global export volumes, which increased 4% year-over-year and was accompanied by stronger realized margins. We exported over 133,000 barrels per day of LPGs across 23 VLGCs during the quarter. This included more than 77,000 barrels per day across 13 ships at RIPET and nearly 56,000 barrels per day across 10 ships from Ferndale, the equivalent of a vessel departing our docks every 4 days. These volumes approach the effective near-term operational capacity of our current export platform, which highlights the need to bring REEF online and our decision to move forward with the REEF Optimization One project. AltaGas' export business was largely protected from commodity price volatility during the quarter through our commercial tolling agreements and our active hedging program. Operating results across the balance of the Midstream business was strong and continue to benefit from the strategic locations of our assets, our long-term contracts and our strong customer base. The greatest strength was seen in our Northeastern BC Montney footprint, where North Pine volumes were up 13%, Blair Creek volumes were up 9% and Townsend volumes were up 6% year-over-year. This strength was partially offset by lower volumes at Younger, which is a nonoperated facility that experienced an extended unplanned outage during the third quarter. Volumes at Pipestone I in the Alberta Montney were also lower on a year-over-year basis in the third quarter due to a planned turnaround where the facility was offline for most of September. Since then, volumes have returned and the plant is operating near capacity. The value of our Dimsdale natural gas storage facility was demonstrated during the third quarter, where gas storage reached record levels and highlighted the critical need for increased storage capacity in Western Canada. This reiterated our decision to reach a positive FID on the first phase of expansion for Dimsdale. Dimsdale will be critical for balancing needs of the Montney and increased natural gas demand from LNG export facilities. We are pleased with the value and protection the asset will unlock for our customers in the years ahead. In terms of risk management, principally all of AltaGas' remaining 2025 global export volumes are either tolled or financially hedged with an average FEI to North America spread of approximately USD 17 per barrel on the non-toll volumes. We've also substantially hedged all of our 2025 Baltic freight exposure through a combination of time charters, financial instruments and tolling arrangements. Turning to Slide 14. The Mountain Valley Pipeline delivered another strong quarter, which reflected the pipeline's long-term contracts and robust demand to move Appalachian gas into key downstream markets. The 2 Bcf per day pipeline is operating near current capacity under 20-year contracts with strong customer demand for additional capacity. Following a highly oversubscribed open season, the partners have increased the size of the proposed MVP Boost expansion project by 20%. Boost is expected to increase overall MVP capacity by 600 million cubic feet per day with the mid-2028 in-service date. This is a year earlier than previously expected with the entire 600 million cubic feet per day of incremental capacity fully contracted by investment-grade utilities under 20-year take-or-pay agreements. USD 450 million project is targeting an approximate 3x CapEx-to-EBITDA build multiple. The proposed MVP Southgate project is also progressing under the more efficient project plan with FERC publishing its environmental assessment in October, including that Southgate will not cause significant negative impacts from its development as the project will adhere to certain mitigation measures and environmental safeguards. AltaGas continues to move through our sales process, inclusive of recent positive developments on the pipeline over the past months and expects to provide an update in the coming weeks. Let's turn to Utilities on Slide 15. Normalized EBITDA was $68 million in the third quarter of 2025 compared to $117 million in the same quarter last year. The year-over-year reduction was principally driven by the absence of the partial settlement of the Washington Gas' post-retirement benefit pension plan that was recognized in the third quarter of 2024. Excluding this impact, Utilities performance was strong as a result of higher revenue from modernization investments, a 5% reduction in operating and maintenance costs at WGL, and stronger performance from the retail business. The steps we took to reduce our cost structure in 2024 continue to drive productivity improvements that benefit all our stakeholders. By maintaining operating costs within approved rate structures, we preserve affordability for customers while creating financial headroom to invest in asset modernization, system reliability and safety enhancements, improving the reliability of our system and reducing leak rates, which benefits our customers over the long-term. We deployed $206 million of capital in Utilities during the quarter, including $121 million towards modernization programs and $33 million for new meter connections. For full year 2025, we expect to invest over $700 million in Utilities as we continue to make critical investments for the future. We remain active on the regulatory front with 2 active rate cases and modernization amendment applications in D.C. and Virginia. In July, we filed a $65 million rate case in Virginia, net of the SAVE surcharge with a requested 10.85% ROE. With a 120-day statutory time line, we expect interim refundable rates to be in effect by 2025 year-end. In early August, we filed an amendment to the Virginia SAVE modernization program, seeking to extend the program by 1 year and move forward with an amended 3-year plan. The proposed plan is to invest approximately $700 million in modernization capital between 2026 and 2028. Decision on the proposed amendment is expected by 2025 year-end. In D.C., we continue to advance the 2024 rate case filed last August and are expecting resolution by year-end 2025. While the PSC of D.C. continues to review the district SAFE application, we recently submitted an application to extend the existing PROJECTpipes 2 program through June 30, 2026, with the additional spending of USD 33 million, which ensures our modernization investments will continue uninterrupted while earning an immediate return on capital. We continue to progress data center business development initiatives with active opportunities in Virginia, Maryland and Michigan. FEED studies are underway for both primary and bridge power solutions with pipeline interconnect infrastructure. These projects are being pursued on a derisked basis through traditional rate-regulated investments with unique rate structures. In the Corporate and Other segment, we reported a normalized EBITDA loss of $4 million, consistent with the third quarter of 2024 as lower G&A costs were offset by lower contributions from Blythe. Turning to our 2025 outlook on Slide 16. We are reiterating our 2025 guidance. While we've seen a number of tailwinds and headwinds this year, they have largely balanced out. And coupled with our performance year-to-date, we are on track to deliver full year 2025 results in line with our guidance ranges for normalized EBITDA and EPS. There are no major changes to our 2025 capital budget, as shown on Slide 17. We expect to deploy $1.4 billion with 51% allocated to Utilities and 45% to Midstream as we complete Pipestone II while making material advancements on REEF. Majority of the Utilities capital will continue to support ARP modernization programs and system betterment, with the remainder targeting new business and customer connects. We continue to optimize our capital structure and drive costs out of the enterprise. In early September, AltaGas issued $200 million of 5.38% junior subordinated hybrid notes with proceeds used to redeem the Series A and Series B preferred shares. This issuance will result in cash savings of approximately $30 million over the initial 5-year term due to lower taxes and financing charges relative to the potential reset rate on the Series A and Series B preferred share dividends. In closing, we delivered a strong third quarter, reinforcing the value of our diversified infrastructure platform and our continued operational execution. As highlighted on Slide 18, we have a compelling investment proposition with low-risk infrastructure that provides stable and growing earnings and cash flows. We have strong organic growth across the platform. We have been disciplined allocators of capital over the past 6 years, and we'll continue to focus on that into the future. And with that, I will turn it back to the operator for the Q&A session. Operator: [Operator Instructions] Your first question is from Jeremy Tonet from JPMorgan. Elias Jossen: This is Eli on for Jeremy. I just wanted to start on the returns and build multiples across exports, frac, gas processing, storage, all the opportunities you have. It seems like there's a lot of optionality in the hopper, both sanctioned and ahead. So can you talk a little bit about the returns on those projects and then how you kind of stack rank the opportunity set? I think you said $3.5 billion worth of dry powder in the next couple of years. And maybe just provide a little more color on that. Dai-Chung Yu: It's Vern here. I think what we set out in our prepared remarks was that over the next 3 years, we have about $5 billion of total investment capacity. We'll use about $400 million a year for system betterment and then about $500 million a year on ARP programs. After that, we start funding our best risk-adjusted returning projects. And in the near-term, the series of Midstream projects that we have, as evidenced by REEF Opti 1 are very attractive projects for us where the build multiples are relatively low given the fact that the base REEF project prebuilds out a lot of the common infrastructure for further optimizations and expansions. And that's similar to how we've looked at the Dimsdale gas storage FID that we did this morning as well. So, again, it's lots of opportunities, both in Midstream and Utilities. Utility build multiples tend to be a little bit higher just because of the difficulty of doing construction and busy metropolitan centers. Elias Jossen: Got it. And then yes, maybe just on the kind of data center-driven power demand. I think you mentioned some pipeline infrastructure opportunities as well in the opening remarks. So, are these kind of more of those like bolt-on size projects? Or is there anything chunkier out there that would contribute more meaningfully to your system or rate base? Donald Jenkins: Yes. Eli, it's Blue. Thanks for the question. What we're seeing are smaller projects consistent with what we shared in the past, those are rate base items that are in that single-digit millions up to the $40 million range. So we connected one in Michigan recently that was about $10 million. We've got some other projects in the hopper that look to be in those type of ranges. So they're incremental single-digit up to $40 million that will roll into our rate base. Operator: And your next question is from Rob Hope from Scotiabank. Robert Hope: So good to see REEF Optimization One sanctioned. When -- and on the call, you did mention that there could be a series of further expansions, including Opti 2, which is 60,000 barrels. How should we think about the sequencing of these events or the key gating factors? Is this -- do you need additional customer commitments, additional engineering and work there? Or do you have to have construction largely done on the first phase just logistically to get Opti 2 off the ground? Dai-Chung Yu: I can start, and Randy can chip in if I miss something, but I think you've hit the nail on the head. We have to make progress on all 3 fronts before we are comfortable sanctioning Opti 2. Number one, I think, is critically, we haven't finished the detailed engineering and don't have a firm Class III cost estimate yet on Opti 2. We see very strong commercial interest for more tolling, but we would need to do a little bit more incrementally commercially to maintain our current 60% toll target for the aggregate global export business. And then finally, we want to make sure that anything we go ahead with on Opti 2 doesn't impact the in-service date of REEF itself and then Opti 1. So that's kind of how we're looking at it. So we'll have much more comfort around all that probably end of Q1, early Q2 next year. Robert Hope: All right. Appreciate that. And then just maybe over to Dimsdale. Can you confirm that you could move up to 70, I believe, is what you said? And then secondly, are you engaging customers already on that expansion? And could that be done in phases as well? Dai-Chung Yu: The actual number is around 69, and we are in active commercial discussions with a whole host of customers right now. Robert Hope: And can it be done in phases? Dai-Chung Yu: Yes. Operator: And your next question is from Sam Burwell from Jefferies. George Burwell: First off, on MVP, did the upsize of the Boost expansion have any impact on the timing of your sales process? I mean, it seems like the [ upgraded ] timing making the project [ more attractive for ] potential buyer. So I'm wondering if that [indiscernible]. Dai-Chung Yu: Sorry, Sam, can you repeat your question? You broke up. George Burwell: Sorry, can you hear me better now? Dai-Chung Yu: Yes. George Burwell: Okay. So just on MVP, did the upsize of the Boost expansion have any impact on your sales process timing? I'm just curious what the remaining gating items or hurdles are getting a deal finalized. D. James Harbilas: Yes. No, I mean, look, we've been pretty consistent about the fact that we're moving through that process, and we are in the very late final stages of our sales process. We have, though, said in the past that we want to get a fair value for MVP. And you touched on some recent developments in terms of the success that MVP Boost saw in its open season. Obviously, the increased throughput, they've been able to realize slightly better rates per dekatherm, too. So we would expect that valuation to be reflected in any transaction that we're looking to consummate on MVP, but we continue to work our way through that sales process. George Burwell: Okay. Great. That makes sense. And then on the REEF Optimization, what drove the decision to upsize that up to $25,000 a day? Is that a function of wanting to get the contracted tolling percentage to the right level or perhaps a function of more tolling agreements coming through? And then also, I'm just curious if you can quantify the build multiple on that. I know that you've said that the brownfield expansions are extremely attractive in the past. Dai-Chung Yu: Yes. I think we've seen tremendous interest in tolling from our customers. And there's -- obviously, we're right now moving as much LPG as we can to Asia, and that interest continues to grow. So the optimization was very well received commercially. So we're very happy to be able to bring that to market. I don't think we're going to comment specifically on the build multiple, but it's a very, very attractive project for us. Operator: And your next question is from Maurice Choy from RBC Capital Markets. Maurice Choy: I just wanted to start with the investment capacity. You mentioned $5 billion, of which $3.5 billion will go to growth while maintaining your leverage guardrails. My question is more of a philosophy discussion about how you see the timing of your growth opportunities versus the funding capacity that you have? Is it that there is a lot of growth opportunities, but your growth investments are limited to $3.5 billion because of your leverage guardrails and the capacity? Or put differently, there's so much projects that makes sense to go for in these years such that you actually have more balance sheet headroom to do more? Dai-Chung Yu: I think we're in a great position, Maurice, where we have growing investment capacity with the $5 billion represents an uptick over what we've had over the last couple of years. And really, that's on the back of the improvements in the balance sheet and the material growth we've seen in our cash flows. We see lots of opportunities in front of us, both on the Utility and Midstream side. So I think we're kind of in the right balance where we're seeing an uptick in investment capacity and the fact that we have lots of projects on the go and those projects now have to compete with each other to deliver the best risk-adjusted returns for us. D. James Harbilas: And I wouldn't mind just adding something to that, Maurice. Obviously, our investment capacity and Vern talked about it, it's increasing and it increases every year, right? I mean, if we look at the end of '25, we're going to have Pipestone II coming on, which is going to generate incremental EBITDA that will take our investment capacity higher into '26 and give us additional headroom to fund some of these projects that we just FID-ed. Obviously, the completion of the MVP process will increase our headroom within 2026. And the last thing I'll add is that, a lot of these opportunities that we have in the pipeline have different gestation periods. So as we start to build out the ones that we've FID-ed and REEF comes online and Opti 1 comes online, it just continues to expand the annual investment capacity that we can allocate to the development pipeline that we have in front of us. So there's a timing element to moving those projects. Maurice Choy: And maybe just a quick follow-up to that. Are you directionally seeing the risk-adjusted returns staying roughly the same? Or do you think that the competition for capital ultimately leads to some of these returns moving higher, be that because customer demand is changing because the landscape is changing? Dai-Chung Yu: I think generally, the utility risk-adjusted returns are staying fairly constant. I think we make progress on all of our capital at the utility as we manage our costs effectively and manage our rate filing process properly. I think it's fair to say in Midstream, the risk-adjusted -- the returns are higher. Obviously, there's a slightly different risk profile, but I think those returns are trending in the right direction, particularly on global exports because of the fact that we've prebuilt a bunch of common infrastructure in REEF Phase 1. So the optimizations and subsequent expansions will be at return better -- provide better returns than the initial investment. Maurice Choy: And if I could finish off my questions with a question on natural gas storage in general. Just wanted to see how you would characterize what is in equilibrium market in Western Canada for natural gas storage. Obviously, like you mentioned a lot of LNG coming on board. There's probably a lot of other demand for local gas usage as well. But you also have your expansion, let's say, through the 69 Bcf. There's another one in Aitken Creek as well. So just curious how you would characterize what is an equilibrium market. Dai-Chung Yu: I'll make a general comment and maybe Randy can follow-up. I think you've seen a material uptick in production happen in Western Canada as a whole with -- on the back of LNG and potentially even more natural gas production coming to support potential data center opportunities in Alberta. But we've seen natural gas storage remain fairly constant in Western Canada outside of our expansion and expansions at Aitken Creek. So I think the amount of aggregate storage available per molecule production has actually come down over the last several years. And given the nature of some of these larger facilities, if there are operational disruptions, you will need more storage going forward. So, is there anything you wanted to add to that, Randy? Randy Toone: Yes. I think where Dimsdale is located in the -- on the NGTL system, it's upstream of what we call the upstream of James River, and that's where a lot of the new production is coming on. So the changing in flows really helps support gas storage in that area. And also with LNG Canada, that demand, we see that as a big pull. And so, again, that's why natural gas storage is really in high demand in that area of the system. Operator: Your next question is from Robert Catellier from CIBC Capital Markets. Robert Catellier: Lots of interesting things on the business development side. I wanted to follow-up on the Dimsdale gas storage here. I wonder if you could just describe how you're approaching the optimization piece of gas storage. Maybe you could comment on how much of your [ working ] capacity is contracted versus available for optimization and how you plan to manage that? And then the second part of my question has to do with the implications of storage for the rest of your value chain. So I'm wondering if there's an opportunity to leverage the scarce capacity for integrated deals that include more than one service. Dai-Chung Yu: Yes. That's a great question, Rob. Storage is very valuable. And I think that's how -- that's why we chose to purchase Dimsdale with the Pipestone assets as we could offer an integrated service for our customers, and that will be something we'll progress as we look at Pipestone III and subsequent expansions of Dimsdale. I think on your first question is, from a high-level perspective, we've been on this path to increase the stability of our cash flows as we move forward. I think similar to what we were doing in global exports, we want to make our gas storage cash flows more stable over time. So this phase of expansion is basically 100% backstopped by firm service take-or-pay contracts. Our expectation is the next phase will be very similar. D. James Harbilas: The only thing I'll add is that, the storage that we bought, the working storage of 15 Bcf before these expansions, even that wasn't used by us for optimization. Most of that was parking loans where we were being paid on injection and withdrawal. So we weren't really exposed to the commodity price there. And as those roll off, we will be looking to contract them longer term for that additional or the initial 15 Bcf on the same basis that Vern touched the expansions would be contracted on. Robert Catellier: Right. So you're not going to have a lot of optimization exposure other than what you need for operational flexibility? D. James Harbilas: You bet. Robert Catellier: Yes. Okay. And then assuming you come to an agreement on MVP, which seems likely, what are your expectations in terms of timing for a closing date? It seems pretty straightforward, but there's a government shutdown. So I'm just wondering about the regulatory approvals. D. James Harbilas: Yes. Great question, Rob. So look, I mean, in terms of regulatory approvals, we believe that any buyer would just need a FERC approval. And our understanding is despite the government shutdowns, there is a smaller staff at the FERC that's still trying to move these type of applications forward. And the type of time line that we would be looking at is anywhere between 30 to 90 days for FERC approval. But that's the only approval that we anticipate needing to get the transaction closed. And obviously, any announcement, obviously, would be seen positively by the rating agencies even if a potential close slipped into the next calendar year. Robert Catellier: Okay. And then last question for Blue. I just wanted maybe a more detailed update on the ERP initiatives, particularly District SAFE in D.C. As you're trying to get an extension and then have this separate program approved. I just wonder what the tone is like with the -- in this process. Are we likely to see a shorter extension of District SAFE? Or will it -- is there an appetite in the regulatory body for a longer-term program? Donald Jenkins: Yes, Rob, good question. A couple of things I'll note. So we've been working that particular, as you recall, we filed Pipes III is where we started based on the time line. Commission asked us to refile Pipes III, which we did. They've granted us 2 extensions so far, and we filed for a third. There isn't anything in the conversation that leads us to believe that there's any apprehension to getting that process done. I think it's just a timing and a demand. They're also working diligently on our rate case, which we're hoping to have done by the end of the year. So I think it's a timing issue on the workload that they're trying to balance. I don't anticipate any particular challenge to that as we sit here today. In their communications, they've been pretty transparent some of this very publicly, of course, on it. So we're expecting -- we asked for a 3-year program under District SAFE. The extensions they've approved have been in line with the spend profile of Pipes II and District SAFE. So all of those data points lead us to believe it's just a timing and workload effort. So we remain positive that there's a good outcome coming our way. Operator: Your next question is from Ben Pham from BMO. Benjamin Pham: I'm just wondering beyond the assets you mentioned today with expansion opportunity, like is there other assets that you can point to that utilization is ramping up quite a bit that you would start to think about or consider sanctioning expansions? Dai-Chung Yu: Yes. I think our actions in Northeast BC have been very positive. I think we talked about how our Townsend facility is approaching -- has seen volume growth and then North Pine, which we recently, not too long ago, had done a brownfield expansion is also achieving record volumes. I think as you see more drilling in the BC part of the Montney, for sure, you're going to see the need for more incremental facilities from us. D. James Harbilas: Yes. And I would add to that, our Harmattan facility has a lot of activity. And I do think Harmattan is a consolidator around that area. So that potentially could lead to a small expansion at Harmattan. Benjamin Pham: Okay. It just sounds like from all your commentary today and all the announcements, there's a long list of midstream opportunities you're working at favorable returns. Does that suggest then that your capital allocation exhibit that even balance between the 2, that's a good picture of how it's going to look in the next couple of years? Dai-Chung Yu: Well, I think, Ben, the utility is going to get the majority of the capital just because the ongoing need there is very high. And there's -- as we've talked many times about a 20-year backlog of aging infrastructure that needs to get replaced with more modern infrastructure. We have, for sure, a very strong project hopper in midstream. The thing to remember is midstream projects tend to be smaller in size and take a couple of years generally to build out. So the amount of capital we actually spend in each individual year for midstream capital tends to be muted. Benjamin Pham: Okay. Got it. And then my last one on the Blythe power gas plant out in California, we've seen a couple of favorable recontracting outcomes years and years ahead of expiry. Is there opportunity for you, AltaGas then to look at crystallizing something similar to that? D. James Harbilas: I mean, look, from our standpoint, we're -- we just started a new contract that expires in 2027. I mean, we would always actively participate in those kind of discussions if they're constructive with the end users. But there's obviously still a need for thermal power in California and Blythe will continue to be a major contributor to meeting energy demand there. So if there's an opportunity for us, we would pursue extensions of the existing contract for sure. Benjamin Pham: Okay. So the base case then, James, is more a typical like 12, 18 months before. I only ask because we saw one that cut 2030 extension so four years ahead of time, which we haven't seen before. So it sounds like the base case is more the typical cycle. D. James Harbilas: Yes. Right now, our contract expires in '27. That is the base case. But like I said, those kind of discussions are always very fluid, especially with data center demand that's starting to emerge across the lower 48, right? So that could be something that initiates a discussion ahead of the time line that we've experienced historically from a renewal standpoint. Operator: [Operator Instructions] And your next question is from Patrick Kenny from National Bank Financial. Patrick Kenny: I guess just at a high level, I know you're still a month away or so from finalizing guidance for 2026. But just based on what you can see today, curious if you had any thoughts on a few of the headwinds and a few of the tailwinds that you expect will come into play or be sustained next year relative to this year? D. James Harbilas: Yes, Pat, it's James here. Yes, we're actually about 5 weeks away from getting our budget approved and rolling out 2026 guidance. We're obviously still working through trying to lock down where our CapEx is going to be. But in terms of what we're seeing as tailwinds right now is FX is a bit of a tailwind relative to last year. Obviously, we continue to see strength in volume exports at the global export platform, and we continue to see some strong rate base growth, and we expect to have new rates in place in 2 of our 3 jurisdictions -- sorry, 2 of our 4 jurisdictions within the utility footprint. So those are some of the tailwinds that we see as well. But very premature for us to actually to give you a range here, but we would expect a slight uptick in CapEx, just given some of the FIDs that we have here relative to where we were in 2024. But some of the headwinds and tailwinds are the things that I mentioned that we will incorporate into our guidance when we roll it out to the market. Patrick Kenny: Got it. And then, James, just on the leverage front, I know there's some noise in the trailing ratio. But as you look ahead to year-end, assuming you are able to close the MVP sale, are you still expecting to end the year with debt-to-EBITDA at or below the 4.65x? And then I guess, as you look to bring some additional midstream growth into that secured bucket, you mentioned the uptick in CapEx next year. But should we expect the incremental growth to be more back-end weighted within the 3-year funding plan? Or do you still have some dry powder through '26? D. James Harbilas: Yes. Let me try to address the second part of your question first, and then I'll come back to the debt target metric, right? I think some of the comments that we made a little earlier on the conference call about our investment capacity growing is what's going to give us the ability to fund some of these additional FIDs and maintain our leverage metrics, right? Pipestone II is coming online, and you touched on the other major catalyst or increase to our investment capacity, and that's the completion of the MVP process. So I do think, even though CapEx grows, our investment capacity will grow relative to 2025 to be able to fund it as a result of those 2 points. On the debt target, look, what we want to say is that, the 4.65x is still something that we feel we're going to achieve at year-end because of the completion of the MVP process. But we do want to remind people that the 4.65x, we're going to fluctuate a little bit around that because we do have a seasonal business if you're looking at it on a trailing 12-month basis, right? And I'll give you the perfect example of that seasonality. If you look at Q3, we were clearly an injection season within our natural gas utilities where we're putting gas into storage to be able to service customers in the winter, right? So that basically takes up some working capital, and that's what pushed us up above the 4.65x target at the end of Q3. And the other contributor was that we just had a higher FX rate relative to where the Q2 FX rate was. So those 2 would have us fluctuate a little bit because of seasonality, but we fully intend to get to that target by year-end once we complete the MVP process. Patrick Kenny: Okay. That's great color. And then just for Vern, maybe with the federal budget coming out next week, wondering if there's anything you'll be looking for on the regulatory front in terms of perhaps repealing certain policies or legislation that might help you to firm up some of the FIDs here for your other midstream growth projects? Dai-Chung Yu: Well, I think, Pat, over the next few years, we're in really good shape because all of our projects, we have the permits in hand to go ahead and build these things. I think longer term, what would be helpful for the industry as a whole would obviously be egress for both natural gas and crude oil. I think as everyone knows, drilling for natural gas in Western Canada is for LNG and then to provide liquids, condensate and LPGs that can be used either in the oil sands or elsewhere. So anything that helps production grow in the Western Canadian Sedimentary Basin will be beneficial for us as we have our strong position on maximizing netbacks for producers on the LPGs. Operator: There are no further questions at this time. Please proceed with the closing remarks. Aaron Swanson: Great. Thank you. Yes. So before we conclude the call, we did want to highlight the REEF construction video that was put on our website yesterday. The updated video is on our infrastructure landing page and provides some nice highlights of recent construction progress at REEF. So definitely worth checking out. Thanks again to everyone for joining this morning. We hope you have a great day. Operator: Thank you. Ladies and gentlemen, the conference has now ended. Thank you all for joining. You may all disconnect your lines.
Operator: Ladies and gentlemen, thank you for standing by. Hello. My name is Dustin and I will be your conference operator today. At this time, I would like to welcome you to California Water Service Group Third Quarter 2025 Earnings Conference Call. [Operator Instructions] I would now like to turn the conference over to James P. Lynch, Senior Vice President, CFO and Treasurer. Please go ahead. James Lynch: Thank you, Justin. Welcome, everyone, to the third quarter 2025 results call for California Water Service Group. With me today is Marty Kropelnicki, our Chairman and CEO; and Greg Milleman, our Vice President of Rates and Regulatory Affairs. Replay dial-in information for this call can be found in our quarterly results earnings release, which was issued earlier today. The call replay will be available until November 29, 2025. As a reminder, before we begin, the company has a slide deck to accompany today's earnings call. The slide deck was furnished with an 8-K and is also available at the company's website at www.calwatergroup.com. Before looking at our third quarter 2025 results, I'd like to cover forward-looking statements. During our call, we may make certain forward-looking statements. Because these statements deal with future events, they are subject to various risks and uncertainties and actual results could differ materially from the company's current expectations. As a result, we strongly advise all current shareholders and interested parties to carefully read the company's disclosures on risks and uncertainties found in our Form 10-K, Form 10-Q, press releases and other reports filed with the Securities and Exchange Commission. And now, I will turn the call over to Marty. Martin Kropelnicki: Thank you, Jim. Good morning, everyone. Thanks for joining us today. Happy Fall. A few items to update you on. First and foremost, I want to start and give a quick update on our 2024 General Rate Case. The administrative law judge assigned to this case a few weeks ago indicated that he may need additional time to process the rate case given the size and complexity. It's a little different than the rate case we had last time that was significantly delayed. We know this judge is actively working on the case. Additionally, the assigned Commissioner continues to stress the importance of getting decisions out on time if not early. In addition, during that meeting, the judge also authorized us to file a Tier 1 advice letter on January 1 for inflationary offset if their decision is delayed. That is really different than what we've gone through before historically at Cal Water with the California Public Utilities Commission. This would essentially, if they are late, allow us to put an inflationary step increase with a Tier 1 advice letter effective January 1. Additionally, the judge also granted us a memo account, which gives us the authority to track and recover our cost, revenue and cost that would normally be recovered if the rate case was effective on January 1, 2026. So I think this is all good news. Again, we don't believe the delay is going to be significant given the commissioner's comments both in meetings with us as well as in public forums as well as the judge actively working on the rate case. And I give the Commission some huge kudos for being more transparent. For some of those of you that were with us in the last rate case, we didn't know nothing for a long time while the rate case was delayed. So there's good communication going on. They're putting steps in place in the event that if the decision is slightly delayed. But given where we are right now, I do not believe there will be a significant delay. Greg Milleman will talk about that a little bit later in the deck. Before I turn the call back over to Jim, I want to update you on a couple of things, including a strong financial performance as well as our operational highlights for the first 9 months of 2025. First and foremost, we continue to invest in our water infrastructure. During the quarter, we invested $135 million. That's up 14.8% so almost 15% Q3 of this year over Q3 of last year and were up 10% year-to-date over 2024. In addition, during the quarter, Jim's team was busy. They refinanced short-term borrowings with the issuance of $370 million of long-term notes and bonds. This transaction was significantly oversubscribed. In fact I will tell you for a bond deal, it was the most oversubscribed bond deal I've ever had the pleasure of working on in my 30 years of doing this. The nice thing about having a significantly oversubscribed deal is it helps minimize credit spreads, which lowers costs for our customers over the long run. We have continued our expansion in Texas while we wait for the commission to approve our General Rate Case settlement. We do have an all-party settlement in Texas that we're just waiting for final commission approval on. And we received an additional $24 million in net PFAS settlement proceeds during the quarter, which brings our year-to-date total recovery to about $35 million. Again, this will be a direct offset for customer costs as we implement the new PFAS rules. In addition to that, we've made steady advancement across multiple regulatory proceedings in the service territories that we operate in. So it was a very, very, very busy third quarter. The third quarter this year is the third year of the rate case, which is always the hardest year for us in California and California is by far our largest operating entity. And as Jim is going to walk through, the financial performance continues to be quite good during the third year of a rate case as we wait for regulatory relief. So Jim, I'm going to turn it over back to you. James Lynch: Great. Thanks, Marty. Well, as Marty mentioned, we did experience a strong financial performance and again, that is all the more meaningful considering we are in the third year of the rate case and that tends to be the year where we're most constrained from an earnings perspective and a cash flow perspective. So we're very pleased with the performance. Q3 2025 revenue increased $11.6 million or 3.9% to $311.2 million and that compares with revenue of $299.6 million in Q3 of 2024. Net income for the quarter was $61.2 million or $1.03 per diluted share and that's consistent with our prior year net income of $60.7 million or $1.03 per diluted share. If we move to Slide 6, you can see the impact of the activity during the third quarter and the impact that that activity was having on our results as compared to 2024. The primary drivers were the tariff rate increases and income tax rate changes, which combined added $0.30 per diluted share. And that was mainly offset by consumption decreases, unbilled revenue changes and water production rate increases, which combined totaled $0.19 per share. In addition, depreciation and interest rate expenses combined added $0.09 of additional expenses per share. Slide 7 shows our year-to-date financial results. And as we discussed on our Q2 2025 call, the company's delayed 2021 general rate case decision did result in interim rate relief that was recorded in 2024. In reporting our 2025 year-to-date results, we present both GAAP and non-GAAP metrics for 2024, which you can see on the next several slides. The non-GAAP financial measures effectively remove the impact of the 2023 interim rate relief from the 2024 results. Operating revenue for the first 9 months of 2025 was $780.2 million compared to $814.6 million for the first 9 months of 2024. That represents a decrease of $34.4 million or 4.2%. However, when you remove the 2023 interim rate relief from 2024 results, our year-to-date revenue in 2025 actually increased $53.1 million or 7.3% over the non-GAAP 2024 revenue. Net income attributable to group was $116.7 million or $1.96 per diluted share. That's a $54.4 million or 31.8% decrease compared to $171.1 million or $2.93 per diluted share compared to the same period in 2024. But again, in 2023 when you remove the interim rate relief from the 2024 results, our 2025 year-to-date net income actually increased $9.8 million or 9.9% over non-GAAP 2024 year-to-date net income and earnings per share. That's an increase of $0.12 in terms of our earnings per share. The primary drivers of our year-to-date diluted earnings per share when compared to non-GAAP 2024 results were tariff rate changes, consumption and income tax rate changes, which added $0.76 per diluted share. In addition, recall that in Q1 2025, we recorded the recovery of the California Palos Verdes pipeline memorandum account, which added another $0.05 per share. These increases were partially offset by water production rate volume increases, which totaled $0.29 per share and an increase in depreciation expense that was $0.13 per share. Moving to Slide 9. We continue to make significant investments in our water infrastructure, as Marty mentioned, in order to continue the delivery of our safe and reliable water service. Our capital investments for the quarter and year-to-date were $135.2 million and $364.7 million, respectively, and that represents on a year-to-date basis a 9.8% or roughly 10% increase compared to 2024. As a reminder, our capital investments do not include an estimated $217 million of remaining PFAS project expenses. We expect we'll incur those over the next several years. Turning to Slide 10. The positive impact of our capital investment program and what it is having on our regulated rate base is presented on this slide. If approved as requested, the 2024 California GRC and infrastructure improvement plan coupled with the planned capital investments in our utilities and other states will result in a compounded annual rate base growth of almost 12%. Moving to Slide 11. We continue to maintain a strong liquidity profile to execute our capital plan and explore strategic M&A investments. As of the end of the quarter, we had $76 million in unrestricted cash and $45.6 million in restricted cash. We also had $255 million available on our bank lines of credit. As Marty mentioned, in October we successfully completed $370 million in long-term financing. That included $170 million of senior unsecured notes that we issued at group and $200 million of first mortgage bonds that we issued at Cal Water. The notes carry interest rates of 4.87% and 5.22% and have maturities in 2032 and 2035. The notes also received an A rating from S&P. The bonds, again those are at Cal Water, will mature in 2025 and carry an S&P rating of AA-. The transaction closed on October 1 and it will further strengthen our balance sheet and support our ongoing infrastructure investments. With that, I'll now turn the call back over to Marty. Martin Kropelnicki: Jim, one clarification. The bonds, which will mature in 2055. James Lynch: The bonds do mature in 2055, yes. Martin Kropelnicki: Thank you for clarifying that. I'm on Slide 12 looking at our dividend program. We're pleased that yesterday, our Board announced and declared our 323rd consecutive quarterly dividend in the amount of $0.30 a share. Earlier this year in January, the Board approved our 58th annual dividend increase as a publicly traded company. This dividend increase for 2025 represents a 10.71% dividend increase and results in a 7.7% 5-year compound annual growth rate for our dividend. Looking ahead on Slide 13 and talking about some of our priorities on growth. As mentioned last quarter, BVRT, which is a joint venture that we own 94% or 95% of, continues to represent a strong area of interest and growth for the company. California Water Service Group made an initial investment in this subsidiary in 2021 with the goal that was to support the water ancillary utility development in the South Austin, San Antonio mega region. Year-to-date we've added 1,100 new connections to our utility services, the utilities that we started in that area back in 2021 and 2022. That puts us just shy of 5,000 connections added to our system. In addition to the 1,100 connections that we've added so far year-to-date this year, we have another 15,500 committed, but not connected customers. These are customers who have provided deposits or developers who put deposits in escrow waiting to connect to our systems as new houses are being built. This region currently has a population of 5 million people and is projected to exceed 8 million by 2050, which makes it comparable to the Dallas-Fort Worth region today. The biggest challenge for growth in this area is timely infrastructure development, especially roads, water and wastewater systems. We believe this area continues to provide a strong opportunity for Cal Water to partner with state and local and the private sector to align our utility investments to support the state's economic development in this region. So very happy with the growth that we're seeing in BVRT. And these were greenfield developments that 5 years ago there was nothing there, basically ranch land where developers went in and established permitting to build large frac family housing. On other fronts on the Texas side, we have reached a full settlement with the Public Utilities Commission in Texas with our first rate case. We're waiting for approval for that and we expect that to come in the fourth quarter of this year. From a growth perspective, we're working closely with major developers to support their water and wastewater infrastructure needs and expect several new deals in Q4 of 2025 as well as when we move into 2026. To further that, we're pursuing alternative water resources to serve the growth in that area, including a private public partnership with the Guadalupe Basin River Authority to bring water into that South Austin market through pipeline expansion. I'd like to move on to Slide 14 to give you an update on PFAS. The EPA has reaffirmed the maximum contaminant level for PFOA and PFAS at 4 parts per trillion and we continue to assess the standards for additional PFAS compounds. So this is really the start of the PFAS family in forever chemicals. For those of you that have really studied it, you'll know there's an estimated 5,000 elements out there they think that are these PFOA and PFAS families that still have to be discovered and researched. So this is the first 2 PFOA and PFAS and the EPA has reaffirmed the target 4 parts per trillion. The agency has proposed extending the compliance deadline for PFOA and PFAS treatment for the first 2 from 2029 to 2031 with the final rule expected in 2026. States are taking varied approaches. Some like the State of Washington, as I mentioned last quarter, have adopted their own rules, which align to the prior EPA guidelines while others continue to evaluate the local implementation timelines and the effects within their state. From a group perspective, we are managing our PFOA and PFAS programs across the enterprise with 1 project team that's responsible for coordinating across the enterprise. Cal Water remains focused on delivering safe high quality water through continued investment in treatment systems and well replacements across California, Washington and New Mexico. As part of this effort, certain treatment will potentially shift between the years. And as Jim talked about our capital growth rate, and just to remind everyone, we have separated out PFAS and it's not included in those estimates. It's included in the footnotes on that slide. So we estimate there's approximately $217 million of PFAS investment needed between 2025 and 2029 to better align with the requirements that are coming out. Our phased adoptive approach helps ensure that we meet the compliance requirements while managing our capital deployment to minimize the impact on our customers. Speaking of minimizing the impact on customers: from a legal standpoint, we continue to make progress recovering PFAS related costs through litigation. Cal Water is a participant in 4 separate class action settlements related to PFAS contamination. Shawn Bunting, our General Counsel, has played a leadership role for the water industry in these proceedings. In May of '25, we received $10.6 million in proceedings net of legal fees from the first 3M settlement, the first of 10 scheduled installments. In addition, in September of this year, we received an additional $24.2 million in net proceeds bringing the total year-to-date net of legal fees to almost $35 million. This $35 million will be a direct offset to the $217 million that we're talking about, again in an effort to keep rates affordable for our customers and to hold flouters accountable for the damage they've done to the water systems. We expect to begin receiving payments from the remaining settlements later this year and well into 2026. I'm now going to turn the call over to Greg Milleman for an update on the regulatory side. Greg? Greg Milleman: Thank you, Marty. If you'd please turn to Slide 15, I'd like to provide some additional comments on our California 2024 General Rate Case. Our General Rate Case continues to move forward. As we mentioned last quarter, hearings before the administrative law judge occurred in May. After the hearings, the ALJ requested additional information that the parties to the proceeding responded to in June. We then filed our briefs on July 7 and our reply briefs were filed on July 28. A final law and motion hearing was scheduled for August 5, at which point the case was turned over to the ALJ to draft a proposed decision. As Marty mentioned, in October, the ALJ requested more time due to the complexity and size of the case. At the same time in the event of a decision delayed beyond January 1, 2026, he authorized the company to implement an interim rate increase effective January 1, 2026 tied to CPI. He also approved an Interim Rate Memorandum Account to capture lost revenues resulting from a decision delay. While we are disappointed with the prospect of a delayed decision, we are pleased with the ALJ's action to allow an interim rate increase and the lost revenue tracking account and are still confident that we will see a resolution in the near term. Turning to Slide 16. We have other regulatory updates in the other states where we operate. In Hawaii, the Public Utility Commission approved a $4.7 million revenue increase for Hawaii Water's 5 Waikoloa systems effective October 9, 2025. In Washington State, Washington Water filed a rate case with the Washington Utilities and Transportation Commission seeking a $4.9 million revenue increase to recover system investments and higher operating costs. The utility also has completed key infrastructures aimed at enhancing reliability and water quality. The proposed effective date of these new rates would be December 15, 2025. And finally, as Marty mentioned, in Texas, our BVRT utility filed a rate case in June 2024 with the Public Utility Commission of Texas covering 5 systems. During the second quarter of 2025, BVRT reached a settlement with consumer advocates and the Public Utility Commission of Texas approval is currently pending. With that, I will now turn the call back over to you, Marty. Martin Kropelnicki: Greg, can you just comment the communications of the commission this rate case cycle versus the last rate case cycle in California? Because from my perspective, it's been really different, a huge improvement in terms of transparency and communication with the Commissioner and judges. Can you please just give me your perspective on that as well? Greg Milleman: Yes, absolutely. Actually since we received the -- had the October 3 update from the ALJ, we've spoken with the Commissioner 4 times during that time frame at various meetings and events. And all 4 times, he's commented that he would like to see this decision moved out on a timely basis. We've never had that in the 2021 case. And so I think that's why we're optimistic that even if the case is delayed a little bit, we will be seeing something much sooner in this 2024 case. Martin Kropelnicki: Yes. It's great seeing the Commissioner was really the assigned hearing officers where the Commissioner is so involved in the rate case and really sticking to it as well as the communications from the judge I think have been, I would almost call them, outstanding. I don't want to get too far ahead of our skis, but I mean the proactiveness on both the judge and the Commissioner I think is really different than what we've experienced before. Thanks, Greg. Before I close out, I want to take a moment to reflect on what we achieved so far this year. Despite operating in the third and most challenging year of our rate case cycle in California, we delivered solid financial performance and operational performance. We've continued to strengthen our balance sheet with the $370 million of long-term financing that Jim and his team concluded in the third quarter. And we've continued to invest heavily in sustainability and the reliability and the quality of our water systems with the $365 million invested in the 9 months year-to-date for 2025. We've also continued to make meaningful progress on PFAS treatment and the recovery of the $35 million in net settlement proceeds received year-to-date. Again the PFAS treatments, we'll continue to call those out separate from our normal capital program so you can clearly see what the net impact is to our customers as well as to rate base and any offset on the recoveries that we have. As Greg said, we've been busy on the regulatory side making meaningful progress in Hawaii as well as Washington and Texas as we stayed laser focused on getting our 2021 rate case done -- 2023 rate case done for California '24. As we look ahead to 2025, a couple of things I think are important. On October 14 of this year, we celebrated our 99th anniversary since our founding in 1926. Some of you heard me talk about this. We were founded by 3 World War I veterans who came back from the war who had a profound sense of service not only to their country, but to customers, communities and the stockholders. As we move into 2026, which will be our 100th year or our centennial year of operations, our priorities really haven't changed. It's maintaining operational excellence, executing our capital programs responsibly and achieving timely outcomes in our rate cases and continue to deliver value for both our customers and our stockholders. With our disciplined financial approach, constructive regulatory relations and our commitment to sustainable and reliable growth, we're confident that California Water Service Group is well positioned as we move into our 100th year of operations, which we look forward to celebrating next year. So Dustin, with that, I'm going to turn it over to you and we'll start the Q&A, please. Operator: [Operator Instructions] And our first question comes from the line of Angie Storozynski from Seaport. Agnieszka Storozynski: So my main question is about your rate base growth projections. I understand that those are slide, I don't see even the number. Again the rate base growth implying 11.7%. That's based on a filed rate case, GRC rate case. Now we have a partial settlement in this rate case, which seems to take down CapEx projections and I know that there's PFAS spending that could be additive here. But as we sit today, how much of a drag do I have on those projections for rate base versus what you're showing in that slide, in Slide 10? James Lynch: So Angie, thanks for the question. So right now we don't have a partial settlement in California, which is the largest driver of our capital expenditures. We are building in anticipation of achieving most of what we have asked for in the rate case. As you know, 2025 is the first year of the '26 rate case just because of the wonkiness in California and the way that they line their capital requirements up with the rate case delivery. So at this point, the settlements that we've talked about -- the settlement that we did talk about was the one in Texas, which we're really pleased on and we're waiting for regulatory approval there on that particular rate case. We still feel committed to the projections that we've provided in the slide. We think that we have made a good case in California to get the majority, if not all, of what we have asked for recognizing the fact that historically, there's a discount that we receive from the commission as we go through the remaining portions of the rate case to get to the final decision. I don't know, Marty, if you want to... Martin Kropelnicki: Yes. I think Angie's question so if you look at the forecasted growth those 3 years out, they're kind of boxed and I say this is what we filed for. And as Greg always reminds me, we never get 100% of what we ask for in the rate case process. Having said that, if you go back and look at the last 10- to 15-year average, we typically average about a 10% compound annual growth rate on our capital spending year-over-year, which ultimately flows into the rate base. So for planning purposes, Angie, probably around 10% is probably a decent number to use excluding the PFAS. And Jim has been very careful on all the slides that we put out there to footnote what our estimates are and those estimates are still evolving, but they're obviously getting more firmed up every time we go into another quarter because the engineers are doing more and more work on the treatment that we need to provide. But that will be incremental rate base growth net any legal proceeds. And that's also why we'll update everyone every quarter on what we've recovered on the legal side. So right now you could take that $217 million less the $35 million. That would be the net rate base estimate as of right now when we have to be in full PFAS compliance. But I expect we'll get some more legal proceeds to come in to help bring that number down. Agnieszka Storozynski: Right. I understand the PFAS component that seems relatively small vis-a-vis what's actually in the GRC. But I'm looking at the August filing, right, the undisputed parts with the California advocates, even based on that, there is actually more than this reduction to that rate base projection versus what you're guiding to. Again, it seems like it's actually pretty substantial. It's almost like a 20% reduction versus what you have projected in the rate base. Again just a rough math. And again, I understand that this is just the portion of the settlement. But there was a filing August 4, I mean I'm looking at it right now. Greg Milleman: Angie, what that would be is it's a listing of undisputed items that per the commission, we needed to file it as a settlement and most likely what you're looking in that in there, you're seeing what Cal Water proposed contrasted to what the public advocates proposed. Those are not settlement numbers of capital. That's just the parties' positions and it needed to be attached to the document. Martin Kropelnicki: And in fact I think the judge asked the parties to do that to help him expedite doing his legal review to make his conclusion and finding the facts while comparing the 2 parties. So he lined everything up and this is just one of the areas that he lined up what we asked for versus what the advocates are saying. Agnieszka Storozynski: Okay. So the hope is that the judge doesn't adopt the advocates position basically? Greg Milleman: Correct, yes. Martin Kropelnicki: Yes. I think, Angie, if you go back and look at the last 3 rate cases, kind of the thing I look at is kind of how successful have we been in the last 3 rate cases. And Greg, I think we've been north of 80% of our ask as high as 90% of our ask over the last 3 cycles. Greg Milleman: Correct. Yes. Agnieszka Storozynski: Okay. I understand. But yes, okay. I'm going to actually look at the 2021 rate case, how it compared to the position of [ Cal Water ]. It's just that the way I look at it is that you're overstating the rate base growth again at this stage of the rate case proceeding and I'm rooting for you. It's just that I'm looking at the current status of the proceeding. It doesn't seem like you can get close to these numbers. James Lynch: Angie, let me correct something you said. We haven't overstated anything. That is a really bad word as a public company. Again, what we put in the disclosures is what was asked for in the rate case and that's why we carefully footnoted it so people can clearly see it. Our typical growth rate is about 10% on the CapEx line kind of year-over-year over the long haul and obviously those numbers will change. But I'm a little cautious when you say what you said because the disclosures are pretty clear and that's also that way in the 10-Q and 10-K. Martin Kropelnicki: And Angie, I just would encourage you to give me a call if you take a look at the 2021 rate case because the way the actual capital delivery number was in that rate case was divided between what was allowed in the rate case and subsequently allowed through advice letter filings and it's differentiated in there. Our view is to take a look at what was allowed through both avenues in order to evaluate how successful we were in our capital ask. Operator: [Operator Instructions] And our next question comes from the line of Davis Sunderland from Baird. Davis Sunderland: As you said, Happy Fall, Marty. Actually I should give credit to Angie for this question, who asked a similar question on the H2O call earlier this week. So I'm going to steal and just kind of modify a little bit. But I guess my first question is just obviously big news earlier this week with American and Essential and the merger, which will bring American into the State of Texas. And I guess my question is does this change how you guys think about growth or willingness to lean into this market or the opportunity there? And then I have one follow-up. Martin Kropelnicki: Yes. I think our stated position kind of on M&A and growth is really kind of the same. Obviously from a planning standpoint, we've been very happy with our organic rate base growth because it's been kind of north of 10% for the last 15 to 20 years. So we're clearly focused on executing our business plans internally. Our primary growth engine is that reinvestment in our existing infrastructure. Being a West Coast utility, a lot of our infrastructure was built out kind of post World War II and it's now coming to the end of its useful life. So we think we're going to be busy just with replacement infrastructure on the West Coast for the foreseeable future and we don't see that piece of the business slowing down anytime soon. From a growth perspective, we think our investment in BVRT has proven to be very, very valuable in terms of being in the right market. Real estate is about location, location, location and that is such a rapidly growing corridor. So we now own 7 utilities in that area. We have the partnership with GBRA to bring water in for another 10,000 customers in the South Austin market. So we'll continue to build out that market. And then from an M&A perspective, it's about being opportunistic. I think American and Essential, we know them really well, they're great companies. I'm sure they had their reasons for why they ended up merging. I'm sure those will be in their proxy agreements when they put those out. And so I think there's a lot of reasons why the overlap service territories in our East Coast-based utility. I think Essential has been more in Texas and not as much American. So I think with Chris Franklin being in charge of kind of the integration work, they will be evaluating all that, what the footprint is going to look like. So I think there'll be more to come on that. For us, obviously, we're kind of Western states focused from Texas all the way to Hawaii and we're going to stay focused on our business plan as it's developed. Davis Sunderland: That is super helpful. And then maybe just 1 more for me. We've obviously been in this higher for longer rate environment for a lot longer than many expected, myself included, and some hawkish comments yesterday from Powell and potentially a lesser likelihood, I'll say, of rates coming down quickly. Just wondering how you guys build this into your guys' planning for the rest of the year looking into 2026 and any other thoughts on that? Martin Kropelnicki: That's a really good question, Davis. For us and look, I'm really happy with our financial results this quarter because if you lay out the timing of the rate case, all the inflation we saw in the last 3 years, we've really absorbed in the P&L and we've been able to still kind of grow the company. So getting the rate case done in California is going to be really important because that kind of trues up our costs, including that inflationary bubble that we lived in. A couple of things that I think are important especially given California is our largest operating entity is we do have that cost of capital adjustment mechanism. That's a 2-way mechanism. So as rates kind of move up and down annually, we are going to evaluate that and we can apply for changes using that mechanism, which I think is a very beneficial mechanism that a lot of people tend to overlook. So I think for us, we like to focus on earning our regulatory rate of return. As an economist, my team knows I keep a keen eye on interest rates and what's happening in the economy and we try to stay a step ahead of what's happening. And so we've been able to preserve the balance sheet, continue to grow rate base, continue to grow earnings despite some of the economic headwinds we've really had the last 3 years or 4 years. And really what will be nice about the next rate case in California assuming rates start to stabilize a little bit more is this bubble that we have, the inflationary bubble that we've had to absorb will be behind us. But again, not too much worried about the bubble because we do have that cost of capital adjustment mechanism in California and that is our largest operating entity. I don't know, Greg, if you want to add anything or Jim, add anything on that? James Lynch: Yes. I would only say, Davis, we did talk a little bit about the fact that we refinanced our short-term debt into long-term debt. I think we got some really favorable rates on that long-term debt and we basically took almost $355 million off of the lines of credit and moved that into the longer-term interest rate environment, if you will. So I think we're positioned very well right now in terms of moving forward. I don't think that if the Fed slows down significantly in terms of bringing the short-term rates down, that would give us any cause to change our current plans. Martin Kropelnicki: Yes. I think one of the challenges for the Fed is most people forget about the fact that the Fed is very quant-based. They look at numbers. While with the government shutdown, they have a limited data set that they're evaluating off of. And I think while it wasn't too bad for them for the meeting yesterday, the longer this government shutdown goes on, the more absentee data they won't have to look at as they do their evaluations. And again, if anyone's ever gone to any of the regional quarterly Fed meetings, they are very, very quant focused. And obviously the big thing I think they were focused on yesterday, I haven't read the minutes of the meeting, but I would speculate is that you're seeing a kind of a rapid softening on labor. And I think that was the key component that the Feds were looking at and certainly we're seeing that right now. Davis Sunderland: This is all super helpful. Appreciate the time, guys. Thank you very much and best of luck with the rate case rest of the year. Martin Kropelnicki: And we'll see you in a few weeks at the Baird Industrial Conference in Chicago. We look forward to seeing you. Operator: Thank you. There are no further questions. I will now turn the call back over to our Chairman, President and CEO, Marty Kropelnicki, for closing remarks. Martin Kropelnicki: Thanks, Davis. That was a good robust discussion today. Obviously if you may ask any questions, feel free to reach out to us. There's a lot of investor stuff happening in the fourth quarter so Jim and I will be on the road quite a bit; Chicago, New York, et cetera. So please reach out if you have questions. And we look forward to reporting our year-end results to everyone in February of 2026. So have a great Thanksgiving and a happy holiday. Be safe and we'll talk to everyone really soon. Thank you. Operator: The meeting has now concluded. Thank you all for joining. You may now disconnect.
Operator: Hello, and welcome to the X-FAB Third Quarter 2025 Results Conference Call. My name is George. I'll be your coordinator for today's event. Please note, this conference is being recorded. [Operator Instructions]. I'd like to hand the call over to your host, Mr. Rudi De Winter, CEO, to begin this conference. Please go ahead, sir. Rudi De Winter: Thank you. Welcome, everyone. In the conference call today, we also have Alba Morganti, CFO. In the third quarter of 2025, we recorded revenues of $229 million, up 11% year-on-year and 6% quarter-on-quarter, which is well above the guidance of $215 million to $225 million. We also progressed well in our core markets: automotive, industrial, medical with a revenue of $216 million, up 14% year-on-year and 5% quarter-on-quarter. Our core business now represents a share of 94% of the total revenue. Now breaking it down by end markets. In the third quarter, the automotive revenue was $147 million, up 1% year-on-year and 2% quarter-on-quarter. The third quarter industrial revenue was $48 million, up 51% year-on-year and 1% sequentially, reflecting the overall recovery of our industrial end markets. The gradual recovery of the silicon carbide business contributed to this positive evolution. Now for the medical business, the revenue in the third quarter hit a record high of $21 million, up 74% year-on-year and 40% quarter-on-quarter. The growth was mainly driven by contactless temperature sensor, DNA sequencing and echography applications that altogether did very well in the past quarter. Now looking at it by technology. In the third quarter, the CMOS revenue recorded a growth of 10% year-on-year and 4% quarter-on-quarter, mainly due to the extra capacity that came online for the 180-nanometer BCD-on-SOI and 35-nanometer CMOS node demand was weaker. Microsystems revenue was up 27% year-on-year and 9% sequentially. This is based on a broad set of customer-specific microsystem technologies that we co-created with our customers. Also, demand for new developments in the micro systems remain strong, and this is an area where we will continue to see above-average growth. Our silicon carbide business continued to recover and revenue grew strongly by 30% year-on-year and 20% -- 21% quarter-on-quarter. The number of wafers produced in the third quarter more than doubled compared to a year ago. The revenue did not follow the same way due to the product mix and also the ratio of consigned substrates that was much, much higher last quarter than a year ago. The positive trend in the evolution of our silicon carbide business is underpinned by increasing bookings attributed to sustained demand from data center, electric vehicles and renewable energy applications. We also see good traction on our new technology platforms that we released at the end of 2024. Many customers are developing their new generation products based on this platform that will give improved performance and lower system cost. The fact that we offer full supply chain for silicon carbide in the U.S. is well perceived by our U.S. customers that are designing in products for high value-added assets such as data centers, industrial equipment and electric energy systems. Quarterly prototyping for the past quarter was $20 million, down 16% year-on-year and 6% down quarter-on-quarter. The order intake for the third quarter amounted to $163 million, down 25% year-on-year and down 21% compared to the previous quarter. The booking in the industrial segment was good. The weakness is primarily due to inventory corrections by automotive customers as well as broader macroeconomic uncertainties resulting from geopolitical tensions and trade disputes. These factors have led to a more cautious ordering patterns while customers also take advantage of shorter cycle times, placing orders later than usual and with reduced lead time. As a result, feasibility is still restricted. The backlog for the third quarter came in at $347 million compared to $413 million at the end of the previous quarter. Let's now move to the operations update. In September, we had the inauguration of the new cleanroom in Malaysia, which will increase the site's manufacturing capacity from 30,000 to 40,000 wafer starts per month. Production at the new facility is being scaled up progressively with the full increase in capacity anticipated by the fourth quarter of 2026. The expansion will effectively double our capacity for the popular 180-nanometer BCD-on-SOI technology, which is particularly suited for applications such as smart motor drivers various drivers such as piezo actuators, LED drivers and battery management systems. The recovery of the silicon carbide business is supported by the existing capacity at our Texas facility. The current installed capacity will enable us to do more than double the wafer starts. The capital expenditure for the third quarter was $23 million, bringing total year-to-date CapEx to $179 million, and the full year capital expenditure is projected to be less than $250 million. Let me now pass the word to Alba for the financials. Alba Morganti: Thank you, Rudi. Good evening, ladies and gentlemen. We will now go through the financial update. I would like to start this section by highlighting that the third quarter, we succeeded in increasing our sales by 6% quarter-on-quarter, which were the highest since almost 2 years, totalizing USD 228.6 million and which is well above the guided $215 million to $225 million. Our EBITDA grew by 4% quarter-on-quarter and 7% year-on-year, being the highest this year. Our EBIT was almost $24 million, down 5% year-on-year, but increasing by 10% if we compare it to Q3 last year. Third quarter EBITDA was almost $354 million with an EBITDA margin of 23.6%. If we exclude the impact from revenues recognized over time, the EBITDA margin would have been 24.2%, within the guided range of 22.5% to 25.5%. Our profitability remains unaffected by exchange rate fluctuations as we continue to be naturally hedged. At a constant U.S. dollar euro exchange rate of 1.10 as experienced in the previous year's quarter, the EBITDA margin would have been unchanged at 23.6%. In the third quarter, we reported a financial result of minus $5.6 million, mainly due to interest result of $4.3 million and realized foreign exchange losses arising from the reevaluation of the euro-denominated debt amounted to $800,000, but of course, it's a noncash item. Cash and cash equivalents at the end of the third quarter amounted to $174.2 million, which means an increase of $16.5 million compared to the previous quarter while net debt decreased by $21.1 million quarter-on-quarter. Despite the peak of CapEx expenditures payments in the first half of '25, our financial situations remain solid. As anticipated and now visible, our CapEx are now significantly decreasing which translates into an improvement of our net debt position, which trend is inversely for the first time since a while. Especially in the current context of uncertainties and geopolitical tensions, it's important to keep our financials strong. And to conclude this financial section, I would like to share our next quarter's guidance. Our revenue is expected to come in within the range of $215 million to $225 million with an EBITDA margin in the range of 22.5% and 25.5%. This corresponds to a full year revenue in the range of $863 million to $873 million for the full year 2025. This guidance is based on an average exchange rate of USD 117 to euro, and does not take into account the impact of the IFRS 15. And now I would like to give the back -- the word back to Rudi. Rudi De Winter: Thank you, Alba. I'm glad about the solid increase in revenue for the third consecutive quarter amid a challenging macroeconomic environment. This is a significant interest or there is significant interest in our specialty technologies. Our silicon carbide business has made measurable progress with growing design activity on our latest silicon carbide technology platform. Additionally, our microsystems division continues to advance with collaborative co-creation projects enhancing our growth pipeline, while visibly continues to be limited, I'm confident in X-FAB position that supports sustained long-term business expense. Besides the third quarter results, I announced today that I will be passing on the CEO role to Damien Macq, today, COO; on the 6th of February 2026 after the full year results call. Damian is very well prepared and the Board of Directors and myself have full trust. He is the right person to lead X-FAB. I will make sure there is a smooth transition. I will be supporting him in my role as a member of the Board and of course, further future. Operator, we are now ready for taking questions. Operator: [Operator Instructions]. Our first question this afternoon or this evening, will be coming from Mr. Michael Roeg of Degroof Petercam. Michael Roeg: Yes, Well, first of all, congratulations on taking the next step and well, spending a bit more time in the Board of Directors, looking down on your successor and guiding him. But of course, I will leave you with a couple of tough questions. So the first one, bookings have come down strongly, and prototyping sales has also come down based on the chart in your PowerPoint presentation. So should we expect a slow start in 2026? Rudi De Winter: Well, first of all, the prototyping is something that fluctuates. There are milestones on projects and so forth that -- so I think the prototyping is at a good level. Remember, this is discussed from 0 every quarter, and it's all about new contracts and new activities. So it's still a substantial business development activity ongoing, so on. Quite happy about that. The production bookings, they indeed are weak, that we still have quite a good backlog. That represents roughly almost to our 2 quarters. So it's a bit less -- it is, of course, too early to say, but it's a sign of weakness in the market. So our guidance for the Q4 is still good. It's in the range of where we were now Beyond that, visibility is low. And yes, so we could see maybe a weaker start from next year. Michael Roeg: Okay. And is there a decent amount of backlog for way deep into 2026? Or is most of it typically scheduled for Q1, Q2? Rudi De Winter: This backlog is -- so customers, they order now typically, when they need the goods. So typically, all this backlog is mostly to execute on deliveries in the quarters to come. Michael Roeg: Okay. That's reassuring at least. Then I have a question. If I compare your sales in Q3 with those of Q2, then they've grown by $13 million, yet the sequential trend in gross profit is minus $2 million. And this is not explained by depreciation and amortization because that was the same in the 2 quarters. So something was in your cost of sales, something strange. Can you explain that? Rudi De Winter: Yes, there is an effect that -- of inventory. So the work in progress, I mentioned we have shorter cycle times because we have improved capacity. The cycle times come down in the -- in the fab that is very much appreciated by our customers, so we can deliver faster. But as a result, the work in progress is lower and that has -- in the quarters where we decreased this WIP as a negative effect on the profitability. Michael Roeg: Is that something that only hits your P&L wants to the lower work in progress level and then if it remains at that level in Q4, and then you will not have that cushion? Rudi De Winter: Yes. yes. So this is -- this is an effect that we have when the WIP -- so this is a typical effect when the activity in the factory decreases or the cycle times as short and the valuation of the WIP decreases when the valuation is -- when we come back to a steady state, then this effect is not there. But you can also have the opposite effect if bookings go up, loading in the fab goes up, you have the opposite effect where the revenue is not yet there, but the WIP increases and the WIP is valued and therefore, it has a positive effect -- could have a positive effect on the margins. Michael Roeg: And if I do the calculations, it's around $4.5 million to $5 million impact in the quarter. This is above average, I guess, normal trends, correct? Rudi De Winter: Yes. So this is -- if we look at the full year, it's even bigger. So we also have inventory or WIP corrections in the previous quarter. I think it is coming to a stabilization in -- by the end of the year. Michael Roeg: Okay. Then my next question is about Texas. You mentioned in the press release that there will be capacity expansion in 2026 towards the end of the year. How much CapEx is there involved with this particular expansion program? Rudi De Winter: There is no CapEx involved. What is mentioned there that these equipments that are already delivered and paid for that will be qualified and will be added to the operating and the production lines. Michael Roeg: Okay. So this is part of the existing program that has just been completed. So there is no additional expansion program currently planned? Rudi De Winter: For now, there is no expansion with additional cash out planned. Michael Roeg: Okay. And during the Capital Markets Day, you mentioned that there would be discussions about further automation of 4 of the 6 fabs. Is there anything that came out of that or a midterm plan for that? Rudi De Winter: Well, this is an ongoing process that we're working on more automation. This is mostly labor and IT and that kind of thanks to a lesser extent, related to CapEx. There might be some CapEx that is minus compared to the equipment investments. Michael Roeg: Okay. Then my final question, a very quick one. There was $2 million of other income in the OpEx. Can you explain what that was for? Rudi De Winter: There was a sale of $2 million. Operator: Next question coming from Emmanuel Matot of ODDO BHF. Emmanuel Matot: I have 3 questions. First, already, could you comment about your decision to step down from your role of CEO, what are the motivation behind that very important decision for you? Second, too early to guide for next year, for sure. But with the churn you have and the ramp-up of significant production capacities, are you confident at this stage for further sales growth next year? And third, I wanted to know if you compete in some spaces with GlobalFoundries because it has just announced a significant capacity expansion in Germany, and I wanted to have your view on that. Rudi De Winter: Yes. So first of all, with respect to the organizational change and me stepping down as CEO. So as we as a manager or as the founders of the company, we always, yes, have in mind that, yes, it's important to grow succession and then move on. I think while the team is very well prepared and Damien Macq is ready to take that role in my view. And therefore, I decided or started thinking about this a while ago. And I think now it's the right moment to for him to take over. And I think this is very well placed to do it. Second question, so I didn't -- now the question was GlobalFoundries. It was a question on GlobalFoundries Dresden. So GlobalFoundries Dresden, they're in different -- I don't see this as a competition to X-FAB. They're maybe also doing automotive first, but that's more into ECU type processors and FD SOI for further applications. It's a different type of SOI. So X-FAB is also doing a lot of SOI and we are very successful in SOI, but it's high voltage SOI. That's different characteristics and FD SOI is more used for lower voltage systems and lower power applications. And the third question was? Emmanuel Matot: It's about the visibility you have now, which seems to be limited, but also we can expect significant production capacity next year on products, you are fully loaded. So growth next year or Gary, you don't want to comment at all. Rudi De Winter: Well, today, the capacity, we are not in allocation anymore as compared to a year ago. So the revenue, the output is mainly driven by the demand in the market that we are following 1:1 now. And so if demand is there, we'll be growing if -- so we will follow the demand. So we're able to -- if demand is there, we're able to anticipate only take advantage and grow. If it's not there, of course. So we are now dependent on the market and, of course, all the new projects that we are in the pipeline, and we gradually rolling out. Operator: We'll now move to Robert Sanders of Deutsche Bank. Robert Sanders: Best of luck with your next role and welcome to Damian. I just had a question about Nexperia. So you're in the European automotive supply chain. There's been a lot of warnings around line stoppages from both European and non-European OEMs talking about significant risk weeks of inventory. Can you just give us your take on how severe and serious the situation is based on what you can pick up? And then I have a few follow-up questions. Rudi De Winter: Yes. I'll following this, of course, also closely, but I also -- most of it is what I also pick up in the press. So what I know is that Nexperia is indeed in it's more -- seems like low tech components, but they're very good at it, and they're producing that in very high quantities. And so they're having some areas of significant market share. And I think for most of those components, there are replacements, but ask the question whether these -- if there are shortages, whether the replacements can be ramped up quickly enough. I have no to my knowledge, it is not yet line stops, but I cannot tell how far it is of. Robert Sanders: Yes. I mean, based on your experience, I mean, what they do is they do small signal logic components like diodes and BJTs and stuff like that, but they are used in like body, comfort, lighting, BMS, interfaces, sensors, safety, just a lot of low-value components. As you say, they have very high market share. I mean based on what you've seen in your previous job, I assume you would be looking at 6 to 9 months to requalify on a competitor. Is that the sort of time line? Rudi De Winter: Well, I think that also, if you look back at the COVID situation, normal -- the market is normal, then all these things take time. However, if there is a threatening line stop things can -- things can change quickly, and there is a lot of agility and creativity. So I think it is more -- I think it's not so much a matter of qualifying it. I think there is -- most of the cases, people are very agile and flexible to move if it's really needed. But it's more a matter of the components in sufficient quantity there from alternative sources. Now I also typically see there have been cases in the past also when Sumitomo plant was blown up years ago. That was producing 50% of these particular chemicals that were absolutely needed everywhere in the semiconductor industry. We had 50% market share. But -- also there, the dynamics, the agility of the whole market, then that came in motion. And finally, it's sourced it out. So let's see how this will turn out. Robert Sanders: Right. And then just a question about China. Obviously, since we last spoke China has turned downwards. There's been production cuts at BYD and Li Auto and all these other guys, too much unsold inventory. How have you seen that manifest in your business, whether it's direct with Chinese customers or indirect through Melexis? Rudi De Winter: I think that's too early, too early to say with somewhat further in the supply chain. It's difficult. We don't have a good visibility, except that we see our bookings in the third quarter that were lower than the previous quarter, in particularly in the automotive segment a bit across the board. As I mentioned, the bookings in industrial, they were good. Yes. So it seems to be more on the automotive side, as I see the weakness. Robert Sanders: And just one last one on OpEx. How should we think about the impact on OpEx of all these various different expansions, whether it's on G&A or just on your cost base more generally? Rudi De Winter: That we do not expect an effect except to the fact that once these expansions are active and producing, then they come into the depreciation. So it will have an effect on our depreciation. Operator: [Operator Instructions]. We will now go to Guy Sips of KBC Securities. Guy Sips: Most of my questions were already answered. There were also experience-related. I have one question on the data center. Do you see there the positive trend, you see that accelerating? Or is it just on a continuous pace as it was over the last quarters? Or do you see a real improvement since, let's say, the Capital Market Day? Rudi De Winter: Well, I think it's -- in the revenues, we see a gradual progress. So in the beginning of the year, we saw strong activity in data center that continues, but it is complemented now also with better demand for industrial and renewable so inverters for renewables and also a bit of automotive. So it's the silicon carbide activity is broadening. And I think that a lot of the data center -- yes, growth still has to come. So it's not yet -- so first of all, the architectures architectural change that uses more silicon carbide in data centers still is coming. And I think also all the announcements on CapEx and so forth start to build buildings and they're not yet installing the infrastructure yet. Guy Sips: And can you put a kind of a time frame on this? Rudi De Winter: No, I cannot answer. It's -- I think some of the customers of us who have announced activities with the data center companies on 800-volt architectures and so are rather talking about 20 -- real ramps in '27. Operator: Next question will be coming from Mr. [indiscernible] who is a private investor. Unknown Attendee: My question is actually the following. If AI is applied, let's say, on the development of prototypes, is it possible to substantially reduce the throughput time for the development and the prototyping. Rudi De Winter: It's a good question. I don't -- not really -- that's not really the case. So there is -- in digital -- in the digital world, there is more activity on automating design environments and so forth. So I think there, it could have an effect on the analog mixed signal design that we're doing so far, there are people looking at it at research institutes, but nothing that is practically usable to my knowledge. Unknown Attendee: Okay. And then I've got a second question. Is it the automotive business part of it? Is it coming to end of life, and that has to be replaced by new products, new components or in which stage are we? Rudi De Winter: Not particularly. So we -- there is, of course, a continuous flow of innovation, but we have existing products that are -- that exist already a couple of years that will -- that are also being designed in, in electric vehicles in certain functions. So that continues. But -- it's not that there is an abrupt end of life of certain components. Of course, if combustion engines are used to a lesser extent, if you have like applications like lambda sonda or pressure sensors that go into an exhaust system of a combustion car, that will gradually phase out. But yes, as you hear, there is push in Germany to extend lifetime of combustion engines and so forth. So I do not see an abrupt change in the next cities rather as a gradual change over the next 10 years. Unknown Attendee: Okay. And could you elaborate a little bit more on the Chinese market for our business? Rudi De Winter: Yes. So as X-FAB, we have direct Chinese business. It's around 10% of our business. But indirectly, we have also customers are selling into China. So I think the direct and indirect business of X-FAB, it's maybe closer to 35% or so of our revenue that goes into China. Now what our customers do have less that's a bit further away, as I would have to refer to the conference call of our customers. What we sell directly in China are predominantly technologies that are, to a lesser extent, available in China. So that's typically our BCD on SOI for high-voltage smart systems, like motor drivers, battery monitoring systems and so forth. And there, we see continued interest also for new designs with our customers because this technologies are not immediately available in foundries in China. Operator: [Operator Instructions] We'll now move to Trion Reid of Berenberg. Trion Reid: Trion Reid from Berenberg. Just also wanted to add to my best wishes really for whatever you're going to do in the future. I had 2 questions on the results. The first was just around the fact that you talked about the results being strong, but the order intake weak. I'd be interested if you have any comments around the pattern of orders through Q3. You saw a sort of any trend or you're just seeing more lumpiness or short-term ordering? Just be interested to get any more color on that. And then my second question was just on the CapEx, which was pretty low in Q3, but your Q4 guidance seems to suggest it will actually ramp up quite significantly in Q4, just to understand why that is and what that sort of implies for next year as well. Rudi De Winter: Yes. So your first question with respect to the bookings yes. So the -- yes, that is what it was in the third quarter. So far, if you ask what happened in October, yes, that's somewhat a continuation of the Q3. The peak or the low amount of CapEx in Q3 is indeed less than what we forecasted. This has to do rather with -- we're not pushing the throttle on our expansions in Malaysia. So the -- this is just a delay. So the cap -- we have not canceled anything. It's just that there is a slower rollout and therefore, also the invoices come in slower and so the cash out is also somewhat less. So the -- in Q4, we expect that it will increase. This is not new CapEx, but it's just a shift of things from Q3 and Q4, we'll have to see maybe there will be some shift from Q4 into Q1 next year. But the increase that you -- that we can expect in Q4 is not a sign for next year. It is just the balance from Q3 that shifted in Q4. Trion Reid: Okay. Great. And just to follow up on the order intake. You're suggesting that there was not a decline through the quarter that the quarter was weak for order intake in all 3 months. Rudi De Winter: No, it was somewhat flat over the quarter. It's not that there was a sudden effect at the end or so. It was somewhat flat over the 3 months. Operator: We have a follow-up question. This one coming from Mr. Robert Sanders of Deutsche Bank. Robert Sanders: Just on the Kuching ramp and the EUR 1 billion expansion that you've done. Is the idea to continue to push that ramp, even though the demand is not really there just to sort of get the economics going because of -- right now, it's a lot of tools but not a lot of revenue? Or is the idea to basically free that plan until the demand is there? Rudi De Winter: The plan is to continue with the rollout of the equipment and to install it, qualify it to be ready for demand that can come. So the -- the equipment is mainly for our 180-nanometer BCD-on-SOI and there, we have good design wins. We have a unique position in the market. So we have -- we feel confident that this will pick up, and we want to be ready. Robert Sanders: Got it. And is there any plan to reduce or exit any legacy facilities? I think you've already said you're going to end-of-life effort by the end of '26. So I'm just trying to understand how much of your capacity that's quite old now is sort of going to get wound down as part of this upgrade. Rudi De Winter: Well, this is an effort we're making the transition from already for many years, we're transitioning to more micro systems business. and gradually exiting the CMOS there. The end of life that we announced there was for 0.6 micron CMOS signal. CMOS is also a in there and that will run until end '26, a little bit in '27 and then there will be one cleanroom there that we -- there are 3 cleanrooms on the site there, and there will be one cleanroom that will be closed. Robert Sanders: Got it. And maybe a question for Alba. What is the France run rate annualized at the moment for revenue in just Corbeil? Alba Morganti: So yes, Corbeil is currently at $54 million per quarter at the moment. So yes, it was the highest quarter that we recorded now in Q3. So it's ramping up significantly. We also invested there in additional tools, as you know, and we are now running only X-FAB technologies since a while. So the efforts start to pay off. Robert Sanders: Got it. And what's the EBITDA of that facility? Alba Morganti: We don't give EBITDA breakdown, as you know, because we don't produce everything on one side. Some of the products are shifted from one side to the other. And -- so it's quite difficult to -- it's misleading to give EBITDA breakdown by site. You know that we start -- some products we start in one factory, then we continue in other factories and so on and so forth. So yes, as I said, it's misleading. Robert Sanders: Got it. And just last question. If Melexis is able to get BCD-on-SOI processes from 8-inch Grays in China. What does that mean for you? Does that mean that you will lose 30% of Melexis business? Or is that something you don't think is a likelihood? Rudi De Winter: Yes. I don't know if grays has BCD-on-SOI, I think definitely not in the quality and the features that we are offering. Anyhow, it's this -- if a customer designed a new product in another fab, it takes a lot of time to qualify and transition. In the meantime, all the existing business typically stays until the products are really end of life. So I don't see an immediate effect. Operator: As we have no further questions at this time. Mr. De Winter, I'd like to turn the call back over to you for any additional or closing remarks. Thank you. Rudi De Winter: Yes. Thank you very much, everyone. So I'm looking forward to hearing you again on the 6th of February for the Q4 results. That will then be together with Damien and I will be then handing over to Damien. Yes. Thank you very much, and have a nice evening. Alba Morganti: Thank you. Goodbye. Operator: Thank you. Ladies and gentlemen, that will conclude today's conference. Thank you for your attendance. You may now disconnect. Have a good day and a good night.
Operator: Ladies and gentlemen, thank you for standing by. At this time, I would like to welcome everyone to the Rush Enterprises, Inc. reports Third Quarter 2025 Earnings Results. [Operator Instructions] I would now like to turn the conference over to Rusty Rush, President, CEO and Chairman of the Board. You may begin. W. Rush: Good morning, and welcome to our third quarter 2025 earnings release call. With me this morning are Jason Wilder, Chief Operating Officer; Steve Keller, Chief Financial Officer; Jay Hazelwood, Vice President and Controller; and Michael Goldstone, Senior Vice President, General Counsel and Corporate Secretary. Unknown Executive: Certain statements we will make today are considered forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. Because these statements include risks and uncertainties, our actual results may differ materially from those expressed or implied by such forward-looking statements. Important factors that could cause actual results to differ materially from those expressed or implied by such forward-looking statements include, but are not limited to, those discussed in our annual report on Form 10-K for the year ended December 31, 2024, and in our other filings with the Securities and Exchange Commission. W. Rush: As indicated in our news release, we achieved third quarter revenues of $1.9 billion and net income of $66.7 million or $0.83 per diluted share. I am pleased to announce that our Board of Directors approved a $0.19 per share cash dividend. The commercial vehicle industry continued to face challenging operating conditions in the third quarter of 2025. Freight rates remain depressed and overcapacity continues to weigh on the market. In addition, while the industry gained some clarity regarding the tariffs that will be imposed on certain commercial vehicles and parts beginning November 1, economic uncertainty and regulatory ambiguity remains, especially with respect to engine emissions regulations. These factors are impacting our customers' vehicle replacement decisions. Despite these headwinds, I am proud of the financial performance our team delivered in the third quarter. Our employees' commitment to operational discipline and customer service was evident in our ability to maintain strong aftermarket results and manage expenses effectively. And I'm deeply grateful for their dedication. Our aftermarket operations accounted for approximately 63% of our total gross profit in the third quarter, with parts, service and collision center revenues reaching $642.7 million, an increase of 1.5% compared to the third quarter of 2024, and our absorption ratio was 129.3%. In the third quarter, our aftermarket products and service businesses remained resilient despite ongoing market challenges. Our strategic focus on technician recruiting and retention, expanding our aftermarket sales force and identifying new customer segments helped to offset weak demand. Looking ahead, we anticipate continued challenges in our aftermarket business due to seasonal trends and broader industry headwinds, but we remain confident that our diversified customer base and operational discipline will allow us to successfully navigate the remainder of the year. With respect to truck sales, we sold 3,120 new Class 8 trucks in the U.S. during the third quarter, accounting for 5.8% of the total U.S. market. While this represents 11% year-over-year decrease, we outperformed the market primarily due to stable demand from our vocational customers, underscoring the strength of our diversified customer base. Looking forward, economic and regulatory uncertainty continues to dampen customer demand, particularly with respect to new Class 8 trucks. We believe that the weak demand the industry is currently experiencing will negatively impact new Class 8 truck sales for at least the next 2 quarters. That said, if stricter emission laws become effective as planned and if capacity continues to exit the market due to bankruptcies, retail sales being below replacement levels, and continued enforcement of government policies regarding English language proficiency and non-domiciled drivers, Class 8 truck sales may be strong in the second half of 2026. In the medium-duty market, we delivered 2,979 Class 4 through 7 medium-duty commercial vehicles in the U.S. in the third quarter, representing an 8.3% year-over-year decrease and a 5.6% market share. We also sold 448 Class 5 through 7 commercial vehicles in Canada, which represents 10.7% of the new Canadian -- of the Canadian Class 5 through 7 commercial vehicle market. Despite ongoing industry headwinds, our medium-duty results in the third quarter outpaced the broader market. Our performance was bolstered by a significant increase in bus sales following our acquisition of an IC Bus franchise in Canada, which further diversified our customer base. Looking ahead, we expect medium-duty commercial vehicle sales to remain stable through the remainder of the year. We sold 1,814 used commercial vehicles in the third quarter, essentially flat compared to the same period in 2024. While financing remains a challenge for used truck buyers, we believe our inventory is rightsized and that our used truck sales strategy is on track. Unlike the new truck market, the used truck market is less exposed to tariff concerns and regulatory uncertainty, which may provide customers more confidence and incentive to consider used trucks as part of their fleet mix in the near term. We expect fourth quarter used truck sales to be in line with the third quarter. Rush Truck Leasing achieved record revenues of $93.3 million in the third quarter, up 4.7% year-over-year. Our full-service leasing revenue increased as we brought new vehicles into service, which also helped lower operating costs and increased profitability. Rental utilization was lower year-over-year, but improved sequentially, and we are confident our leasing and rental performance will be solid for the remainder of the year. On the capital allocation front, we remain focused on returning value to shareholders during the third quarter. We repurchased $9.2 million of our common stock as part of our expanded $200 million repurchase authorization, and we also paid a cash dividend of $14.8 million in the quarter. In summary, despite the aforementioned industry headwinds, I believe we've delivered solid results, and I'm proud of our team's performance in the third quarter. Our employees across the U.S. and Canada continue to demonstrate resilience, and I'm deeply grateful for their dedication. With that, I'll take your questions. Operator: [Operator Instructions] And our first question comes from Andrew Obin from Bank of America. Andrew Obin: I'm sure the team works very hard. Just a question, could you just tell us, we've been stuck in this cyclical malaise for a while now. We've been waiting for the turn of the cycle for a while now. Can you just expand and tell us what are you seeing? When do you feel things actually bottom? And what's the path going forward? What gets this thing sort of on court and just lets the sales actually go up eventually? W. Rush: Right. And I'm guessing, Andrew, that you're speaking about from my customers' perspective. Is that correct? Andrew Obin: Yes, correct. Yes. W. Rush: Okay. Well, great. Well, I just so happened, I spent the last couple of days in lovely San Diego, California at ATA, which is the largest truck convention -- our customer truck convention there is. So I met with quite a few customers while I was out there. And I think as I mentioned in one of the paragraphs there in the press release, and I mentioned a little bit earlier, this is the first time I'm going to say, I mean, we've been 3 years in a freight recession, 3, okay? This usually doesn't last, but 12 to 16 months, I have never seen in my career, it go so long, right? And you could figure out why supply was not coming out, right? There's supply and then there's demand. I can't really speak to demand as well. That's more of an economic-driven, the only economy-driven stuff around tariffs and just around the economy itself. But from a supply side, the crazy thing is it just has not come out of the market. It always comes out faster. And I think if you look at it after rates were way up in '21, '22 and they started coming down. That's been that 3-year row, just depressed freight rates from the customer perspective, especially on the truckload side, not so much on the LTL side, but on the truckload side for sure. And I think the government has finally got their arms around some of this when -- I mean, one of the things I learned while I was there is you read a lot and people are saying this is non-domiciled driver thing and the English-speaking proficiency, but really around the non-domiciled driver thing. Most some of the numbers I've heard before, well, if we can enforce that, it's going to be up to the states to enforce that, okay? And I've heard numbers of 5% or something. Well, I was there. Some of the carriers I talked to said that was way understated. And like 15 to 20 of the states are really starting to enforce it right now and that they all have to get on board. And so over the next little bit, it could take out up to 15% of the drivers, which are probably some of the smaller carriers have been using to hang on and stay. Those are the carriers that usually go out in a freight recession first, not your more well-capitalized bigger guys, but the smaller carriers are always that variable piece that get in and get out based upon where rates are. And so that's one of the things that I believe will, for sure, help. Also, I think we -- people continue to buy trucks after we came off of allocation, we should have not slowed down selling trucks or producing trucks quicker than we did because there's 2 sides to it, right? That's the attrition side. Well, the other side is what are you producing, right? Well, right now, the last -- the back half of this year, I mean, you're talking we're going to be down in production 30%, 35%, 40% at all the OEMs combined. I'm not sure exactly where it is, but it's down dramatically. And I think that's going to continue into the first quarter for sure, maybe the first half. If you add that, you think about that, so you're shutting down the supply side, the intake side, you're taking people out of the attrition side. Well, you should start to get a more rightsized or balanced fleet out there with what market demand is, right, or what freight tonnage is. And I think you can see that if you look out. Now on top of that, even though the carriers, and I'm on their side, would prefer that it's changing the law that's going into effect right now. The current law, the way it stands is 35 -- don't give me, it's changing to 35 particulates on the NOx side. It's 200 currently, okay? But the new law says 35. I'm with the carriers. They would prefer a pause on 35 and they -- but I'm not in the middle of that, but you see folks and customers that are putting pressure on the EPA to pause that law. Right now, I can't tell you where it goes. But if it stays as is and goes into effect, I do believe it will change -- if it stays as is, you will see change in the warranties will come down because a lot of the cost for that is going to be more. But it's still going to add more cost where tariffs have added more cost to an industry that's been in a 3-year recession. But people are asking for, like I said, carriers are asking to say 200, and I support them on that. I don't know. But currently, if you look at the law, it said it's going to go to 35. Well, that's going to add more cost also by the end of next year. So you tie that in with tariff costs, which are happening for sure, starting Saturday with the new tariffs, I mean, the tariffs already all year, but with the new 232 rule and how that affects everything, you're going to put -- the EPA thing will only increase cost on trucks at the end of next year. So you add that with a better rightsized fleet, for the environment. That's why I wrote you can see a much stronger back half of next year. Now I would prefer that we also have freight tonnage growth with that. So it's not just regulatory driven. I think if we can get some freight growth, which I hope we get some certainty. I mean uncertainty for everybody has been the craziest thing trying to run a business all year, okay? But we get some certainty around whatever it is, add that in, like I said, take it supply out. And even if it stays that 35% will help truck sales, but I'd like for my customer to be more healthy. And I think getting the right-sized fleet is the most important thing with a pickup in freight tonnage. And that's why you see some optimism. I'm more optimistic now for that -- the big over-the-road market. Look, that's still 2/3 of the market that's out there, all right? Vocational is awesome. And we do more in vocational than 1/3 of our business, but that's still the largest segment, and it has been obviously headwinds for everyone, my customers more than me for the last 3 years. So I know that's a long-winded answer, but you're used to my long-winded answers, I'm hoping. And that's sort of the way I see it right now. I have a little more optimism than I have had after coming back from San Diego, that's not happening right now, okay? Remember, we had 5 months, 6 months of the lowest order intake since 2009. I'm the tail of the dog. So we are going to feel it in Q4 and Q1 without question. At the same time, it feels good to really believe that you can see real drivers to get back and get the market rightsized long as the economy stays in good shape. That's sort of the way I see it. Andrew Obin: And just a follow-up question. I ask it on every call, but what's your read on the macro, just general macro outside of the stuff that feeds into your customer base? Is it getting better? Is it getting worse? What are you excited about? What are you worried about? W. Rush: No. I'm not an economist, Andrew. What I worry about? I worry about unemployment, which for sure would affect consumer demand. That bothers me. I worry about -- I don't feel that we have seen the full effect of tariffs, no way. We had a prebuy prior to August, but we're draining those -- as we drain those inventories down, we've got to restock. I have seen many large companies, manufacturers, customers across all segments that have eaten a lot of those costs. I don't see them eating those costs forever, which ends up being pushed down to the consumer at the end of the day. Those are the 2 things that bother me more than anything. I'm hoping we can get around all that. But I do -- an inflationary -- a little more inflationary environment if tariffs get pushed through because everybody knows that people prebought prior to August, but we're draining those. So -- and you put that in, we get some more unemployment. You read some of the stuff you see. I see a little anecdotes out there myself that have me a little nervous, a little bit concerned. I can't say this is going to -- this is a number or this is what's going to happen. But I do have some concerns as I look at -- just look around myself and try to pay attention to what's going on, right? Like I said, I'm not an economist. I'm just looking at it from my street level, but I do have quite a bit of touch and feel with a lot of different companies and things out there. So besides all the big stuff you read about when you read about UPS and these big companies that are laying off right now, Amazon by laying all these people off. There you go. That's what I'm worried about. Andrew Obin: And I'll -- just feeding into that, I'll just take advance and ask one last question. How is your parts and service business trending on a daily basis into the year-end? Is it getting better? Is it getting worse because that's also a good indication and also obviously has quite a bit of torque to your financials. W. Rush: Yes. Well, it was flat to slightly up for the third quarter, but September was softer than I would have liked. Remember, we naturally or yes, we naturally have seasonality. And I've always told folks if I could get rid of sometimes November, December, January and February, I might keep the holidays for the kids. But other than that, from a business perspective, if I could sometimes we're in the south, -- it can help a lot of our stores in the South, the majority of them are. So that's a little harder, a little softer. You have fewer working days. We typically tick down 3% or so, 3% to 4% from Q3 and Q4 and Q1. It will start picking back up, hopefully by late February, March. It softened a little quicker in September. I'm waiting to get October finished tomorrow night. I'm hoping that we can try to get pretty close to flat with last year. I'll be really close, I think. But it's still to be -- how about TBD, to be determined. There are certain things I look at that show month-over month, we got the same amount of backlog in our work in process in the parts and service. But I do -- I'm hoping it's just like normal seasonality, and we have a slight downtick and less -- we have 1 less working day, which is quite a bit of gross profit as big as our parts and service operations are and it's the holidays, factories shut down between Christmas and New Year, but you deal with that every year. So I'm hoping we stay in the range of what we typically do. I was a little disappointed with September. Typically, we'll start in October. But we'll see here by the end of the working -- the month by midnight tomorrow night on Halloween because they'll be closing tickets and doing what they do every month, getting it all in. So we'll see, but I expect it to be fairly close to flat with last year's number, which if we're there, given the environment, I'll be okay with it. I'll be okay with that. Operator: Our next question comes from Brady Lierz from Stephens. Brady Lierz: I wanted to start kind of just with the outlook for the remainder of '25 and the first half of '26. You've mentioned a couple of times on the call that you expect a challenging end to '25 and for that to persist into 1Q. But can you expand just a little on that? I mean what are your customers telling you as to why they're not placing orders? Is it just uncertainty around regulation? Or is it uncertainty around tariffs? Or is it both? And if we got more certainty around those items, could we see a meaningful improvement -- and then maybe just kind of related, your vocational customers seem more resilient. So are there some company-specific opportunities you have to help offset this weakness and outperform the market? W. Rush: Well, from a delivery perspective, we slightly outperformed the Class 8 dip. I think [indiscernible] market was up more than that, I think, in Q3. But around -- I'll go to your first part, Q4, first Q1, maybe partially into Q2, I can't tell. Look, remember, like I said earlier, we're the tail of the dog. And when you look at the order intake from April, May, June, July, August, September, it's like September, it was 20,000 units. We have months that was 7,400 units. This is North America, 11,000. Those were the worst order intake months since 2009. I know that every manufacturer has taken more down days over the last -- since July. Everybody built as much as they could in the first half of the year. There is not one manufacturer, not one that hasn't taken many down days and weeks, okay, so far in this quarter, okay? So we're building less trucks. I guess it's less to sell because there's been less demand. And you can circle lead. That's all of the above. When you see you hit it, it's really 3 things. It's their business. It's everybody's business, but the uncertainty, tariffs that make freight go up and down and cost of trucks go up and down. And then you add in, can we get an answer on emissions next year because everyone I spoke to, if their business can get a little bit -- a little -- which we're not -- I'm not saying they're getting it now because you got to take care of those supply issues that I rambled on and talked about earlier when I talk about the amount of trucks on the road, has to get in line with freight. If you can get that back in line, bring some certainty, here's what the emissions regulations are, whatever they are. And if they stay as they are currently under the law, I don't think there's any question in spite of the large freight customers, they'll probably try to pull a little bit forward, not have huge prebuys, but they will try to shift some stuff maybe they do in Q1 or '27 or Q2 and try to shift some of those purchases into the back half of the year. If it stays as it's written right now and doesn't get -- there's not a pause and they get a little relief, which I said before, for their sake, it might hurt my truck sales in the back half. But for their sake, I just assume they get it -- get that relief. But it's what you said. But really, they need to get aligned -- really, we've got to get the supply aligned with tonnage, and to where they can get a little contract rates. I mean if you look at the TL side, I mean, if they got 2%, they were lucky this last year because they were going down, down, down 10%, 15-plus percent the prior couple of years. Well the cost of trucks and everything operationally and inflation went up, up and up, they have nots, you've seen the ORs and some of these things, and they're not what they historically have been on that side. Now LTL still fared better. Of course, 2 years ago, they got a little tailwind with the demise of yellow and stuff. So when the third largest carrier goes out. And there's many fewer barriers to entry or there's excuse me, more barriers to entry in LTL with all the doors and terminals and all the stuff that's required in that space. So they've weathered it better than the TL side. But I just got to tell you, the next couple of quarters is going to be tough. You can tell by the order intake that's been there. And it wasn't like everybody was ordering trucks handover fish. Some people -- it was -- we weren't even -- it's difficult to give a price on a trucks deal. But remember, the tariffs, the definition of it just came out 1.5 weeks ago, okay? And these manufacturers are just pouring through it, trying to make sure they clearly understand it, okay? Because it gets pretty complicated as to where -- how these tariffs are figured out from where you build and what are your suppliers because people use different suppliers and where that comes from, et cetera. I would tell you that we'll probably have a whole lot more clarity as to how things are going to pick up in the next 30 to 45 days. There wasn't a lot of clarity at ATA because people -- it was good for some manufacturers and bad for others. And they're trying to sort it out with the Rule 232 is what I'm talking about, but that just came out, whatever, 10, 12 days ago, 10, 11 days ago, and folks are just pouring through it, making sure that they understand it right. So I mean I'll be honest, you couldn't price a lot of people right now. And when you can't do that from a manufacturer, that somebody is supposed to buy something. It's been crazy all year because you would price like you would give quotes that were only good for 90 days, right, or maybe 120 based upon the ever-changing environment around tariffs. Well, that's difficult. You've got all these question marks. If this happens, this will, if not, it's no good. I mean this is the world we've been living in for the last 6-plus months, which has made it extremely difficult. So as all I can tell you is clarity, clarity, clarity and less uncertainty and continue taking supply out and hopefully get a little bump in freight early on in tonnage here. I don't see it right now. But I would hope as we get into the first part of next year, we do see something by the time we get out of Q1, into Q2, something there while you're taking supply out over here, while you're building less trucks, so your intake is less. So you should naturally be squeezing down the supply of trucks. I mean that's all I can -- the best way I can describe it, which for me, the hard part was while we were in a freight recession, we just kept building and selling trucks longer than we probably should have. But now we're on that rightsizing piece, along with the government activities around drivers that are going on the things I mentioned earlier. So anyway, I have some optimism. It's just not over the next 6 months. Okay. Brady Lierz: That's very helpful color. And if I could just follow up on medium-duty. Medium-duty has continued to kind of be a stable growth driver for your business. Can you talk about what you're seeing in medium-duty into the end of the year? And just maybe any preliminary thoughts on medium-duty in 2026? W. Rush: Medium-duty is a different environment, right, a different market by far than the Class 8 world. I would tell you, we expect it to be fairly flat in Q4 with Q3 on the medium side. Most of the downturn will be -- for us will be on the Class 8 side, for sure. Like I've mentioned, there's no question we're going to deliver fewer trucks and things because you can see order intake, that kind of tells you what you're going to eventually come to regardless of what our share percentage might be, there's going to be a lot less deliveries in this country because we haven't taken many orders in for the last 6 months. I would tell you there's a lot of leasing around the medium-duty, okay? And also what we call our Ready-to-Roll inventory. It's just -- it's more about the general economy and what's going on around there. Housing has a lot to do with. There's a lot -- the leasing companies. I would tell you, we're working some stuff that had me somewhat hopeful for the entire year next year. But it too will probably suffer some, maybe not to the degree, right? It will be more stable, I believe, than the Class 8 business will for the next couple of quarters. But at the same time, I don't know that we can comp -- I don't believe we'll comp to the same that we did this year, but it won't have as big a hit, say, as the heavy-duty side will right now. So that's about all I can tell you about it. It's pretty much hand-to-hand combat out there still right now, right? If you want a truck, I still build a queue this year. All good news tell me, there's lots of slots open for everyone, for all manufacturers. So that's -- it's going to be November 1, and we shut down, most manufacturers shut down in the last 10 days of the month of December. So -- and they're still not full by any stretch in their backlogs, and that's why they keep taking shutdown days. I'm talking about all manufacturers. Some will probably do better than others, but I'm not going to get into all that right now. But -- all I can tell you is that medium-duty should weather better from a downturn perspective given the diversity of its -- of the markets it serves because it serves so much the general economy. But it's not totally -- it will get – it will suffer some for sure, though. Brady Lierz: That's super helpful. Maybe just a final quick follow-up. Could you share what you're seeing in the used truck market, particularly how is used truck pricing trending just given this, like you said, volatile backdrop to say the least? W. Rush: Well, I think it's been fairly stable. And when I say that, normal depreciation, unlike, say, a year ago, if you asked me that, I would have told you no, depreciations for 2 years for sure, we're double depreciating. I would tell you now depreciation is more in line with what you typically would see from a percentage perspective. So that's good. And our used trucks, while it's always more difficult winter time with used, but we've done a really nice job. I'm proud of the job we've done on the used side all year long, managing our inventories and staying and doing whatever we have to do to support our customer base. Because remember, one thing about used is you have -- you've got -- you take trades, right? So you have to have the flexibility and the ability to take trades. We've managed -- we've taken our inventory up a little on purpose during this last couple of quarters to try to move more, not to -- we've taken it way down, okay? I think we've probably split the middle on where our inventory is currently from where I used to carry it to where we do now because you got to turn your used inventory. And our turns are -- they're maybe not as tight as they were at one time, but our production overall, you got to have inventory to do that for sure. As always, when you think about, as I mentioned in my comments to open, used trucks, they don't have to worry about tariffs or emissions, do they, okay? So there is somewhat of an advantage to that -- there's not -- there's certainty around used trucks. So they're not worried about tariffs or, as I said, emissions. when you're buying a unit. So that's a plus. So we've had a really nice year, and we expect it to be solid going forward. I mean the problem is just -- the volumes just can't make up for when heavy-duty pops down. But remember, we -- the thing about the company, and I think sometimes people lose sight of is we have many revenue streams. Remember, I got a great leasing fleet. We're super profitable in our leasing operations. We're profitable on our parts and services. You can tell all the time. Everybody is focused always on truck sales, and they are a big piece of what we do. But at the same time, they're not the most -- parts and service is the one stable piece that you -- when I say it -- it does not have the volatility of the Class 8 truck sales market. So fortunately, we have all those revenue streams that help us weather the storm, but we top it up, knock it out of the park when you're not -- you need to have all pieces contributing. But the good part is, unlike some other businesses where they're tied to just 1 or 2 revenue streams, we have many more, which allow us to get through environments like we're seeing right now and continue to put out the kind of results we do. Are they the best results we've ever had, of course, not. But we're not going to sell as many trucks, but they're going to be solid and they're going to be good. And forgive the environment, a whole lot better than my customer base has had to put up with. I feel sorry sometimes what they've had to go through the last 3 years. A lot of them have anyway, especially like I said, on the truckload side and some of the others. So anyway, I know it's probably more you want to hear about, but that's just how I it. But now we're good where we're at on used and hope to continue to have solid quarters there. Operator: Our next question comes from Avi Jaroslawicz from UBS. Avinatan Jaroslawicz: So I know parts and service business is a pretty big focus area for you guys in trying to grow that. Can you just remind us what you're doing to pick up more share in that part of the business? And is that more challenging to pick up more share in a softer market like that, like what we're seeing now? And also, where are you still seeing opportunity within that space? W. Rush: Well, it is more challenging without question, right, because the overall market is down. I would tell you we're holding our own this year. I don't know that we've picked up as much as we would like to because when you get in this type of environment, it becomes much more highly competitive and especially with the inflation stuff we've seen in the parts arena this year, it becomes more competitive, to be quite honest. Some folks are just looking to turn cash, right? And sometimes margin sometimes takes a backseat. So you have to balance what you're doing between taking share and margin and results at the same time. And so that becomes a challenge in this type of environment when it's not a growing sector, we've remained fairly flat all year, right? I would tell you we're in line, maybe a little bit better than the overall from a dealer -- break it into independents and dealers. And I would tell you from a dealer perspective versus other dealers, I think we're in pretty good shape. The independents, they can get down and dirty when it comes in this type of environment. But our overall deal is this. And over time, I don't want to look at it just every quarter. I'd rather look at it annualized and over a couple of 3 years. If the market goes up, just make a simple math, 5%, we want to go up 6%, okay? Why that means we're taking share. We have historically been able to do that and then throw a little M&A in there and do better than that some years, right? But -- so I'm not going to say we've done that this year, but I think we've taken some maybe not as much as I would like. We want to be 20% better, right? Because to be 20% better, if you're taking a little bit more, you're just slowly ramping up your share. It's not an add water and stir arena. And as far as what we do, like our technology and our data is second to none, okay? So it's continuing to take that. And without getting into each and every project that we have out there, we always have projects going on to help enhance it that support growth, right? They're not just -- we don't go about it the same way every year like what we go about our business, but we keep enhancing and adding technology and stuff to make it easier and easier for our customers to do business with us. And that's the key piece from our perspective as we look at going forward. Our industry is -- it's not like consumer, right? It tends to operate a little behind the time well, which can be challenging because you have to keep pace with your customers, right? And when I say that, I don't want to downgrade our industry, but it's typically still a little more hands-on than, say, some other consumer type things and how you go about it. But technology continues to be a bigger piece of it. And I don't like to get into some of the things we do just because I consider them proprietary. I think those investments and also our investments in folks and people, our growth in the mobile service area, those types of things, we have goals that are pretty well stated out there. I think most a lot of investors understand that because we expound on them quite a bit when we go to conferences. I have 3 up here coming up in the next month. to let people know those types of investments, where we want to grow our mobile service fleet to x and then we want to take our total technicians, and we want to grow our outside service -- excuse me, our outside parts and service, what we call ASRs, take those guys more -- grow that part of our business, too. But sometimes you got to be careful because in a market that's getting really tight, you need to have a market out there, but we still think there's a lot of runway, and we will continue to do it and have the goals we have around, like I said, to try to do about 20% better from a growth perspective. If market goes up 5%, we want to go up 6% because it's not somewhere you're going to go from 5% to 15%. If market is 5%, we're not going to take 15%, I mean if I'm giving stuff away or doing this and doing that. And that would not be -- I don't believe that's the right way to go about it. Operator: That concludes the question-and-answer session. I would like to turn the call back over to Rusty Rush, President, CEO and Chairman of the Board, for closing remarks. W. Rush: Well, everyone, this is the longest gap between earnings calls. We won't be talking to everybody until February. So in the meantime, I wish everyone a happy holidays and safe holidays, and we'll talk to you in February. God bless you all. Thank you. Operator: This concludes today's conference call. You may now disconnect.
Operator: Thank you, and welcome to the ConnectOne Bancorp, Inc. Third Quarter 2025 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Siya Vansia, our Chief Brand and Innovation Officer. Ma'am, please go ahead. Siya Vansia: Good morning, and welcome to today's conference call to review ConnectOne's results for the third quarter of 2025 and to update you on recent developments. On today's conference call will be Frank Sorrentino, Chairman and Chief Executive Officer; and Bill Burns, Senior Executive Vice President and Chief Financial Officer. I'd also like to caution you that we may make forward-looking statements during today's conference call that are subject to risks and uncertainties. Factors that may cause actual results to differ materially from expectations are detailed in our SEC filings. The forward-looking statements included in this conference call are only made as of the date of this call. The company is not obligated to publicly update or revise them. In addition, certain terms used in this call are non-GAAP financial measures, reconciliations of which are provided in the company's earnings release and accompanying tables or schedules, which have been filed today on Form 8-K with the SEC and may also be accessed through the company's website. I will now turn the call over to Frank Sorrentino. Frank, please go ahead. Frank Sorrentino: Thank you, Siya, and good morning, everyone. Pleased to report that during the third quarter, we continued to build upon our strategic objectives, a clear reflection of our team's focus, client dedication and discipline. As a result, the integration of our merger is complete, credit quality remains solid and our margin continues to expand, all while organically growing our balance sheet. And so our systems merger, as we just talked about, systems merger integration, which took place only 2 weeks after the legal close, went exceptionally well, driven by outstanding collaboration across our team. In our first full quarter post-merger, we're operating seamlessly. One organization, consolidated systems, strong cultural alignment and unified client-first mindset. We have since built meaningful momentum across our markets, leading to accelerating performance metrics. We're seeing strong engagement, ongoing new client onboarding, healthy growth in loans and deposits. This progress is especially evident on Long Island, where we're leveraging our strategy to drive growth and strengthen our business. An attractive market we entered several years ago, the merger has accelerated our goals. Importantly, the positive financial aspects of the transaction are beginning to take hold, and Bill will discuss a little bit more about that in a little more in a minute. Operationally, ConnectOne's ability to attract and retain deposits remains a strength. During the third quarter, our core deposits continued to grow across both established and newly acquired client relationships. Loan originations this quarter remained healthy with over $465 million in new funding. Our team is energized to leverage our expertise and attract growth opportunities across our expanded. Looking ahead, we're well positioned for the balance of 2025 and into 2026 with a healthy and diversified pipeline for C&I, CRE, construction, SBA lending, demonstrating the strength and the reach of our franchise. Credit remains strong, supported by prudent and consistent underwriting standards and portfolio oversight. Our nonperforming assets were just 0.28% at the end of the quarter. Annualized net charge-offs remained below 0.20% and 30-day delinquencies were just 0.08% of total loans. Additionally, ConnectOne's capital and tangible book value grew meaningfully. Overall, our third quarter operating performance clearly demonstrates the strength and the potential of this organization. And with that overview, I'll turn it over to Bill to walk through some of the performance... William Burns: All right. Thank you, Frank. Good morning to everyone on the call. It was a great quarter, and our outlook remains very positive with strong performance anticipated across all of our operations. As Frank mentioned, the merger, which was finalized 5 months ago on June 1, now fully integrated, and that was due to a swift seamless brand and back-office systems conversion completed within the very first month. That rapid integration has allowed our performance metrics to excel with an acceleration of improvements expected in the fourth quarter and into 2026. Operating performance metrics already show significant year-over-year improvement. In the current quarter, operating return on assets increased by over 30 basis points to 1.05%, while PPNR as a percentage of assets rose by approximately 50 basis points over the past year to 1.61%. our earnings performance is being driven by the merger and a widening net interest margin, which grew to 3.11% from 3.06% in the sequential quarter and from 2.67% a year ago. And the spot margin at quarter end was already higher than 3.20%. We expect the fourth quarter margin at 3.25% or even above. Now the current quarter's margin of 3.11% reflected 2 temporary factors. One was the $75 million of high rate subordinated debt that was still outstanding but redeemed on September 15. And we also had higher than typical average cash balances due to the large deposit growth that we've had, which exceeded $600 million. We anticipate average cash balances to be below $400 million in quarter 4 as that cash rotates into loan fundings. So without those 2 items, which work to compress the reported margin, the third quarter NIM would have been in excess of 3.50%. In terms of the balance sheet, we continue to observe robust deposit growth following exceptional organic growth in the second quarter. On a sequential basis, our client deposit growth was approximately 4% annualized, and that was building on the second quarter's annualized growth of 17%. Annualized sequential loan growth for the quarter matched deposit growth, and that maintained our loan-to-deposit ratio below 100%. Now the loan pipeline is strong, and we expect loan growth to accelerate in the fourth quarter, average loans increasing by more than 2%, not annualized, 2% from quarter-to-quarter versus the sequential third quarter. And please keep in mind for your models that average cash is likely to decrease and that will slow the increase in total interest-earning assets. In 2026, we could easily see loan growth in the 5% plus range, that will be dependent, of course, on the economy and loan demand. Now adding to the strong performance of ConnectOne this quarter were 2 nonrecurring items that boosted pretax income by more than $10 million. Let me explain those to you. First was a $6.6 million of cash received this quarter, the employee retention tax credit that was conceived during the pandemic. Now initially, it was for companies with less than 100 employees, and that was for the years 2019 and '20. That employee threshold was raised for 2021 to include businesses with up to 500 employees, that allowed ConnectOne to qualify. At the time, ConnectOne had 450 employees, reflecting our efficient operating model given our asset size. Now today, our staff size has grown to about 750 employees due to organic growth and acquisitions, yet we remain a peer-leading efficient organization, about $19 million in assets per employee. Now the second onetime benefit recognized during the quarter $3.5 million pension curtailment gain relating to the freezing of First of Long Island's pension plan effective September 30, with the shifting of those benefit values to our 401(k) match program. The realignment of the benefit plans will result in merger net cost savings of $1 million annually, and that's in addition to this onetime $3.5 million present value benefit recorded this quarter. Now in terms of noninterest income, very, very strong quarter because of those nonrecurring items, it exceeded $19 million. The recurring level of noninterest income right now remains at about $7 million per quarter. We expect growth, especially in gains on sales as we continue to build out SBA, BoeFly and residential mortgage. We expect SBA to add significantly to our noninterest income in 2026. Keep in mind, with the government shutdown, we could see a backlog building in the fourth quarter, and that will be made up after the government reopens. Operating expenses, net of merger and restructuring charges were $55.8 million and our recurring run rate guidance remains approximately $55 million to $56 million for the fourth quarter and $56 million to $57 million per quarter during the first half of '26. And the latter part of '26 could drift to slightly higher. I'll keep you updated on our targets as we move forward. These amounts reflect normal expense growth, net of additional merger savings, which have not yet been realized. Turning to taxes. Our tax expense line for the full year has been a little tricky that reflected the merger and we had a second quarter charge related to intercompany dividends. I also want to mention that our actual marginal tax rate has trended upwards, but our growth and geographic reach have impacted our traditional tax strategies. Now for '26, we plan to utilize new strategies. Those are expected to result in an effective tax rate in the range of 28%, maybe a little higher, maybe -- let me turn now to credit. As Frank mentioned, I'm going to repeat some of these numbers, credit quality remains sound by all measures. Nonperforming asset ratio is at historical lows at 0.28%. Charge-offs for the quarter were just 18 basis points. Delinquencies more than 30 days were only 0.08% of total loans, very, very low in terms of. The CRE concentration continued its downward trend, falling to 4.34% at September 30. Our capital ratios continue to strengthen. Holding company tangible common equity ratio rose pretty significantly to 8.4%. And while our goal is to reach 9%, there's no immediate need to achieve this. Additionally, tangible book value growth has resumed its upward trend, a 5% increase we've calculated in tangible book value per share since the merger's completion. And with a higher level of projected retained earnings, we expect to have enough room in '26 for a common dividend increase and opportunistic share repurchase. That's it for my introductory remarks, and back to you, Frank. Frank Sorrentino: Okay. Thank you, Bill. Simply put, we've built a premier commercial bank with the scale and talent to serve the largest and one of the best markets in the country. ConnectOne's franchise value is in its strongest position ever, driven by accelerating financial performance, prudent organic growth opportunities, a strong technological focus and solid credit quality. Based on where our stock is trading today, we believe there's never been a more compelling time to invest in ConnectOne. As always, we appreciate your interest in ConnectOne Bancorp. Thanks again for joining us today. And with that, I'd like to turn it over for your questions. Operator? Operator: [Operator Instructions] Our first question comes from the line of Daniel Tamayo from Raymond James. Daniel Tamayo: Maybe starting on your profitability targets. I think last quarter, you talked about, Frank, hoping to hit 1.2% ROA and 15% ROTCE in 2026. Just interested in your current thoughts around profitability targets for next year. William Burns: I think those targets are in line -- still in line with where we said before, easily see 120 by the second quarter. And my model at least is showing us getting close to 130 by the end. Daniel Tamayo: Okay. Great. And then a follow-up kind of unrelated, but we saw yesterday the announced end of quantitative tightening. I'm just curious maybe you guys' thoughts on how that could impact deposit growth and/or pricing in your markets. Frank Sorrentino: Well, I think it will bode well for us going forward. Certainly, it appears the Fed believes the economy is going to continue to be somewhat robust and that more liquidity is needed in the marketplace, and that liquidity generally turns into deposits at banks. So I think across the spectrum of banks, you'll see deposits continue to grow, which I think will be good. It will reduce some of the competitive pressures out there. I think everyone has seen over the last quarter or 2, some of the -- while short-term rates have gone down, there's been increased competition for deposits. So a steepening yield curve, more liquidity and a robust economy that's pretty stable. I think certainly for ConnectOne bodes well, and I think it bodes well for our industry... William Burns: I agree with what Frank said. And also the margin continues to expand for all the reasons we've talked about before. It's still going to be -- we don't know exactly how many Fed cuts at the end of next year, but there are going to be a few. And our loans are repricing faster. Even in a down rate environment, our loans are repricing upward. So still looking at margins. I'll be bold enough to say approaching in the 3.40% to 3.50% range by the end of next year. Daniel Tamayo: That's great. Yes, let's hope all of that works out in your favor. It seems like it's trending certainly positively. So anyway appreciate all that color guys. Operator: Our next question comes from the line of Tim Switzer from KBW. Timothy Switzer: The first question I have is now that you guys have closed the merger full quarter in, how do you guys think about the capital allocation and deployment going further? Frank, you mentioned you think your stock is a value. Are share repurchases on the table here? And I would just like to get some color on that. Frank Sorrentino: Well, from my perspective, I know Bill made some comments relative to our ability to build capital. Capital is building quite quickly at the company, as you know, from a variety of areas, including profitable growth that we have. So I do think we'll have a lot of flexibility in 2026 to make some determinations as to what we should do with that capital. Obviously, if we see higher growth rates and we're opportunistic to engage in organic growth at the higher end of the spectrum, that will leave a little bit less for other opportunities. But overall, I think we can pretty much do anything we want to do in '26. Bill, I know you had some strong... William Burns: Yes. No, I agree with that. Our growth is going to be prudent and disciplined in terms of spreads. I'd like to see the capital ratios trend upwards. But I think I said on the call, even with all that because of the low dividend payout ratio we have today and the high level of earnings, we'll have room for opportunistic share repurchase. Timothy Switzer: Okay. Great. That's good to hear. And then I was also looking to get an update on BoeFly and maybe the growth outlook there, putting aside the government shutdown, the impact on SBA it's more near, but I'd love to get an update on that. And then also maybe some color on the recent changes to rules governing kind of like the smaller dollar million dollar or less loans in SBA that in terms of like underwriting and the new fees that came back in over the summer. Frank Sorrentino: So we'll start with BoeFly. Bill will talk a little bit more about the specifics of the various programs. But BoeFly since inception here at ConnectOne has continued its upward trend. We now represent some over 250 national franchise brands across the nation, which is an all-time high. When we purchased the company, I think they represented that. So this trajectory upward, and we put a lot of effort into sort of being the predominant company that can validate franchisee applications in that space. And so that's led to this growth in that portfolio. We've really focused over the last year or so to drive the opportunities that come out of that business to our growing SBA platform. And we're really beginning to start to see on a -- from a financial perspective, the fruits of all of that labor. And you will continue to see that in the future by the SBA revenue line continuing to expand. So we're very happy about where we are. We're very happy about where we're headed with that, and we're very happy about how it's translating into quality revenue here at ConnectOne. Bill, maybe you want to add. William Burns: Just to repeat a little bit of what you said and that we spent the past couple of years really building and perfecting platform for BoeFly led to significant increase in the number of franchisors that participate. And we're now starting to translate that into more income through SBA sales. So it already was reflected this quarter. And the increase is expected to accelerate. There's a little bit more of a -- when it comes to franchise loans, there's a little bit more of a period that it takes from inception to gain. So the pipeline is building heavily for next year, and I'm very optimistic we'll have a lot of gain on sale there. In the meantime, we've been building our boots on the ground SBA lending and everything is working in our favor there. So look, we started off from 0, and it's going to be a big portion of our noninterest income going forward. Operator: Our next question comes from the line of Matthew Breese from Stephens Inc. Matthew Breese: First one for me. It was really nice to see those noninterest-bearing deposits up, I think, 3.7% quarter-over-quarter and then CDs down 2.8%. Maybe just talk to us about what's going on, a few of the wins there? Are they acquisition related? Meaning is the FLIC deal and the brand starting to bear some fruit? And then looking ahead, can we see deposit growth match or exceed loan growth for next year, maintaining that sub 100% loan-to-deposit ratio? Frank Sorrentino: Yes. Well, I'll take your questions in reverse order. So the goal would be to match the deposits with the loans. And that actually answers the first part of your question. There's been a focus here at ConnectOne over the last couple of years to really redefine and make certain that the business we're in is to be a relationship bank that takes in deposits and make loans. And we like taking in deposits from the same folks that we make loans to. So we've had an effort ongoing here through all of our lending teams to really focus on making sure we're going after the types of clients that bring us substantial depository relationships. And we've been weeding out part of the slowdown in the overall growth is weeding out of clients who maybe promised us depository relationships and never delivered or just folks that wound up here with a transaction. We really don't want to be just a transaction-oriented bank. So I think with that focus and that focus continues going forward, I think actually, the merger that we just completed, the group of clients that we onboarded there, actually, they have had the sort of a reverse issue there where they were very deposit-rich and didn't take advantage of all the lending opportunities for those clients. So I think rounding out the folks that we're getting in front of on Long Island, this continued focus on high-quality relationship-type clients is really what's driving the profitable and as Bill said, spread-dependent business that we have. And also, it's allowing us to bring on high-quality type clients that should ensure that we keep a loan-to-deposit ratio in and around the range today. Matthew Breese: Great. And then, Bill, maybe you could help me out with a couple of things. What proportion of loans are now pure floating rate? And this quarter, what did you see for roll-on versus roll-off dynamics on fixed rate or adjustable rate loans? I guess where I'm going with this is, are you starting to see any spread compression as some of your competitors have indicated? William Burns: First off, to answer your first question, it's only about 15% of pure floating. So we're in good shape there. In terms of the roll on and roll off of fixed versus floating, I'm not sure whether -- how much has changed the dynamics of the balance sheet. I know you usually ask about what rates loans are going on versus coming off. When you add drawdowns to it and pay downs, it's like in the high 6s going on, the low 6s going off. Matthew Breese: Great. And then just 2 others for me. First one is just on the reserve. You have a 1.35% reserve to loans ratio. Historically, ConnectOne has been a lot lower, maybe 1% to 1.05%. Credit remains solid. Over some period of time, should we expect that reserve to kind of trend back to where you were as kind of FLIC loans reprice? It just seems high relative to the credit quality. William Burns: Yes. I think that -- yes, that's how it will work. Okay. It will gravitate back towards the 1 level or maybe a little bit higher. We'll see where the economy is and how the CECL works at the time. Matthew Breese: Okay. All right. And then last one is just, Bill, you had mentioned elevated cash, cash could come down next quarter. What should we be thinking of in terms of normalized cash to assets? That's all I had. William Burns: For now, I would say $350 million to $400 million would be normalized. It could go lower than that. But for this quarter coming up, that's what I would say. Okay. So if you look at our loan growth on an average basis, you're going to see pretty flat interest-earning assets. And that's fine by me in terms of capital ratios, in terms of margin. Operator: [Operator Instructions] our next question comes from the line of Feddie Strickland from Hovde. Feddie Strickland: Just wanted to stick on the loan repricing opportunity piece there. Bill, can you help us quantify just on the amount of fixed rate loan repricing we could see over the next several quarters? What -- just trying to figure out the size of the opportunity there. William Burns: The opportunity is quite large, probably have about $1 billion repricing in '26 and another $1 billion in '27. Feddie Strickland: And then wanted to follow-up on credit. Obviously, good to see NPA stable, net charge-offs step down a bit. Do we expect charge-offs to kind of remain in the high teens to low 20s range just in terms of basis points of average loans? Or does that step down? Just trying to get a sense for what we should see... William Burns: Yes. I mean it's hard to predict, but we've been pretty steady with that. So I'm running my own model, that's what I would have going forward for the next 4 quarters. Operator: Our last question comes from the line of Daniel Tamayo from Raymond James. Daniel Tamayo: Just a follow-up here for me. So maybe first, you can just remind us what your balances of rent-regulated loans are at the end of the quarter. And then the follow-up to that is just curious kind of if you could update us on your thoughts if we do get a Mamdani win next week in the mayoral election, what that means for the whole rent-regulated kind of industry in your opinion? William Burns: All right. Let me start with the numbers, and I think we're positioned well. The total aggregate exposure to majority-owned rent-regulated $700 million. 60% of it or $400 million came from First of Long Island, where we have a 20% mark against it. So in my view, that's completely ring-fenced -- rest of it, ConnectOne portfolio is about $275 million, less than 2.5% of our total loan portfolio, conservatively underwritten, no value-add projects, continue to perform well, moderate, I would say, not super significant stress in the portfolio. And Frank, do you want to comment on. Frank Sorrentino: Sure. As you can well imagine, we get this question a lot, certainly being centered in the New York Metro market. And my answer has been fairly consistent. There are so many variables as to what will happen from today forward, whether he wins, he doesn't win. Let's not forget the other alternative to Mamdani is Cuomo, who is the one who signed the actual 2019 rent regulation law that's causing a lot of the consternation in the portfolio anyway. So it's not like we're going from one side of the spectrum to the other. Rent regulated is here to -- rent stabilized rather, is here to stay. It's a constant struggle within that marketplace relative to the expense base versus the revenue stream. On the positive side of the equation, we saw this year a 3% increase that came on the back of a 2.7% increase the year before. It looks like for the next couple of years, we're still going to have a rent-regulated board that's fairly reasonable and is taking into account inflation, other costs that are being pushed through the system. There are those who would argue that potentially a Mamdani administration might actually be good for the rent-regulated portfolio in that he's looking to work to reduce the expense side by reorganizing the tax basis and tax base for real estate taxes and other potential solutions to allow landlords to be able to invest in the property to get more units back on the market. As you know, there's some 50,000 rent stabilized units that are vacant today because of the change in the 2019 law. So there's just too many variables to put your finger on, here's what's going to happen. All I know is this has been something that's been in existence for a very long time. It's ebbed and flowed. And for the most part, I'm pretty optimistic that one way or another, people need places to live. I think there's going to be programs put in place to make certain that, that product continues to be available to residents in New York City. It will change over time, how that change occurs. Hard for me to say right now. We're pretty -- we're not pretty, we're very comfortable with the loans that we underwrote. We were never part of the whole value-add story to get rent stabilized tenants out and replace them with market tenants. So we really don't have that risk on our balance sheet in those lending opportunities. And I think over time, it's just going to get figured out what to do with that product set. So we're comfortable with the operators that run the assets that we have. And we have very strong LTVs and debt service coverage ratios at properties that are in our portfolio. Of course, we're going to watch very, very closely what happens over time. But I do think this is a very, very slow-moving process. I don't think anything is going to happen with any immediacy in the short term. Operator: There are no further questions at this time. I'd now like to turn the call over back to the management for closing remarks. Frank Sorrentino: Well, I want to thank you, everyone, for joining us today and for some really great questions. And we look forward to speaking with everyone during our year-end and fourth quarter conference call. Everybody, have a great day. Operator: Thank you. You may now disconnect.
Operator: Good day, and welcome to the Saia, 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 Matt Batteh, Saia's Executive Vice President and Chief Financial Officer. Please go ahead. Matthew Batteh: Thank you, Chloe. Good morning, everyone. Welcome to Saia's Third Quarter 2025 Conference Call. With me for today's call is Saia's President and Chief Executive Officer, Fritz Holzgrefe. Before we begin, you should note that during this call, we may make some forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements and all other statements that might be made on this call that are not historical facts are subject to a number of risks and uncertainties, and actual results may differ materially. We refer you to our press release and our SEC filings for more information on the exact risk factors that could cause actual results to differ. Also, in the third quarter, we recorded $14.5 million in net operating expense reduction from a gain on real estate disposal and impairment of real estate. When we discuss adjusted operating expenses, adjusted cost per shipment, adjusted operating ratio or adjusted diluted earnings per share in our comments, it refers to our adjusted results that exclude the gain from that sale and impairment on that property. See our press release announcing third quarter results for a reconciliation of non-GAAP financial measures. That press release is available on the Financial Releases page of Saia's Investor Relations website. I will now turn the call over to Fritz for some opening comments. Frederick Holzgrefe: Good morning, and thank you for joining us to discuss Saia's Third Quarter Results. We are very pleased to share that our results for the third quarter reflect our continued focus on customer service, network optimization and cost control efforts. Our customer-first focus remains paramount as we continue to mature in our newer markets. Although the economic backdrop continued to exhibit the trends seen throughout 2025, with customers awaiting a more certain environment. We are pleased that our expanded footprint continued to provide opportunities to service customers in both our legacy and ramping markets. Our ramping markets, which are made up of the 39 terminals opened since the beginning of 2022, grew sequentially and improving their operating ratio by over 100 basis points compared to the second quarter and are now operating at a sub-95 OR. 17 of these terminals have just completed their first year of operations, making the overall improvement in performance even more impressive. Our nationwide footprint allows us to build deeper relationships with customers, and we're seeing the benefit of the investments made in our network over the past several years. Compared to the second quarter, we experienced revenue growth in both legacy and ramping markets. Customers value ease of doing business and with our now national network, we are better positioned to provide solutions than we ever have been. Our third quarter revenue of $839.6 million was relatively flat compared to last year's third quarter, reflective of the macroeconomic landscape. While our third quarter operating ratio was 85.9%, adjusting for the onetime real estate transactions, our adjusted operating ratio was 87.6%. Adjusting operating ratio -- adjusted operating ratio increased by 250 basis points compared to our operating ratio of 85.1% in the third quarter last year, but improved by 20 basis points compared to the second quarter of 2025, outperforming historical seasonality. The improvement from the second quarter was achieved primarily due to our focused cost control efforts, resulting in a decrease in sequential adjusted cost per shipment despite headwinds from increases in self-insurance and related costs. Excluding the net impact of the real estate transactions, our adjusted cost per shipment improved sequentially from the second quarter by 70 basis points. The sequential improvement reflects our continued focus on operational execution and efficiency while still maintaining our focus -- our performance standards. For the quarter, our cargo claims ratio was 0.54%, which is our fourth straight quarter of sub 0.6 cargo claims ratio, a notable company record. Additionally, reflective of our expanded offering and continued service performance for customers, our contractual renewal rate for the quarter was 5.1%. Volumes for the quarter were in line with our expectations based on how the overall freight market has trended in 2025. Compared to the third quarter of 2024, shipments per workday increased -- decreased 1.9%, while sequentially shipments per workday improved 3.2%. We continue to experience outsized growth in our newer markets where our expanded footprint and service offering provides more opportunities as customers come to understand and see the value in our expanding service capabilities. Our ramping facilities saw a 4.2% sequential improvement in shipments per workday in the third quarter of 2025. In facilities opened prior to 2022, shipments increased 3% sequentially and decreased 4.8% compared to the third quarter of 2024. We are pleased to see both legacy and ramping facilities grow sequentially, reinforcing the value of a national network through our expanded service offering despite a softer overall LTL freight market. In Q3, we saw continued benefits from our accelerated network optimization efforts that began in the first quarter of the year. Enabled by our ongoing investments in technology, these initiatives improved efficiency across our national footprint as handles or the number of times a shipment is touched as it's routed through our network continue to be lower than their first quarter peak. We expect our national footprint to continue to scale moving forward, aligning with our long-term strategy of getting closer to this customer, improving service levels and providing solutions that meet customers' needs. We are already seeing the benefit of our investments in our results and conversations with customers reinforce our value proposition. Optimization of mix remains an intense focus for us, and our ongoing efforts around pricing remains one of our biggest opportunities. As noted earlier, our expansion strategy is yielding tangible results as we get closer to customers and can provide more solutions to meet their needs. Sequentially, over 70% of our volume growth came in 1- and 2-day lanes across our network, with over 2/3 of that growth coming from customers that we already do business with. Growth in these lanes helped drive an increase in operating income and profitability compared to the second quarter. This growth driven largely by our National Accounts segment demonstrates the impact of our expansion and ability to grow with existing customers and build relationships with new customers. We implemented a GRI on October 1 at a rate of 5.9%. As a reminder, this increase will impact approximately 25% of our operating revenue and varies by mix of business and lane. Ensuring that we drive returns on our substantial network and service investments remains a focus, and this GRI is another step in the right direction in obtaining the compensation we expect from our customers for the service we provide in this inflationary business. I'll now turn the call over to Matt for more details from our third quarter results. Matthew Batteh: Thanks, Fritz. Third quarter revenue was relatively flat compared to prior year, decreasing 0.3% to $839.6 million, while revenue per shipment, excluding fuel surcharge, increased 0.3% to $294.35 compared to $293.39 in the third quarter of 2024. Fuel surcharge revenue increased by 2.1% and was 15.2% of total revenue, compared to 14.8% a year ago. Yield, excluding fuel surcharge, decreased by 0.1% while yield increased by 0.5%, including fuel surcharge. For the third quarter, shipments per workday decreased 1.9%, while weight per shipment and length of haul increased slightly compared to the third quarter of 2024. With this change, tonnage per workday for the quarter decreased 1.5% to approximately 24,700 tons compared to approximately 25,000 tons in the third quarter of 2024. Shifting to the expense side for a few key items to note in the quarter. Salaries, wages and benefits increased 0.7% compared to the third quarter of 2024. This increase is primarily driven by increased employee-related costs including group health insurance and workers' compensation costs due to cost inflation and experience. These increased costs were partially offset by reduced wages compared to prior year as we continue to match ours to volume. Compared to the third quarter of 2024, head count was down 3%. Purchase transportation expense, including both non-asset truckload volume and LTL purchased transportation miles decreased by 9.5%, compared to the third quarter last year and was 7.1% of total revenue compared to 7.8% in the third quarter of 2024. Truck and rail PT miles combined were 12% of our total linehaul miles in the quarter. Fuel expense for the quarter increased by 0.9% compared to prior year, while company linehaul miles increased 1%. The increase in fuel expense was primarily the result of an increase in national average diesel prices by over 1.8% on a year-over-year basis. Accident claims and insurance expense increased by 22.5% year-over-year. The increase compared to the third quarter of 2024 was primarily due to development of existing accident-related claims and inflationary increases in cost per claim. Depreciation expense of $64 million in the quarter was 17.2% higher year-over-year, primarily due to ongoing investments in revenue equipment, real estate and technology totaling over $600 million over the last 12 months. Compared to the third quarter of 2024, adjusted cost per shipment increased 4.6%, largely due to the increases in depreciation and self-insurance related costs. On a sequential basis, though, adjusted cost per shipment improved 0.7% from the second quarter of 2025 as cost management and core execution remained a heavy focus. This sequential improvement was achieved despite the headwinds from sequentially rising fuel costs and self-insurance related costs. Total operating expenses increased by 0.6% year-over-year, but after backing out the net gain on real estate in the third quarter, total adjusted operating expenses increased by 2.6% for the quarter. When combined with the year-over-year revenue decrease of 0.3%, our adjusted operating ratio increased to 87.6%, compared to 85.1% a year ago. Our tax rate for the third quarter was 24.8% compared to 24.4% in the third quarter last year, and our diluted earnings per share were $3.22 compared to $3.46 in the third quarter a year ago. Our adjusted diluted earnings per share for the third quarter of 2025 were $2.81. I will now turn the call back over to Fritz for some final comments. Frederick Holzgrefe: Thanks, Matt. I'm pleased with our team's ability to focus on what we can control at this point in the cycle. Each day brings new variables and the ability to improve operating ratio sequentially from the second quarter despite headwinds from increased fixed costs in addition to elevated insurance-related expenses, speaks to our team's ability to remain steadfast in our focus on core execution and cost management. This quarter is yet another example of our team's operating performance being the best in the industry. In addition to the GRI, we also implemented a wage increase of 3% effective October 1, for all employees. We recently completed our annual engagement survey, and for the third year in a row, had a participation rate over 6 -- or over 80%. This participation rate remains among the strongest in the industry and most significantly, our overall employee engagement remains high and actually improved compared to last year. The results of the engagement survey continue to reflect an engaged workforce despite the economic trends seen throughout the year. While we always have areas in which we can improve, I'm very pleased with the results of the survey and the ongoing commitment of our teams throughout the network. Saia expanded footprint is supported by our best-in-class team and the commitment of the team shows in the results seen in Q3. In a down freight cycle, we continue to focus on the customer by providing a high level of service while at the same time, maintaining cost management and improving core execution. We have remained resilient amid customer shifts that seem to transpire on a day-to-day basis and are well positioned to leverage our investments in the network over the last few years into an opportunity to turn Saia into one of the largest players in the LTL industry. Given the ongoing market conditions, the results we're seeing from the investments in our network and our ability to adapt to uncertain environment, we believe that we're still in the very early stages of realizing our full potential. With that said, we're now ready to open the line for questions, operator. Operator: [Operator Instructions] The first question comes from Chris Wetherbee with Wells Fargo. Christian Wetherbee: Maybe 2 quick questions here. Just kind of curious how things have been trending in October from a tonnage perspective or a shipments perspective. And then Fritz, I noted you put the wage increase in October 1. Maybe you could give us a little bit of color or framework around how you think about the fourth quarter operating ratio in the context of the improvement you're making on the cost per shipment but also obviously some changing dynamics with seasonality and volume. So a couple of questions there would be great. Matthew Batteh: Sure. Thanks, Chris. I'll go ahead and give the monthly for Q3 as well, just so everyone has it. So in July, shipments were down 1.2%, tonnage down 0.9% -- excuse me, up 0.9%. August shipments down 2.2%, tonnage down 2.2%, September down 2% -- 2.5% on shipments and 3.3% on tonnage. In October so far, shipments are down around 3.5%, tonnage down about 4%. If we look at October so far, we've seen trends be a little bit depending on the day, up and down a little bit. I think there's maybe a few things that, that could be attributable to, but the first couple of weeks were a little bit lighter than we anticipated. We still have a couple of days to go, but that's where we're tracking as we stand right now. We think about the OR portion, and I'll hand it over to Fritz too for some commentary as well. But if we think about the OR, if you look back in history, the average sequential Q3 to Q4 is about a 250 to 300 basis point degradation usually, assuming years, it's a little bit better. There's obviously tails on either side of that. With October trending a little bit lower this year than what we've expected so far, I think, a fair range, probably in the 300 to 400 basis point degradation range. A lot of that's going to be volume dependent, just seeing where we are so far in October. October is a big month, 23-workday month, followed by an 18-day November, which has its own challenges and just around the holidays in general. So with what we see now, that's where we stand. It's going to be volume dependent as we look forward. Frederick Holzgrefe: Yes. I think just to add, Chris, I mean, I think that the overall environment that's kind of leading the trends that we see, it's been pretty muted throughout the year. I think if you look at the month of October, I mean, certainly, we don't have a direct exposure to sort of the government per se, in terms of business with various different departments. We're downstream from that. And I think to assume that, that doesn't -- hasn't had some impact on kind of the overall environment is probably a bit naive. But I think there's something to that. But at the same time, I'm pleased with what we're doing at Saia around kind of driving the results. So could we get to more of the history we could, for sure. And I think it depends on how November develops and into December. Operator: The next question comes from Jonathan Chappell with Evercore ISI. Jonathan Chappell: Fritz, updates on the -- we'll call them the new terminals, the 39 opened since the start of '22, went from breakeven to high 90s OR to now you said less than 95. And I assume you're doing that without the volume that you had anticipated when you open that up. Is this all strictly a productivity, cost efficiency? And given what you just laid out for October, is it possible for those new terminals to continue to edge better on a margin front without any volume through -- or an accelerated volume throughput in the near term? Frederick Holzgrefe: Good question, Jonathan. The -- our focus as you get developed maturity in those facilities, what's exciting about them is that the incrementals can be pretty positive, and you start to see a bit of that. So I think that as we get -- continue to grow in those markets, both inbound and outbound, that's a benefit to us. Now we're going to run into a bit of challenges around seasonality for sure now, right? It is just -- Q4 is typically a slower time of the year. But the opportunities there are -- it's about maturity in those facilities. I mean you -- we're just now lapping, getting full year behind us on '17 last year. So we're really pleased with what we're seeing around operating efficiencies as we build density across not only in those facilities, but across the linehaul network, right? So as you build those opportunities out, that's what's exciting about where we are at Saia. Operator: The next question comes from Scott Group with Wolfe Research. Scott Group: I want to talk about the pricing environment. If you look at yield and rev per shipment ex fuel, both kind of flat. What are you seeing with the pricing environment? Do we -- I know you don't tend to give updates, but maybe it would be helpful if you did, right? And do you think that we should be expecting those yield metrics to turn positive in Q4? Just sort of any color there? Frederick Holzgrefe: Yes. Listen, I think broadly, Scott, the environment is around pricing is disciplined and focused. I mean, I think that this -- the underlying nature of the business is inflationary. And we've talked about that, and I know others have talked about that as well. And -- so it's important to get the pricing right. I think it's also important when you study the metrics at Saia that you understand a few elements of that, right? So this is an emerging -- the mix of business in our -- for us is changing as we go. Right now, we highlighted for you that the growth in the business from Q2 to Q3, a good chunk of that came in 1- and 2-day lanes which we're really excited about because that's -- those are opportunities to grow share of wallet with customers. But those are also, by definition, 1- and 2-day lane pricing, that tends to be relative pricing versus 3-and 4-day lanes are -- it's going to be less, right? That's just the market, but that's not a bad thing. So you're going to have a mix of businesses in there. And I think the other element to consider too and we've highlighted a bit year-to-date, we're impacted by -- we had a very -- we have a very strong or have had a very strong franchise in Southern California. And we look at year-over-year third quarter, that's down high double digits, 18-or-so percent shipment wise. So that's a negative mix headwind for us from -- on the revenue line. But we look at that holistically, what we've been able to do in the ramping terminals. And in the others, I think that's been pretty good performance. So there's a lot moving in. I'd point all this out because there's a lot moving in and out of our revenue lines. Scott Group: Okay. And then again, if you have any thoughts on the Q4 yield, I know you don't do it, but I think it would be helpful. And then just when I look at the margin progression, right, Q1 was tough, down 700 basis points and Q2 was a little bit better, down 450, Q3 down 250, so more progress. But it sounds like Q4 takes a step back and it's down 300 to 400 basis points again. So just curious your thoughts on why it's getting worse again. And maybe it's just too early, but any sort of early thoughts you have about how to think about margins next year? Frederick Holzgrefe: Yes. So we just did a GRI of 5.9%. So that kind of gives you a feeling of what we think about pricing in the environment. We're continuing to push contractual renewals. So that's part of what the opportunity is for us. So we'll continue to focus on pricing and yield management. So that's critical to us. That hasn't changed. I think we need to recognize that we saw that in October so far, it was a bit soft. It's 1 month in the fourth quarter, 23-workday month. We have November coming up, which is 18 workdays. The fixed costs remain the same. You don't have the opportunity to reduce those in a month -- short month like that. So can we over outperform the thoughts around Sequential, we could. And -- but we're trying to be realistic around what we're seeing trend-wise right now and that's reflective in the guide. Matthew Batteh: One add to the pricing environment, Scott. Fritz talked a lot about mix. And obviously, we're getting a lot of great opportunities with customers that we're really exciting about. It's -- this is why we put those dots on the map and we get a chance to talk to them about an expanded offering. And we've had several customers tell us that we're getting awarded this because we can just now solve more problems for them, and we get excited about that. It's great opportunities that we're going to continue to take advantage of. So there is some mix shifts in there. But if we look at just the contracts that we renewed Q3 of last year and how they performed Q3 of this year, on like-for-like business, we're netting a little over 4% revenue per bill on those specific contracts. So we're seeing good flow through on those. We would like it to be more, but that's part of the environment we're in now. But importantly, there's mix shifts in some of these new businesses. But we -- underlying pricing environment, we feel remains very rational. This is an inflationary business. We have to get price. Operator: The next question comes from Jordan Alliger with Goldman Sachs. Jordan Alliger: Question, you mentioned in your opening remarks, your network optimization efforts continue. Can you provide a little more or remind some of the things you're specifically doing, whether it be on the legacy side, the total network side? And where are you in that process? I mean, is it still relatively early in the improvement front on that side of things? Frederick Holzgrefe: Yes. The -- I think the way we studied this or I've described it before, so one of the key things, key initiatives that we have as you build out a network and you -- it changes. There was a time -- a year ago at this time, we had several -- 17 fewer terminals, right? And as you add those to the terminal, how you schedule and manage freight through connecting all of the dots, how you design that network is critical to how you optimize cost. So when we deploy our AI models around how do we reroute freight, you want to do it in a way that you synchronize the system such that you have fewer handles through the system. So if you went back to Q1 of this year, as we were challenged in that environment, one of the things that we were really focused on was that in that period, we had what we call peak handles, which meant as freight was routed through our networks, particularly our largest brake facilities, the amount of work that was being -- the number of touches of freight going through those facilities was an all-time high for us. So we've been continuing to work that down over time. And the way you do that is you're building efficiencies around how do you build out loads and build density in a market, say, like a Trenton or a new market like that and handle that freight and not have it touch any other dock worker or facility through the network. And it's part of its maturity, part of its scheduling. Part of it is really taking the data that we have and figuring out ways that we can better optimize that. So it's an ongoing effort. I'd tell you, I think we're in the early innings because it's -- what's critical to that is I think we're in the early innings of monetizing this network expansion. I think from the beginning, we have said pretty clearly that the idea wasn't to fill the terminals up as quickly as possible to do it in a way that people -- customers understood the value paid for that service. And at the same time, we have to continue to optimize the cost structure behind it. It's been a bit of a challenging environment. Had we had more sort of growth in those markets, I think we'd have been in a position to take advantage of that quicker. But the great thing about it is it's set up for really significant incrementals going forward if -- as the market improves. Operator: The next question comes from Ken Hoexter with Bank of America. Ken Hoexter: Fritz and Matt, maybe parse a little bit of the 300, 400 basis point sequential margin change. Maybe how much of that is what you're talking about volume? How much is it of the timing of the 3% wage increase? That was a big issue, I think, when you were debating the timing of the wage increase last time. So I just want to see how much of that is affecting that sequential change? And then thoughts on October, if seasonality holds the 3% down, is that a good read on the full quarter? Or is it normally just given the holidays, does it normally get worse as we go through? Just want to understand where we are on that. Matthew Batteh: In terms of the OR guide, Ken, if -- so the GRI and the wage increase went into place on the same day, October 1 for both of those, that -- you can consider that to just wash out amongst each other in terms of the guide in terms of the impact. So net neutral from the combination of 2 of those. I mean, Fritz commented on the fixed cost impact. If you look at the holiday months, they're just overall challenged from a demand standpoint. But when you've got fewer workdays, there's some workdays that are workdays and they're revenue days, but they're not really full revenue days, but you get all the fixed cost aspect of it. So if you look back in our history, I mean, we've had some quarters where there's an OR that's higher than our average. And a lot of that, you've got weather in there, you've got demand trends. So with what we're seeing in October trending a little bit worse than what we would typically see. I wish we had a crystal ball and read into what November and December would look like, it's just -- generally those holiday months have their own impacts and challenges. So we're focused on core execution. We're focused on the 4 walls in our business. There's an externality component on demand that we can't always control. But when we look at the bridge between that is just where we're seeing things in October so far, versus what's ahead of us in those couple of holiday months. But it's -- I would view that as -- October is an important month in the quarter, right? So it's 23 workdays without holidays, and then you get into November and December and those have them. So that's kind of the bridge for it. Ken Hoexter: But Matt, are you saying that we're subseasonal and it's -- this holiday season or something is getting worse than normal? Or just because you always have the same fewer days in November, December, right? So October is more meaningful, but I'm just trying to understand if your commentary, is that something got noticeably worse and it's accelerating on the downside on the volume here as we enter the fourth quarter? Matthew Batteh: Well, October to date is a little bit softer than where we expect it to be. I don't know how that reads out fully from November to December. But we're just taking what we see so far in October and our daily trends that we look at our -- at the reports every day and see what's coming through. So not a great readout. I mean we have thoughts that it sort of bounces back a little bit towards more normal seasonality, but what we're seeing so far in October is below that. Ken Hoexter: Okay. And then any thoughts on excess capacity? I know that's a number that the industry gives a lot in terms of your capacity. And I don't know if you want to throw in a thought on AI and technology. Everybody seems to be talking about what they're adding on. I don't know if that's something you want to -- if that's something you're adapting in any way to accelerate the productivity gains? Frederick Holzgrefe: Yes, I'll jump in there. I mean I think the capacity, there are many, as you know, Ken, there are many ways to measure capacity, be it drivers, be it doors, be it acreage, all those sort of things. I think we've got ample capacity across our network. Maybe because of where we are in the maturity of the network, we're going to have facilities that are 20% capacity, and we're going to have some that are 85%. So I think it's a relative number depending on where you are. As far as technology initiatives and AI, I mean, we've for a number of years, we've been investing in network optimization tools, which are AI tools. That's how we've been able to drive our efficiencies around network redesign, all the things that we've done around our linehaul network, the initiatives that we have around route planning around our city operations to what we're doing to manage our staffing model. All those things are optimization tools which are AI-based. Our view on that, quite frankly, it's not new. These are things that we've been investing in for a number of years. And I think I'd point back to kind of our successes over time, that's been based on those tools. And the way we think about those tools is that there is always a new version. There is always a new feature. There's always a new analytic that comes into that. So we're continuously investing in that. Operator: The next question comes from Tom Wadewitz with UBS. Thomas Wadewitz: I wanted to see if you could give us some thoughts about -- I know there are a lot of moving parts in the business, right, and mix and new terminals and legacy terminals and weak freight market and kind of less freight out of L.A. So a lot of moving parts, but if we get to a more kind of normalized backdrop where there isn't so much mix, I just want to try to contemplate when that could be, right? Like is that possible as you go into '26? And if so, then do you think it's reasonable for us to see what you're talking about, let's call it, 4% contract pricing, something like that actually come through in the revenue per hundredweight or revenue per shipment? Because it just seems like that's been something where market discipline, what you're doing, your services, you've got more capacity, all the good things, but it just doesn't seem to show up in the numbers we see. So that's -- yes, I guess, that's kind of the first element. I have a follow-up too. Frederick Holzgrefe: Yes, it's a good question, Tom. I mean I think the underpinning of what we're doing, the organic expansion is quite candidly, is unlike anybody else in the LTL business. So when you do that, not everything -- unfortunately, not everything moves in a straight line or kind of on a continuous slope. So we're -- we have to manage through challenges around differences in mix of business as that changes in the environment. You see new competitors in some spots or some parts of the network. Those are all part -- that's part of the challenge. I think what's really, really compelling about Saia is that the network is poised for real opportunity, both for our customer and for the shareholder and for the company, right? The national footprint gives us reach to markets that we haven't been able to do. I mean we get anecdotes on a daily basis about how we've won a new piece of business simply because we've been able to solve somebody's problem into the Great Plains where they say, you know what, you can solve that problem. I don't have to deal with anybody else. Now I can do more business with you because of that. And that's an important value that we can contribute to the customer. I think in a more normalized freight environment where maybe there's a bit more in the industrial sector, industrial production improves a bit. I think we're poised to really take advantage and see the incrementals that we saw in the last freight cycles, right? And I think they actually could probably see what we've seen before, simply because we have a footprint that allows us to not only drive value in the local customer market for the customer. But then it's also one that where you have a national footprint, you can drive linehaul efficiencies as well. And you're seeing we're getting efficiencies right now through network redesign efforts, and we don't have the volume that we expect to get. And if we leverage and get the volume, I think the incrementals could really be compelling. We're getting cost efficiencies in a challenged environment. And that's a big deal in this business. And with facilities that quite candidly are, in many cases, immature. So I think that longer term, there is a compelling opportunity for Saia. And I think we're going to continue to grind on generate value in the short term. And when the market does and the freight market does change, I think we're poised to win. Matthew Batteh: One of the things we're really pleased with, I mean, cost per shipment was down 0.7%, and that's -- it's sequential. And if you think about what Fritz just said, too, it's -- we've got terminals that are not mature yet. I mean we've opened 39 terminals since 2022, 17 of those, like Fritz said, just crossed over a year. So there's naturally inefficiencies with those. There's fixed costs that are associated with them. So we're very pleased with the cost performance and the execution of the team on a day-to-day, but we don't open these for 1-year time horizon. These are long-term investments for us. very proud of the execution that we have in the near term. But when that comes back, the incrementals are going to be strong because we have that opportunity to leverage it in the new markets, but also the existing markets where we're getting more of best because we can solve more problems. So it's not about just about growth in these ramping markets. When we can solve more problems, we also get business in our existing markets. We're seeing that now. And that just gets better when the freight environment gets better, too. But we're seeing the fruits of that labor now. Thomas Wadewitz: Yes. That's great. And the quick follow-up is, I think it's better in this type of market to be a low price point than to be a high price point. Another LTL that reported this morning talked about kind of gap versus the high price point in the market and how they're closing that gap. So I just to kind of level set, I think there is opportunity for you over time to deliver service and maybe kind of improve price more than the market, right? So how do you think of your gap versus whether it's OD or XPO or just kind of broader LTL market, your gap on price point? Frederick Holzgrefe: Listen, Tom, that's an ongoing opportunity. We make no mistake, we pay really close attention to that. We think that is -- continues to be an opportunity for us. And I would encourage anybody to study what -- sort of whatever their view of revenue per bill across the public sector and compare that to what -- where Saia is, and we feel like we got to continue to close that gap. I think what's really compelling is with that analysis, you take that and look at our cost per shipment and see how that stacks up, and you see a really compelling OR that gets spit out at the bottom, right? And that's really what the value is in the business. And for those that understand that, I think they understand that, that's what we're focused on. Thomas Wadewitz: But do you have -- I mean, do you think it's 15 points or how wide do you think the gap is between, say, you and OD or whatever benchmark you want to look at? Frederick Holzgrefe: Yes, it's going to be a number like that. I have to be honest, I haven't studied the results that were published by others today. So I'm sure it's probably at a discount to that. I think that our service stacks up as well, if not better than others. And I think that warrants pricing. And now that we have a national network that is -- matches up with some of those guys. I think that it's a different game, right? And that lets us compete on an equal footing and an equal footing major in an equal market, that means you get the opportunity to continue to push pricing. Matthew Batteh: What a national network allows us to do, Tom, is to have those conversations at a different level. When you're able to solve more problems and then you're having a conversation about the value you're providing, you're harder to replace. You're stickier. The reality over the years is we've been doing a great job without a like-for-like footprint. We have a national network now for the first time that we've opened all these facilities. So we get to have that conversation more and more. That helps pricing become stickier when you're doing more for a customer, you're harder to replace. That's a great value of the national network. Operator: The next question comes from Ravi Shanker with Morgan Stanley. Ravi Shanker: Would love if you could just expand on your initial comments on the Mastio survey and kind of how the results they were received. Are you guys happy with your spot? Do you think it's worth investing more to get further up? Or is it the sweet spot for you right now? Frederick Holzgrefe: We need to continue to invest in service regardless of what the Mastio result says, right? Because we know that our -- the value that we generate in the business for our customers is all about service. So we're hyper focused on driving that. Are we satisfied with the Mastio results? We would have preferred to be a different position there. But I think there's some pretty interesting data if people look underneath the covers. You look into that, you see that we over-index based on where we are in terms of our relative share relative to the market. I think that says that people are giving us a shot. We got to continue to focus on completely satisfying those customers as they get to know us and that turns into value both for them and for us. So listen, I -- regardless of where we are today in Mastio, we're focused on investing behind our customers, and that's critically important to driving value in the business. Ravi Shanker: Understood. That's pretty helpful. And maybe as a quick follow-up, apologies I missed this. Just on the 4Q OR walk, I'm assuming the starting point in 3Q is adjusted for the gain this quarter. Frederick Holzgrefe: That's right. Yes, that's right. . Operator: The next question comes from Bascome Majors with Susquehanna. Bascome Majors: If we exit this year in the kind of down year-over-year tonnage, 3%, 4% range that you're trending in October, do you think that there's an opportunity to grow tonnage next year without a meaningful improvement in the industrial economy? Frederick Holzgrefe: I think we'll continue to have the opportunity to develop share of wallet opportunities with our customers. So as we continue to solve problems, there will be accounts that we grow with. And I think those accounts will understand and appreciate and value the service they get from us. And I think it's going to be that kind of -- that's where the growth is going to come from. If I think about the overall shipments and tonnage growth, I have to be honest with you. We like the idea of continuing to grow share, but what we really like the idea is generating a return for the network investments that we've had. So it's -- for us, it's really not about how quickly we can grow shipment count for the sake of shipment count. It's going to be about growing the -- our share of wallet with customers that value the service they get from us. So I think there is an opportunity to grow that into next year. Now what the market makes available. I don't know yet. But I think our idiosyncratic story continues. And I think that opportunity certainly is right in front of us and we'll continue to work through that into next year. Bascome Majors: And maybe expanding on that, it sounds like from your commentary on the fourth quarter, the margin pressure is really about volume operating leverage and absorption on that than necessarily anything, idiosyncratic to the wage increase timing or anything like that. If we're in a more flattish tonnage environment next year? And kind of noticing that you have headcount now and you've done a very good job of controlling costs in the last couple of quarters here. Is there an opportunity to expand margin without growth in tonnage? Frederick Holzgrefe: I think so. Not meaningful, like big growth in tonnage. I think we can continue to drive efficiencies and continue to focus on pricing, continue to make sure that we get paid for all the services we provide. That's certainly an opportunity. Keep in mind, to the extent that we do get a little bit of growth, in a network that is underutilized because we invested for the long term, the incrementals are going to be pretty good, right? So it's not going to take a whole lot. And -- so we'll continue to be focused on that. I think there are incremental returns that we'll get in the business, and I think we'll continue to drive that value into next year. Operator: The next question comes from Bruce Chan with Stifel. J. Bruce Chan: Maybe just a follow-up on the customer mix comments as you round out the network. You've talked about wallet share expansion with existing customers, which is certainly very encouraging to see. Maybe you can just talk about where else you're targeting growth and how that process is going. I don't know if you can parse what field account penetration looks like versus enterprise, for example, and maybe whether there are any new end markets that you think are big opportunities. Some others have talked about, events business, grocery consolidation. So any color there would be great. Frederick Holzgrefe: I think the growth opportunities are all the above for us, right? So -- but I think that let's break those apart specifically. So if you look at the facilities that have been opened since 2022, the -- what we call the ramping facilities. Those -- the opportunities in those markets is to date, one of the things we've been able to do is we've grown national account business into those markets, in part because we already had established relationships with those customers. So it's an opportunity for us to kind of leverage in those markets, and that was really part of the growth thesis. But the second part of that, that I think that is underappreciated is in some of these places, we haven't done business before. And so getting that Saia brand name out there, the next legs of growth in those markets are going to probably come from the field accounts or the accounts that who's this company with the red and white trucks? That remains to be opportunity for us, right? So I think as you mature in markets, you start with the relationships you have, you grow that business. And then the secondary opportunities come from finding that customer doesn't know us. And for people that have followed us, Bruce, like you have, you know that we know how to do this. So if you go back to our Northeast expansion, that's exactly how we've grown that business to be a meaningful part of our total portfolio. We started at those national accounts because they knew who we were, and we've done a great job of developing that. The local business or field business, as we call it, as those facilities mature. We like verticals and that particularly in spaces that value service, that value our on time and value our investment in technology. Those are customers that are in business to deliver whatever product or service that they offer. They need a good LTL partner that can achieve at a very high level. That's where we come in. And those markets that you described are all ones where we can win, be it trade show or grocery or whatever it might be. Those are markets that value our level of service. They're getting to know us in some cases and in some markets, because we're new, they're finding out about us in there. So I think the growth is for us, and this is the really exciting part about the company is across all markets all verticals because we're just now getting to maturity. J. Bruce Chan: That's super helpful. Maybe just a quick follow-up. I imagine there is a margin uplift opportunity as that mix changes. Any thoughts on what that differential with those new field accounts looks like versus the legacy national? Frederick Holzgrefe: Listen, the margin uplift, like if you just get the average sort of pick up market pricing opportunity, right? So if we get the pricing, we come in and get the business at market. The first uplift is going to happen as you have a very underutilized facility be it a city driver, equipment, linehaul network that are already in place. And if you get market pricing on that new business, put it on that underutilized piece of equipment, that is a really interesting, compelling incremental margin opportunity. We know, despite our inefficiencies, we got a pretty good cost structure that we can leverage and scale from here. So I think the opportunity comes in a couple of places, right? It comes from growth around good pricing, but then it's also scaling a very, very competitive cost structure. Operator: The next question comes from Brian Ossenbeck with JPMorgan. Brian Ossenbeck: So maybe first, just to follow up on that line of question. When you get those new field accounts, does that -- is that incremental to the volume you have already there with the nationals and just drop straight in and help balance it out the mix? Or does that -- do you shift those ramping facilities to have more of a percentage mix of some of that national might churn and go away. Maybe you can help provide some thoughts around that and what that -- where that would show up if it's more on the rev per piece side or if it's more on the cost per shipment side rather? Frederick Holzgrefe: It's going to end up in both places, Brian. So if I just go back at our Northeast experience, right? So look at as we expanded in that network, you find customers that are willing to pay for the value that you're providing, right? So that's the top line. And that may require that you find a piece of business that you picked up and you realize that, geez, the pricing is not right, or this isn't working, you exit that business and then you bring in something that's maybe a little bit more appropriately priced. You get all the accessorials and that's an incremental, right, in terms on the pricing line. And regardless, the volume is going to be incremental to leveraging the cost structure. So if I have a facility that is underutilized, that's an opportunity for us to win on both accounts. We're not necessarily targeting, hey, is it field? Is it national account? Is it different segments of the business. We're more focused on customers that say, let's look at the value that Saia provides, and we're willing to pay for it, right, and understand what that investment is. And those are customers that fit best for us. Sometimes that's a national account. Sometimes that's a field account, sometimes it's a combination of both, and it could be across industries. So it's more of that profile that we're pursuing that makes the most sense for us. Brian Ossenbeck: All right. And then a quick follow-up for Matt, can you just give us some more details around the CapEx continuing to come down, I think, for the third straight quarter here. Where is that trim coming from? And do you think that's set a good place as you exit the year? And maybe some early thoughts on next year as well? Matthew Batteh: Sure. Sure, Brian. We have a pretty robust real estate pipeline that we look at. And from an equipment standpoint, pretty much all the equipment for this year has been delivered and in service. So that's more on the real estate front. When we go through and look at projects. We're going through diligence on these, having conversations about what the market opportunity is going to be serviced by different locations. So that's just looking at projects that we've got in flight and being a little more discerning on those. And it's not that we're never going to do them. It may just be that we're delaying a little bit. So you've seen us push a little bit of that out as we stand. I think that's probably in a good range for this year, depending on what -- a couple of things that may flow through. But I think that's probably a pretty good range. And then it's still early. We're looking at next year. But I'd say early read is probably more in a $400 million to $500 million range from a CapEx standpoint. So obviously, way down from last year will be down again from this year. And again, the network build out, we still have opportunities and dots that we need to put on the map, but we've made big strides in that, that shows in the CapEx line over the past couple of years. So still some finalization to be done for 2026, but I'd say probably a $400 million to $500 million number is probably a fair range. Operator: The next question comes from Tyler Brown with Raymond James. Patrick Brown: I missed the first part of the call, so I apologize if you addressed it. But I think last quarter, we talked about peak touches in linehaul maybe in Q1 or Q2. And I think Patrick's got a number of initiatives to kind of, let's call it, fundamentally redesign linehaul to basically take touches out regardless of volume. I think your cost per shipment fell sequentially for the second straight quarter. So can you just kind of talk about where we're at on that touches or brakes per shipment journey? And do you feel at this point that you're basically past peak pain? Frederick Holzgrefe: Yes, Tyler, I think we're past peak pain. I think we're continuing every -- as we pass into the next few months into next year, we continue to have steps around our network redesign, linehaul optimization efforts. As we continue to refine and deploy our AI-based routing tools around that. I think there continues to be opportunity around that. And I think it's -- I think what's really, really interesting is the value of that we haven't necessarily monetized yet because I think there's still a lot of growth to come in facilities that are still immature. So where I say that we have the opportunity to monetize that, I think the cost structure is very effective. And as we continue to grow in markets that have been open less than 3 years, you're going to be doing that and further leveraging those sort of cost savings initiatives. So I think the incrementals, that's going to help drive the incrementals into the future. So I -- it's early innings on what the opportunity is. Now it's challenged into the fourth quarter, right? Because you've got this is a notoriously this time of the year, inefficient time of the year in the first quarter. But I would tell you that I think that the scaling opportunity is really interesting we haven't run through a full year of leveraging that redesigned network. Patrick Brown: Yes, agreed. And so what about balance as well? Because -- is the outbound inbound mix starting to balance out. And I would assume that as you build that outbound side, particularly on the new terminals, that's going to help with this touch issue as well because you're going to be able to build more directs. Is that right? Frederick Holzgrefe: No. Tyler, great point. I mean, we're early innings on that stuff, right? So if you think about just in the simplest form, these are not huge markets. But if you just took the -- Great Plains states. So the immediate value we can provide to a customer, we can go to those points now. So you have a customer say that's in Dallas that says, "Hey, I need to go to Montana. Well, Saia can now go to Montana. We solved the problem. So that's an opportunity. Now the challenge for us is that immediately makes us sort of out balance, right? So you have those Montana markets, we don't have the freight coming out of there yet. The opportunity for us is to grow out of those markets to the extent there's available freight, that's a balancing opportunity, right? So those are the smaller markets. Then you take a big market like a Trenton or Laredo. Man, we're early innings there, too. So those facilities had just cross over a year, there -- the opportunity to grow both the inbound and outbound is very, very meaningful. And that is all a scaling, leverage the network build directs, take touches out, and we've already got a good cost structure to start with. So I think there's an opportunity to keep getting better from where we are. Matthew Batteh: That part doesn't even factor in the value that you get when a little bit of uplift from the environment. You're also getting the volume back from those dense legacy networks, right, the Newarks, Dallas, Houston, all those. When you get that volume back to, it's an opportunity to continue to leverage that density that's been built over the years. So it's going to be a combination of both and the opportunity to service customers. You're right, Tyler. It's the direction really matters in this business, too, where the freight is coming from. So length of haul and weight per shipment are important metrics, but direction really matters, too. Frederick Holzgrefe: If you take a handle out, you have the opportunity to improve service to a customer. You might be able to [Audio Gap] Operator: The next question comes from Eric Morgan with Barclays. Eric Morgan: I guess just one for me. Could you give us an update on conversations with customers heading into '26? I know that real-time volume picture sounds pretty sluggish. But I guess just curious if you're getting any early reads on potential green shoots or just broadly how your customers are positioning into next year? Frederick Holzgrefe: So I think right now, the way I would characterize this, people are -- they're incrementally maybe a little bit more confident, positive than they were at the beginning of the year, right? So you think through, we've kind of got a view of what the tariff landscape is. We've got a view of what tax policy is. We've got a view around interest rates. All that is incrementally positive, right? I'm waiting to see it in the numbers. And I think that, that's -- we haven't seen that yet, but I think customers, we're kind of ticking off the uncertainties, which is good. Now we just need the next step, I think is -- for customers to have the confidence to say, now is the time to build my -- launch the new product or build a new facility or whatever it might be, ramp up production, that sort of thing. Operator: The next question comes from Richa Harnain with Deutsche Bank. Richa Harnain: So just a few quick clarification ones for me. First, the 300 to 400 bps of OR deterioration, I know, Matt, you talked about how October being lower than you expect is contemplated in that outlook. But what are you assuming for November, December? Do we assume an in-line seasonality type results for those months? Or do we assume that things continue to be subnormal. And then, Fritz, did you say when you were talking about margin expansion opportunity next year? I just want to clarify, that was a year-over-year comment, i.e., you can still maybe expand margins next year even if the environment remains lackluster. And then lastly, contract renewals. Can you remind us what those were in Q3? Matthew Batteh: Yes, I'll start and then hand it back over to Fritz. So I'll hit the contractual renewals number one quickly. So 5.1% for that piece. In terms of the margin progression, like you referenced October, what we're seeing so far is contemplated. What we've got our thoughts around for November and December is that it gets back a little bit more towards seasonality. So that's different plus or minus, it could impact where we land from what we're projecting and thinking through right now. If there's a bounce back in November, could we do on the lower end of that? We certainly could. But I think a lot remains to be seen in those holiday periods. But our assumption is that we're getting sort of back towards what normal seasonality would be, which are usually declines from October. Usually, what you'd see in October to November would be a decline in shipments and then November to December would be another decline in shipments. So that's what we're forecasting now, but we'll see what we get from the October exit rate. Frederick Holzgrefe: Yes. And with respect to 2026, we haven't given you a number around. But I think in a sort of steady state environment, I think we could be in a position where we could see some incremental improvement around OR and operating income. . Operator: The next question comes from Ari Rosa. Frederick Holzgrefe: I think that -- I'm sorry. Operator: Pardon me. Go ahead. Frederick Holzgrefe: Okay. Sorry, I may get garbled there for a second. So I'm not sure what you missed, but I think could we have operating income and OR improvement next year versus -- 2026 versus 2025. So we haven't quoted a number around that yet, but I think there's an opportunity for us to drive some performance into next year and which we're excited about. I think the maturity of the facilities that have been opened since '22 is going to be a key catalyst for that. And then I think that as we continue to develop that share of wallet with our customers, I think that will be -- continue to be a positive for us. And those will all be contributors for us next year. Operator: Are we ready for the next question? Frederick Holzgrefe: We are. Operator: Wonderful. The next question comes from Ari Rosa with Citigroup. Ariel Rosa: So Fritz, you mentioned the cargo claims ratio. And with all due respect, I'm aware it's a little bit higher than kind of the best-in-class player. How do you think about your service kind of in context? And to what extent is that holding back some of the pricing opportunity or kind of the ability to realize better pricing? Frederick Holzgrefe: So just to kind of level set a bit. So our cargo claims ratio is a GAAP number. So I'm not exactly sure how everybody else calculates it. I think the best thing we can do to improve our cargo claims ratio is to get our pricing in line because with market. So that's a way to drive improved cargo claim ratio right away. I don't think that there is a situation where we lose business because of the cargo claims. I think that a customer looks holistically at doing business with us around everything from picking up on time, delivering on time, meeting the promises being able to meet their expectations. So there's not a singular limiter that says, "I'm not going to do business with you because you got a 0.54 cargo claims ratio. We haven't lost business with that. We've had opportunities around that. I think it's not a discernible difference from other numbers. I think where we win though is that alongside of all the other things our team does for customers, and that's where we win. And then we continue to focus on driving pricing and that obviously, is in the denominator. So that would improve cargo claims ratio, too. Ariel Rosa: Got it. That's helpful. And then I wanted to shift gears a little bit just on my follow-up. It sounds like potentially CapEx coming down a little bit. I got to say, Fritz, I've heard you sound more confident, I think this call in terms of the incremental opportunity from expanding the network and into 2026. And yet the stock is obviously down quite a lot. And it sounds like maybe the free cash flow is going to be pretty robust over the next couple of years. How are you thinking about the opportunity maybe to initiate a buyback here or get a little bit aggressive in terms of driving shareholder returns for kind of long-term holders? Frederick Holzgrefe: So I'm excited about and have been incredibly excited about the Saia opportunity. And this is entirely why we invested in our network is to generate value not only for our customers but for the shareholders of Saia. We did it on an organic basis. We did it with the idea of creating long-term value for our customers and for the shareholders. I think that we are on the right on the cusp of really taking advantage of -- when we have an improving market, better macro backdrop, I want to put the work 213 facilities and drive the incrementals out of that. Customers will see what service they get and a business that we know how to scale. We've got a record history of being able to do that. And I think that gives us confidence. I'm confident in it because I watch every day to see what our team is doing for our customers, seeing the performance there, seeing what response we're getting in a lackluster market. So I think about if there's a big market or a positive market, man Matt, what the potential is, I've always known it's there. I'm just excited about it right now because I think that longer term, people need to understand that. Now we are also and always have been stewards of the shareholders' capital. So the opportunity to drive value is going to generate returns for Saia that will give us investment opportunities to further expand this network because I think there are opportunities to do that. But at the same time, I think there's going to be an opportunity, and I just don't know when to return capital to our shareholders in any number of forms. But I think that those are things that are front and center for us. But the biggest thing, all that happens if we drive value out of the network we've just -- we've invested in. And so as we look into next year and frankly, the capital numbers even this year, we see slow growth. And as a steward of shareholders' capital, we're slowing capital investment as it relates to that and making sure we're in a position -- position the company to take advantage of the opportunities that will inevitably be there for us. Operator: This concludes our question-and-answer session. I would like to turn the conference back over to Fritz Holzgrefe, Saia's President and Chief Executive Officer. Please go ahead. Frederick Holzgrefe: Thank you, everyone, for taking the time to listen and learn about Saia's results. We're very pleased with the outcome of Q3. Q4 in the current environment continues to present challenges. But I think what's critically important is the underlying value that Saia is creating for customers ultimately is underlying value for our shareholders, and it's really about the story from here how we drive incremental improvements in margins in the business that we've invested in over the last number of years. Company is built for the long term and long term is long-term value-creating for the shareholder. So thank you for your time. Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Operator: Welcome to the Bristol-Myers Squibb 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 Chuck Triano, Senior Vice President and Head of Investor Relations. Please go ahead. Chuck Triano: Thank you, and good morning, everyone. We appreciate you joining our third quarter 2025 earnings call. With me this morning with prepared remarks are Chris Boerner, our Board Chair and Chief Executive Officer; and David Elkins, our Chief Financial Officer. Also participating in today's call is Adam Lenkowsky, our Chief Commercialization Officer; and we welcome Cristian Massacesi, our recently appointed Chief Medical Officer and Head of Global Drug Development. Earlier this morning, we posted our quarterly slide presentation to bms.com that you can use to follow along with Chris and David's remarks. Before we get started, I'll remind everybody that during this call, we will make statements about the company's future plans and prospects that constitute forward-looking statements. Actual results may differ materially from those indicated by those forward-looking statements as a result of various important factors, including those discussed in the company's SEC filings. These forward-looking statements represent our estimates as of today and should not be relied upon as representing our estimates as of any future date, and we specifically disclaim any obligation to update forward-looking statements even if our estimates change. We'll also focus our comments on our non-GAAP financial measures, which are adjusted to exclude certain specified items. Reconciliations of certain non-GAAP financial measures to the most comparable GAAP measures are available at bms.com. Finally, unless otherwise stated, all comparisons are made from the same period in 2024, and sales growth rates will be discussed on an underlying basis, which excludes the impact of foreign exchange. All references to our P&L are on a non-GAAP basis. And with that, I'll hand it over to Chris. Christopher Boerner: Thanks, Chuck. Welcome, and thank you for joining our third quarter earnings call. Q3 was another strong quarter, reflecting focused execution across the business as we continue to make progress on our plan to position Bristol-Myers Squibb for long-term sustainable growth. Building on the momentum from the first half of the year, we saw continued strong demand across our growth portfolio, achieved positive clinical and regulatory milestones and further aligned our cost structure with the needs of our business. Let me start with a high-level review of our quarterly performance on Slide 4. Our growth portfolio delivered another strong quarter with sales increasing 17% year-over-year, strengthening the foundation we're building with assets that are early in their life cycle. Growth was driven by multiple products, including our IO portfolio, Reblozyl, Camzyos and Breyanzi. And due to our strong performance to date, we are again raising our top line guidance and maintaining the midpoint of our bottom line guidance. David will provide more detail shortly. Our 2 recent launches performed well in Q3. Cobenfy is delivering steady growth as we continue to receive positive feedback from physicians on key indicators supporting our expectation that this is a meaningful first indication for Cobenfy. Qvantig's launch is also tracking well. From a clinical and regulatory standpoint, I want to highlight a few recent updates. On the clinical data side, in our protein degradation platform, the Phase III EXCALIBER study for Iberdomide in patients with relapsed or refractory multiple myeloma demonstrated a statistically significant improvement in MRD negativity rates. Now that we have these results in hand, we will be discussing these compelling data and potential paths forward with health authorities. The trial will continue to evaluate PFS, which is expected in 2026. CELMoDs have the promise to be a new foundation in the treatment of hematological malignancies. More broadly, our multipronged protein degradation platform has the opportunity to also address solid tumors, initially with our oral androgen receptor ligand directed degrader, among others. At the World Lung Conference last month, we presented Phase II data for pumitamig with our partners at BioNTech. The clinical development program is both advancing and broadening for this important asset. Last month, we initiated the pivotal triple-negative breast cancer study and plan to share early data at the San Antonio Breast Cancer Symposium in December. Additionally, pivotal studies for pumitamig and chemotherapy combinations are now initiating in first-line microsatellite stable colorectal cancer and first-line gastric cancer. This week, we announced encouraging data at the American College of Rheumatology Convergence Conference, which continue to strengthen our conviction behind CD19 NEX-T in autoimmune diseases and Sotyktu in rheumatology. We presented additional follow-up data for CD19 NEX-T in both lupus and scleroderma and presented the first disclosure of data in myositis. For Sotyktu, the long-term extension data from the Phase II PAISLEY study continues to validate its potential in lupus as we look forward to Phase III results. On the regulatory side, we achieved several milestones, which include our potential first-in-class bispecific ADC iza-bren receiving breakthrough therapy designation for previously treated advanced EGFR-mutated non-small cell lung cancer. And earlier this month, the FDA granted Fast Track designation to our anti-tau antibody for the treatment of Alzheimer's disease currently in a Phase II study with data expected to read out in 2027. Together, these milestones highlight the potential of our pipeline to both enhance and sustain growth in the outer years by addressing critical areas of unmet need and the importance of advancing these programs quickly and efficiently. On the business development front, we recently announced we are acquiring Orbital Therapeutics to strengthen our cell therapy franchise, where we have industry-leading expertise. This acquisition will add a potential off-the-shelf best-in-class asset, OTX-201, which can be administered in the community setting. This in vivo CAR-T represents a novel treatment approach that could redefine how we treat autoimmune diseases. We will also gain access to Orbital's differentiated RNA technology platform, which combines various RNA engineering and advanced delivery methods. In addition, we saw progress with our partner, SystImmune, as we announced that the first patient was treated in the global Phase II/III trial of iza-bren in previously untreated triple-negative breast cancer ineligible for anti-PD-L1 drugs. In August, we closed the previously announced licensing agreement with PhiloChem for exclusive worldwide rights to [ Onco-ACP3, ] potential best-in-class radiopharmaceutical therapeutic and diagnostic agent with the opportunity to become a breakthrough treatment for prostate cancer. We continue to be excited about the overall opportunity with radiopharmaceuticals and believe PhiloChem added to RYZ offer a transformational platform for cancer treatment. In terms of progress, we opened a U.S. manufacturing hub with the ability to deliver RYZ's next-generation radiopharmaceutical therapies directly to patients within just 3 days of production, a critical advantage due to the short shelf life of RPTs. The facility is currently manufacturing clinical doses of RYZ101, which is in Phase III clinical trials for GEP-NETs. Moving on to key data catalysts on Slide 5. As we've said before, we are entering a data-rich period. We continue to anticipate data readout for ADEPT-2 by the end of this year and have 2 additional Cobenfy studies in Alzheimer's disease psychosis, both of which are expected to read out next year. We anticipate needing 2 of these 3 studies to read out positively to support regulatory approval. The pace of pivotal readouts will accelerate in 2026. As a reminder, over the next 12 to 24 months alone, we expect data for 7 new molecular entities and 7 meaningful life cycle management opportunities. Among others, we will see data for admilparant in IPF, a fatal lung disease with high unmet need, CELMoDs, iberdomide and mezigdomid, which represent a significant step forward in the treatment of multiple myeloma, the broad milvexian program, where we are running 3 large Phase III trials to address ongoing unmet needs for patients with cardiovascular disease, including an AFib trial that could potentially open treatment to at least the 40% of AFib patients not suitable for Factor Xa today, Cobenfy in a broad range of Alzheimer's-related neuropsychiatric conditions and Sotyktu in lupus and Sjogren's. Together, these represent an attractive set of near-term catalysts that can further shape our pipeline and longer-term growth trajectory given the significant commercial potential of these indications. And looking out a bit further, by the end of this decade, we have the potential to introduce 10 new medicines to the market and at least 30 significant life cycle management opportunities. This strategy is designed to set BMS on a clear path of strong and sustainable growth which remains our guiding principle. Beyond the specific commercial and R&D highlights, the company continues to focus on strong financial discipline. Consistent with prior quarters, while we generated significant cash flow in the third quarter, we also continue to be prudent in managing our expenses as we align our cost structure with the projected shape of our business. In addition, we progressed our efforts in the quarter to rewire how we operate, including continuing to integrate digital technology and AI across the company. We anticipate these efforts will drive additional efficiencies going forward and significantly enhance the agility of the organization. So what does this mean? Between our growth portfolio performance, the business development activity I just referenced, including the BioNTech partnership and combined with our broad pipeline and strong financial discipline, we feel even better about our longer-term growth potential. I want to take a moment and thank my colleagues around the globe who are committed to our mission to discover, develop and deliver innovative and life-changing medicines to patients. With that, I'll turn it over to David. David Elkins: Thank you, Chris, and good morning, everyone. I'm pleased to report another strong quarter of execution. The growth portfolio continues to perform well, and we continue to maintain cost discipline. Now turning to the third quarter sales performance on Slide 7. Total company sales were approximately $12.2 billion, which reflects strong demand across our business. Global sales of the growth portfolio increased 17%, driven primarily by demand across multiple brands, notably our IO portfolio, Reblozyl, Camzyos and Breyanzi. Beginning with a review of the oncology portfolio on Slide 8. Opdivo global sales were approximately $2.5 billion, up 6%, driven primarily by continued demand. In the U.S., sales grew 6% to roughly $1.5 billion, largely driven by a strong launch in MSI-high colorectal cancer and continued share growth in first-line non-small cell lung cancer. This growth was achieved even as we saw expanded uptake of Qvantig. Outside the U.S., sales grew 6%, driven by demand with expanded indications across multiple markets. We are pleased with the expanded growth of Qvantig with sales of $67 million in the quarter. Growth was fueled by continued use across all indicated tumor types as well as the permanent J-code received in the quarter. Due to the strong performance year-to-date, we now expect global Opdivo sales together with Qvantig to deliver stronger growth than previously guided, with sales expected to increase in the high single-digit to low double-digit range for the full year. Turning to our hematology performance on Slide 9. Reblozyl global sales were $615 million in the quarter, reflecting continued strength across our MDS-associated anemia indications. We are annualizing over $2 billion in sales for the brand. In the U.S., revenue growth continues to be strong, up 38%, primarily due to demand in first-line RS-positive and RS-negative setting as well as improved duration of therapy. Outside the U.S., Reblozyl sales grew 31%, driven by demand in newly launched markets. Moving to Breyanzi. Sales were $359 million in the quarter and now annualizing over $1 billion. Global sales grew 58%, reflecting strong demand across all indications. In the U.S., sales were $251 million, growing 45%, reflecting growth in large B-cell lymphoma, and expansion from new indications approved last year. Outside the U.S., sales were $109 million, more than doubling due to continued strong demand across existing markets, along with added demand from newly launched markets. Transitioning to our cardiovascular performance on Slide 10, starting with Camzyos. Global sales increased 88% to $296 million, reflecting continued robust demand. This is another asset in our growth portfolio, also now annualizing over $1 billion. In the U.S., sales were $238 million, up 76%, driven primarily by increasing new patient starts. Outside the U.S., sales growth more than doubled, driven by continued launch momentum in multiple markets. Eliquis global sales were $3.7 billion, growing 23%, primarily driven by continued strong demand and the expected favorable impact of Medicare Part D redesign. U.S. sales grew 29% and ex U.S. sales grew 11%. Moving to immunology performance on Slide 11. Sotyktu sales grew 20% globally. In the U.S., sales remained consistent with prior year due to demand being offset by higher rebates associated with our increased commercial access. Now turning to discuss Cobenfy on Slide 12. Cobenfy sales were $43 million in the quarter and $105 million year-to-date. As previously communicated, sales and weekly total prescriptions continue to grow steadily. We remain focused on disrupting the entrenched D2 prescribing behavior by educating physicians on Cobenfy's innovative profile, and we've completed our field force expansion to increase reach and frequency to targeted health care professionals. Now let's move to the P&L on Slide 13. Gross margin was approximately 73%, primarily due to product mix. As expected, operating expenses decreased by approximately $100 million to roughly $4.2 billion compared to the same period last year, primarily reflecting the savings from our ongoing strategic productivity initiative. Our effective tax rate in the quarter was 22.3%, reflecting our earnings mix. Overall, diluted earnings per share was $1.63 due to strong performance in the quarter and includes net charges of approximately $530 million or $0.20 per share attributed to acquired in-process R&D and licensing income, primarily related to the PhiloChem asset license and SystImmune milestone payment. Turning to the balance sheet and capital allocation highlights on Slide 14. Our financial position remains strong. We generated cash flow from operations of about $6.3 billion in the third quarter with nearly $17 billion in cash, cash equivalents and marketable securities as of September 30. Our capital allocation priorities remain unchanged as we continue to take a strategic and balanced approach. As Chris mentioned, in recent months, we closed our licensing agreement with PhiloChem, announced the acquisition of Orbital Therapeutics and advanced our SystImmune partnership. Strategically investing in our growth portfolio of brands, along with business development are our top priorities. We also continue to be on track to further delever our balance sheet. As of the end of the third quarter, we have paid $6.7 billion of the $10 billion debt paydown we've committed to by the first half of 2026. And we remain committed to returning capital to our shareholders through the dividend. Now turning to our non-GAAP guidance on Slide 15. We are increasing our full year revenue guidance by $750 million at the midpoint to a range of $47.5 billion to $48 billion, primarily reflecting continued strong performance of our growth portfolio. We continue to expect the legacy portfolio to decline approximately 15% to 17% for the year, our Revlimid sales expectation remain at approximately $3 billion, along with the continued impacts from generics of Pomalyst in Europe, Sprycel and Abraxane. Our gross margin guidance for the year remains unchanged at approximately 72% and our operating expense guidance also remains unchanged at approximately $16.5 billion, reflecting over $1 billion in net savings versus 2024. Regarding OI&E, we now expect annual income of approximately $500 million due to higher-than-anticipated royalties, licensing income and favorable interest income. We are maintaining our full year tax guidance of approximately 18%. As a result of our strong performance year-to-date, the midpoint of our revised 2025 non-GAAP guidance would have increased by approximately $0.20 per share. This increase was offset by the net impact of acquired in-process R&D charges and licensing income, primarily related to PhiloChem asset license and a SystImmune milestone payment. As a result, we are narrowing our expected EPS range for 2025 to be between $6.40 and $6.60, which leaves the midpoint of our range unchanged. Taken all together, I'm pleased with the performance of the business year-to-date, and I'd like to thank our colleagues around the world for their continued focus and execution. With that, I'll turn the call back over to Chuck to start Q&A. Chuck Triano: Thanks, David. And before we start our Q&A session, I want to note that questions related to our solid tumor development programs will be answered by Adam rather than Cristian during today's call. And with that, Betsy, could you please poll for questions? Operator: [Operator Instructions] The first question today comes from Chris Schott with JPMorgan. Christopher Schott: Just I want to start with ADEPT-2. Is there any additional updates you can give us in terms of any actions, if any, that you've taken following some of the clinical site reviews you highlighted on the 2Q earnings? And then maybe just kind of putting the broader ADEPT program into context, as we think about ADEPT 1 and 4 next year, can you just talk about the relative confidence you have in those studies relative to ADEPT-2, just given some of the differences in study designs? Just maybe an update kind of broadly on how you're thinking about that indication. Christopher Boerner: Sure. Thanks for the question, Chris. Maybe I'll start and then obviously, Cristian can chime in with any additional context he has. So just remember, ADEPT-2 is obviously an ongoing study, and it's an ongoing study, as I referenced in my prepared remarks, that has a readout in the next 2 months. So we're not going to be able to provide a lot of specific comments on the product. But what I can say are a few things. First, I will reiterate that we expect results by the end of the year. And of course, we'll communicate those results as we normally do. The second thing I would say, which really gets to the second part of your question is while we remain blinded to the data, our confidence in the Cobenfy development program, including in ADP, continues to be strong. And with respect to ADP, I'd just remind you of the source of that confidence. We obviously have compelling external data going back to the Lilly day in the late '90s. We're hearing very interesting real-world stories based on our experience, albeit in schizophrenia, -- and of course, we have internal data with respect to the ADEPT-1 lead-in and the ADEPT-3 extension data. So that's what I would say about ADEPT-2. But if I step back from the specific studies, remember, the work that we're doing in development fits with the focus that we have on execution really across the company. And given the importance of the late-stage studies, I think it's prudent that we take whatever learnings we can and pull whatever appropriate levers we can to ensure that we deliver these studies with the highest [ PTS ] and on time. We're obviously excited to have Cristian on board to bring a fresh perspective to that. So net-net, I feel good about where we are in terms of working through the broader development programs and ensuring that we're executing appropriately. But Cristian, I don't know if you want to add anything. Cristian Massacesi: Thanks, Chris. Yes, let me try to, first of all, reassure that the Cobenfy development program is progressing at really a rapid pace. We currently have in the development plan, 14 studies that are ongoing or in the process to be activated. 10 of those studies are pivotal studies. We actually posted and maybe you have seen a third pivotal study in bipolar mania, BALSAM-4. We are also expanding the indications. We plan to initiate pivotal studies in autism spectrum irritability in next year. So the program is moving at pace. I think, Chris, you answered very well the reason to believe. I want to add -- part of your question was some differences. Just to clarify, ADEPT-4 is very similar to ADEPT-2 is the sister or the brother study. So we are doing ADEPT-4 exactly in the same patient population with the same primary endpoint than ADEPT-2. The readout, as you know, is projected next year. ADEPT-1 is slightly different because it's a relapse prevention design. This is a trial in which patients are enrolled into Cobenfy for 12 weeks. And then at the end of that period, based on the response on the psychosis metrics and CGI, the patient is randomized to Cobenfy and placebo. So different approach, but same setting. Operator: The next question comes from Geoff Meacham with Citi. Geoffrey Meacham: Just have a couple. Also on Cobenfy, but more commercial. How would you guys characterize the speed of reimbursement and maybe the depth of prescribers in the U.S.? I guess I'm just looking for what could be a tipping point of demand as it sounds like maybe there's more work to do on education. And then I also wanted to loop in Cristian here. I know obviously early days, but can you give us a sense of your priorities and maybe approach to development for a diversified portfolio like Bristol's? Christopher Boerner: Adam, then Cristian. Adam Lenkowsky: Yes. Thanks for the question. So we're pleased with the progress that we made in Cobenfy's first full year on the market, and we're establishing a new treatment paradigm in what we knew was going to be a highly entrenched market. As you have probably seen, we've now surpassed 2,400 TRxs on a weekly basis, and we expect to see continued steady growth. We are adding a significant number of new trialists each week. Physician feedback continues to be positive regarding Cobenfy's profile, and we're very pleased with the kind of the pace of access that we're able to establish early on. As you know and as a reminder that this is a heavy Medicare, Medicaid population. And so we have virtually 100% access across both. Now stepping back, there's clearly more work to do in year 2. We need to continue to increase both breadth and depth of prescribing, which will drive additional growth for the brand. We've onboarded our expanded field force now in the community and in the hospital setting. And so based on the leading indicators that we're seeing, Cobenfy is going to deliver continued steady growth in schizophrenia and longer-term growth is going to be fueled by additional indications, as Cristian has stated, and that's what we've also seen with other antipsychotics in the market. But we are confident that Cobenfy will be a big drug over time. Cristian? Cristian Massacesi: Yes. Jeff, thanks for the question. Let me tell you why I decided to join BMS beyond the fact that I like Chris, is -- the first thing is the science. BMS always did a very strong science and continue to do it. And of course, the portfolio is an impressive portfolio across therapeutic areas with a lot of potential first-in-class and/or best-in-class assets. So this is, of course, the basis. I also like very much the focus that BMS is having in the therapeutic areas where it's playing because beyond oncology and hematology, the focus on immunology, cardiovascular, in neuroscience specifically, those are TAs where you have the intersection, the best intersection of what is the current or the emerging biology rationale and the medical need. Of course, the BMS people has always been very highly reputated. I formed a very strong development organization here. What I want to do here, what I'm starting to do and we're going to continue to do is evolve this drug development organization to try to deliver on the pipeline, the short and mid- to long-term pipeline, focusing on the key strategic priority. I have 3 main areas where I started to work and will continue to work. The first thing is how we prioritize our ongoing and future opportunities. Usually, it's science, strong science that needs to be the basis we do. Execution, flawless execution is incredibly important in development and then the value because what we do needs to bring value to the patients and, of course, to the company. The other aspects I'm starting to work with a lot of urgency is integrating new way of working in development. We are a turning point. We cannot continue to do things like we were doing in the last decades. We have AI. We have a novel solution and tools, and this needs urgently be integrating the way we work. The last thing is people. I need to continue to build -- I want to continue to build the right teams and attract talent in the company. Operator: The next question comes from Evan Seigerman with BMO Capital Markets. Evan Seigerman: I want to touch on the competitive landscape for the PD-L1/VEGF bispecific. So we saw some data at ESMO with PFS benefit in the HARMONi-6 trial in squamous non-small cell lung cancer. Can you just help frame how that maybe informs how you're thinking about your partnership with BioNTech? Does it make you more incrementally confident? Or is it really too early to read into kind of your program? Christopher Boerner: Thanks, Evan. Let me just say one thing about BioNTech, and then I'll turn it over to Adam. That partnership continues to go very well. We have a very tight relationship with BioNTech, both on the development side and of course, anticipating the commercial opportunity on the commercial side. And so far, that relationship is quite strong. But Adam, do you want to go through the details? Adam Lenkowsky: Sure. Thanks, Chris. And Evan, good to talk to you. So we believe that pumitamig has the potential to become a new standard of care. The data that we have seen both from BioNTech as well as from the competitors adds to our conviction and broad development program that we have for pumitamig. We have multiple trials that are currently ongoing across several solid tumor indications. As you know, we've got first-line non-small cell lung cancer. We just presented data in small cell lung cancer. And we also have triple-negative breast cancer first line initiating. We will be presenting TNBC data at San Antonio Breast in December. We've also been working with urgency with our BioNTech partners and made very good progress building a robust clinical development program. In fact, we'll be initiating 2 new studies that are now posted on clinicaltrials.gov in first-line [ MSS mCRC. ] And as you know, that's not a place where first-generation PD-1, PD-L1s have shown activity as well as in first-line gastric cancer. So our focus is on speed to market. Our opportunity is to be either first or second to market across indications. And we feel very good about combining our industry-leading commercial and operational capabilities with BioNTech's scientific expertise, and we plan to maximize the potential of this asset. Operator: The next question comes from David Amsellem with Piper Sandler. David Amsellem: So I wanted to come back to Cobenfy and not trying to read too much into the prescription data over the summer relative to earlier this year. But I did want to ask about how you're thinking about potential or key barriers to adoption thus far? Is it GI tolerability? Is it twice daily dosing? Is it just prescriber inertia in terms of the dominance of the D2 blockers? Just wanted to get a better sense of what you're hearing and seeing in the field and what you think you need to do to drive more acceptance of the product among psychiatrists. Christopher Boerner: Thanks for the question, David. I'll turn it to Adam, but one thing I just was in the field with Cobenfy sales reps very recently. And what I would say is that once physicians begin to use these products and patients have access to it, One thing that gives us a lot of confidence about the long-term potential of this product in schizophrenia is the feedback that we're getting from both. Feedback continues to be very strong, but I'll let Adam go through the specifics around your question. Adam Lenkowsky: Yes, David, I appreciate the question. So as I said earlier, we're pleased with the progress that we've made. We're now just about a little over one year in the market right now. And this is an entrenched market as we know that. This is the first new mechanism that's been approved in over 3 decades in the space. And so I think what's really important, what we look for in terms of leading indicators are adding new trialists, and we're tracking very well on a weekly basis as well as new prescriptions. When we look at the feedback, in general, the feedback is very positive regarding Cobenfy's profile, as Chris mentioned. I would say that the #1 question that we get as a team is around how to switch from a D2 to Cobenfy And even from physicians who are sitting on the sidelines, that's the question they want to know. And so we've got robust peer-to-peer activities that are ongoing. We've introduced real-world data, and we have a Phase IV switch study that reads out early next year, all will help build physician confidence. What I will say is if you look historically, all the recently launched D2s, we are tracking ahead of all recently launched analogs in schizophrenia. So based on everything that we're seeing, we feel good about the performance for Cobenfy. We're going to continue to see steady growth and the inflection will come as we continue to add new indications. Operator: The next question comes from Asad Haider with Goldman Sachs. Asad Haider: Congrats on the quarter. Just first for Chris or David, on the cost side, as it relates to your strategic productivity initiatives where another $1 billion in cost savings is expected to drop to the bottom line by 2027. Any updated thoughts on the shape of this over the next couple of years in the context of the potential R&D expenses associated with the development of BNT327 as it starts to move forward into later-stage Phase III programs, recognizing, of course, that you have other Phase III programs over the next 18 to 24 months that are going to come off. Just trying to understand the margin trajectory as we go through these pushes and pulls. And then second for Cristian, maybe just double-clicking on your previous response. Could you share with us any early thoughts on the pipeline and if there are programs that you're particularly encouraged by? Christopher Boerner: Maybe I'll start and turn it to David for the first question, and then Cristian, you can pick up the second question. Just on the cost side, as David goes through some of the specifics, the one thing I would just remind everyone is that the way we think about cost and our investment profile generally is there's a balance that's going to be maintained. One is continuing to invest in areas to drive value and growth. That's not only on the pipeline, including [ BNT, ] but the R&D organization more generally. And then, of course, as we did this past few quarters, investing in the growth profile of the company with Adam's organization. At the same time, we have committed, and I think you've seen it in the numbers over the last number of quarters, is we're going to be disciplined with respect to financial management, and that's going to be our operating approach going forward. David? David Elkins: Yes. Asad, I know '26 is top of mind for many folks. And so let me just share with you how I'm thinking about it overall. First, we're exiting 2025 with really strong performance from our growth portfolio. Year-to-date, it's up 16%. And as I said in the prepared remarks, we now have 4 products that are annualizing greater than $1 billion in that growth portfolio. So we're exiting this year in really good shape as we head into next year. We're also executing well against our efficiency commitments. We're on track for $1 billion this year, and we have clear line of sight to the $2 billion that we're targeting by 2027. So we feel good about that as well. And also remember, we have numerous Phase III programs completing next year and going into 2027. And just as a reference point, our 2024 cost base was $17.8 billion, and we're guiding $16.5 billion this year. So we made really good progress. And I'd say, overall, we have clear line of sight to the pushes and pulls of '26, and I feel confident in our ability to manage the cost base. And as Chris said, what we're doing, we're focused on balancing up investments that we need to do in order to drive growth in the growth portfolio as well as to create headroom for additional business development, and we'll balance that with our savings program. And look, we're getting smarter as we go and we see additional opportunities. So we have a lot of P&L flexibility, and we're going to remain financially disciplined as we go through this transition period. And this financial discipline not only helps us manage our margins, but it also provides a strong basis to deliver cash flows to strengthen the balance sheet as we committed to, provide both strategic and financial flexibility and to continue to build on the growth portfolio. Chuck Triano: Great. Thank you, David. Let's take our next -- Cristian, sorry. Cristian Massacesi: Yes. Chuck, I can speak lengthy obviously -- thank you for the question. I mean I cannot speak about solid tumors and oncology, but there are a lot of exciting readouts and assets in the portfolio. I think we talked about Cobenfy, how invested we are on this drug and how excited we are because there are multiple readouts in front of us. I want to speak on 2 short-term potential readouts. One is milvexian. When I dig into milvexian, I think BMS, first of all, has a deep expertise and understanding of this area, this market, cardiovascular. This is an oral next-generation Factor XIa anticoagulant and can be the first maybe and the only Factor XIa in atrial fibrillation and ACS and potentially best-in-class in SSP. So I'm really eager to see the readout of these studies. ACS, SSP are planned next year, and we are really pleased that we can complete the atrial fibrillation study next year. The other drug I want to point out is admilparant because admilparant is playing in a very difficult disease, pulmonary fibrosis that is a huge medical need. Chris mentioned that. I think we have very strong proof of concept in both IPF and PPF because the Phase II study that is underneath the registrational programs show more than 60% improvement in lung function decline. I think this is -- give us a lot of confidence on the 2 pivotal studies. I'm very eager to see the IPF1 [ readynamics ] here. But now let me talk a little bit about the platform because this is short term, more on the midterm. I'm really, really excited in what are some of the scientific platform this company can leverage. One is the protein degradation. BMS is a leader in this space, I think Revlimid, Pomalyst. And I think today, targeted protein degradation is one of the priority research platforms across the TAs. In our portfolio, if you scrutinize a little bit every stage, Phase III, II and I, we have more than 10 drugs in clinic that are protein degraders. And what excites me most is not that we just have a platform with preliminary data. Now we have Phase III data. iberdomide met the primary endpoint in EXCALIBER relapsed/refractory multiple myeloma for MRD negativity rate. And of course, we released that. And this is the first readout of one drug in this platform that give us confidence. The other one briefly, I want to mention because I think it's very relevant is the platform that we are putting together in cell therapy for autoimmune diseases. We have an autologous CD19 CAR t. We presented the data in [ CR ] a few days ago, preliminary data, spectacular data with -- across indication, lupus, scleroderma and myositis. And we have also a CD19 allogeneic CAR T in this space that is in clinic, can represent an off-the-shelf option. And we acquired Orbital now that give us the in vivo platform that can be transformative in this space for multiple reasons. So this is great, if you think because it's, first of all, a step forward in the concept of immune reset and potentially to cure more patients with autoimmune diseases, and BMS can own this space. This is very exciting. Chuck Triano: Thank you, Cristian. Now we can move to our next question. Operator: The next question comes from Mohit Bansal with Wells Fargo. Mohit Bansal: My question is regarding the VEGF-PD-1 and the data we have seen from Summit so far. So what is your impression of the data, especially on the OS side of things? And the second part of the question is that -- I mean, there are 2 ways to think about it. One is like you could actually go after indications where PD-1s work really well or you could go after indications where VEGFs work well and PD-1 could add some value there. Is there an either/or approach here? Or could there be a scenario where it works better to improve the efficacy of VEGF with the VEGF PD-1 approach? How do you think about that? . Adam Lenkowsky: Yes, Mohit, thanks for the question. So in terms of what we have seen, we are encouraged by the magnitude and consistency of the PFS data that we believe will ultimately translate into a survival benefit over time. So the data we've seen adds to our conviction of the broad development plan that we're building. I do think in terms of the strategy that we have employed, as you can see, our strategy really is twofold. One is to become the new standard of care. For example, when you look at the studies we have in first-line non-small cell lung cancer versus standard of care as well as in small cell lung cancer, but also a good example of expanding beyond where PD-1, PD-L1s play, and that's in MSS CRC. And so that's the balance that we are taking as it relates to the strategy for pumitamig. The other exciting factor that we have across both of our companies is the ability to combine pumitamig with novel combinations. So we've got a host of novel combinations, ADCs, targeted treatments, et cetera, that both companies will look to employ as quickly as possible. And we very much look forward to sharing these additional studies as they ready to be posted online in clinicaltrials.gov. Operator: The next question comes from Tim Anderson with Bank of America. Timothy Anderson: A couple of questions. The first is on trough earnings. Chris, are you still looking at very late 2020s relative to what you may have been forecasting, say, a year ago? Is that trending towards being pulled forward or being pushed back or maybe staying the same? There's been lots of developments both at Bristol and then industry-wide. And I'm wondering if any of that has changed the timing of reaching trough earnings. And then just on Cobenfy, as you undoubtedly know, there's heightened investor nervousness around ADEPT-2 on the back of comments that were made in Q2. Do you think investors read too much into those comments that Summit had made? Christopher Boerner: So first of all, Tim, before I answer the questions, I just want to say congratulations on your next move. We're going to miss you on the calls, and we won't take it personally. With respect to trough, as you know and as we've discussed previously, we have not given long-term guidance just as a standard of course, and that applies obviously to how we're thinking about the specifics of the trough. What I will say is that there's a consistency in what our focus has been. We continue to be focused on making this trough as shallow and as short as possible. We still anticipate that we're going to be exiting this decade with growth. Our North Star continues to be that we're going to grow as quickly as possible in order to maximize that exit trajectory, and we're doing the things necessary to enable us to do that. You see the performance that we've delivered on the commercial side. Obviously, that provides a very good foundation for how we think about our ability to navigate through the trough and exit with robust growth. Cristian has commented on the strength of our late-stage pipeline. We've got to continue to deliver that. And clearly, it's going to be important that we continue to maintain financial flexibility so that if we find additional substrate that makes sense for us to be the owner of that we can engage either in partnerships or business development as appropriate. And that's generally how we're continuing to think about the trough. With respect to the comments last quarter and this quarter, look, what I can say is that there's a lot of focus on execution at the company. There's a lot of focus on ensuring that we continue to deliver on that pipeline. We obviously understand there's a lot of focus on individual programs, including the ones that are going to be reading out most near term, and that would include the ADEPT programs. So I wouldn't read too much into it other than to say that there's a lot of focus on us being able to deliver on each of the stages of our strategy, commercial execution. I think we feel really good about what we delivered this quarter, the strength of the late-stage pipeline and executing that, and we've talked about that and then also continuing to deliver strong financials with disciplined cost management, and we've done that, too. So we feel good about where we are. Operator: The next question comes from Luisa Hector with Berenberg. Luisa Hector: Maybe a policy question. I just wondered whether we should be worried about the lack of any subsequent deals with the administration. Is there perhaps a bandwidth issue? Just trying to -- you're in the queue waiting your turn to negotiate. And then maybe to sort of expand that a little bit on to potential DTC offerings. You already have Eliquis. Anything you can comment in terms of that going live, any impact on volumes? And then perhaps just a mention of that guidance that you have for Eliquis for '26 and '27. How confident are you? Can you tighten those ranges at all now that we're sort of through '25? You've seen the Part D restructure impact and the DTC. So some of those changes there, how they're informing your view of Eliquis as we go forward? Christopher Boerner: Thanks for the question, Luisa. Maybe I'll start, and then I'll flip it over to Adam. Look, obviously, the policy environment remains very dynamic, both from a U.S. and an ex U.S. perspective for that matter. I don't know that I'd read too much into no additional deals over the last week or so. What I would say from a BMS standpoint is we continue to actively engage with the administration. I would characterize those discussions as frequent. And while not always fully aligned, they're always constructive and thought-provoking on both sides. Clearly, [ MFN ] and tariffs are front and center, but we continue to monitor a host of other issues, including the shutdown and what potential impact that could have downstream. And then there's, of course, a lot going on ex U.S. Framing all of that for us, though, is that we agree with the President on the need for equalization of prices. U.S. prices need to come down. We're sharing ideas to do that. Ex U.S. prices need to come up. We've seen some good progress, for example, in the U.K., but more needs to be done. And accomplishing those objectives while preserving the ecosystem for innovation that we have in the U.S. is what we're focused on. So there's a lot going on. It's manageable. We have a great team in D.C. of whom I'm incredibly proud, and we're engaging at the right levels. I'll let Adam handle the DTC questions. Adam Lenkowsky: Yes, Luisa, thanks. So as far as the direct-to-patient program, as you know, as part of our commitment to increasing patient access, we with our Pfizer partners for Eliquis, we announced that Eliquis would be available via direct-to-patient at a discounted rate over 40% less than the list price. I can tell you since launching the program, we have received a substantial number of inquiries through Eliquis 360. If you remember, we also subsequently announced that Sotyktu will be available via our own direct-to-patient platform at a greater than 80% discount effective January 1. So we're launching this as part of our commitment to patient access and affordability. As Chris mentioned, we're listening, we're coming forward with solutions, and we're doing that with urgency. As it relates to Part D redesign, for Eliquis, we are seeing a more even distribution of sales like we talked about throughout this year. We expect to see similar in the Q4 time frame as the coverage gap has been removed. And that is being offset by patients in the catastrophic phase for products like Revlimid, Pomalyst and Camzyos, for example. So when you look on a net basis, we're roughly equal in terms of the positives and the negatives. Operator: The next question comes from David Risinger with Leerink Partners. David Risinger: Congrats on the strong third quarter results. So I have 2 questions, please. First, milvexian is being dosed at 25 milligrams BID in secondary stroke prevention, which is the same daily dose as Bayer's asundexian 50 milligrams QD. So could you please discuss milvexian's profile, including its potency relative to asundexian? And comment on asundexian secondary stroke prevention Phase III trial readout in coming months and implications for milvexian's secondary stroke prevention readout in the second half of '26. And then my separate question is, are IRA prices for the first 10 price-controlled drugs in 2026, including Eliquis currently being renegotiated? Christopher Boerner: So I will ask Cristian to start and then Adam, you can briefly comment on the second question. Cristian Massacesi: So let me start with your first part of the question relating to the dose. We believe that we characterize very well the dose, not only the scheduling, the dose and the design of the trial that we are running. Specifically on your question on the dosing, don't forget that we have a BID administration. And BID administration can actually ensure a better coverage of the exposure that you need to get what you want to get. So this is, we believe, is an important differentiation. So vis-a-vis what maybe other competitive drug can be using. So we are very confident. This is a work that has been scrutinized very carefully in BMS and also with our partner, J&J, in this setting. Let me tell about your second part of the question. I don't want to speculate on future competitive program results. But first of all, a positive competitive SSP trial can be great for patients and validates the Factor XIa mechanism in this space. I am confident that our Phase III program that has been developed, as I say, with high scrutiny can maximize the efficacy of milvexian and potentially can provide even a superior profile in SSP. And don't forget that in AF and ACS milvexian is potentially the only Factor XI that can play in this indication. And these are, of course, the very important part of the market. Adam Lenkowsky: Adam I'll just add one thing, Cristian. Thanks for the answer. We were able to, if you've seen clinicaltrials.gov, accelerate now the readout of atrial fibrillation for milvexian, which is the largest opportunity for the product. So now we expect all 3 studies to read out in 2026. As far as IRA, no, there was no plan to revisit Eliquis negotiation, and that price will be effectuated January 1. Operator: The next question comes from Carter Gould with Cantor. Carter Gould: I asked this question with an appreciation that your time lines have been consistent, but there's been lots of discussions around potential scenarios where you might add patients to sites that -- I'm talking about ADEPT-2, you might add patients to sites that under enrolled based. And can you address those discussions and say definitively, whether you've gone back and added more patients since enrollment was completed based on your own ct.gov entries? And could that address the variance between what was implied by those time lines and the actual time lines to data? Christopher Boerner: Thanks for the question, Carter. And again, I appreciate there's a lot of interest in the study. All I can say is that we continue to expect the results by the end of the year. We're obviously going to communicate those results when they're available. And the good news is that it's practically November, so we don't have to wait long for the turning of that card. Operator: The next question comes from Terence Flynn with Morgan Stanley. Terence Flynn: Maybe just another policy one. We've seen some headlines around these GLOBE and GUARD, what I assume are CMMI pilots for Medicare. Can you weigh in at all in terms of those, if there's any progress or any details in terms of how those might play out? And then a second question is just on iberdomide and your upcoming discussions with the FDA on a potential for a filing on MRD. What's your confidence level that FDA will actually move in that direction? Or do you think they're going to want to see more definitive data first before acting on MRD? Christopher Boerner: I'll hit the first one, and then I'll ask Cristian to take the second. So on the CMMI potential demos, look, we've obviously seen the same coverage. You've seen I think it's too early to say really anything about what's in them, when they might read out and what the implications of that are. We're obviously actively monitoring and engaging, but nothing new to report there at the moment. And then, Cristian, do you want to take the second piece of that on Iber? Cristian Massacesi: Yes. Iber showed this positive outcome in MRD negativity rate. We announced it. FDA -- we are very pleased that FDA keep this very in consideration. There was a lot of discussion. It is an endpoint that, of course, we discussed and we agreed with the agency. We will share the data, and we will discuss not only with FDA, with multiple regulatory agencies to see if this readout can grant or not an accelerated conditional approval, and we will keep you posted on the next steps. Operator: The next question is from Courtney Breen with Bernstein. Courtney Breen: Just one for me, particularly as we think about the PD-1 VEGF opportunity and the clinical development plan that you've alluded to here. What learnings are you taking from your first round in the PD-1 battle, the development and commercial kind of competition with Merck? What would you have done differently in that? And how are you using kind of a look back at that strategy to improve your approach in arguably a more complex and competitive environment? Christopher Boerner: Thanks for the question, Courtney. And I'll turn it over to Adam, but what I would just highlight is the first learning you can get is with the deal itself. The reality is based on the experience that we've seen in the first round of PD-1, PD-L1 competition, one of the things that's most clear is that the first and second players in that particular race have garnered the vast majority of the commercial value and the ability to help the most patients. And so our focus coming into this was that we wanted to make sure that if we were going to enter what could be a much more competitive space that we were in a pole position. And so I think that's what we were able to do with the BioNTech deal. But Adam, do you want to provide specifics? Adam Lenkowsky: Yes. Courtney, thanks for the question. Just a reminder, we're the only company to launch 3 IO assets with YERVOY, OPDIVO and Opdualag. So we understand what it takes to compete and win in a highly competitive market. We've got the infrastructure in place. We can leverage the capabilities that we've built over the years. As Chris mentioned, order of entry clearly matters. We've seen that with PD-1, PD-L1s today. I would also say the importance of community oncologists is critically important. They are responsible for about 70% of the prescribing here in the United States, and we've got decades-long relationships there. Finally, I think the ability and agility to pivot quickly to support new indications is critical. So we've seen this velocity of launches in this first generation of I-O with Opdivo now over 30 indications. And the final thing I'd mention in terms of learnings, I do think it's critically important to look at more novel, novel indications. We have seen over the last decade since Opdivo was introduced a host of new mechanisms and modalities that have been introduced to the marketplace that will continue to raise the bar on overall survival. So taken together, we're excited about the opportunity we have with pumitamig and our partnership with BioNTech, and our focus is to transform the current standard of care. Operator: The next question comes from Akash Tewari with Jefferies. Akash Tewari: Just on ADEPT-2, I think your team has hinted there are no site irregularities that you're seeing right now and dropouts seem to be similar to the schizophrenia studies. So if that's the case, why hasn't the data been locked at this point? And why open more ex U.S. sites? And can you also comment specifically on what you learned from the open-label period in your relapse prevention studies with Cobenfy and Alzheimer's psychosis? Christopher Boerner: Yes. Again, I'm just going to reiterate what we said previously. The study is going to be reading out in the next couple of months, and we're very close to that. So we're not going to provide additional comments on the specifics. I would also just step back, though, and remind you of what I said earlier, which is the confidence that we have in the overall Cobenfy program, which is what Cristian spoke to. And then with respect to why we have so much confidence in the Alzheimer's disease psychosis program, I would just remind you of 3 things. First, we have compelling external data coming forward from previous studies. We have heard considerable feedback, albeit in the schizophrenia indication on the performance of the product on psychosis symptoms, which again gives us a lot of confidence, albeit in a separate setting. And then, of course, we have additional data that we have internally. And so we feel good about where we are with the program at large. And obviously, we'll wait to see the ADEPT-2 data between now and the end of the year, and we'll report that out when we get it. Cristian, anything you would add? Cristian Massacesi: Yes. I mean, for ADEPT-1, as I said before, this is a relapse prevention design. So it's a different endpoint, primary endpoint compared 2 and 4 and of course, the study is ongoing. We don't want to share data on the lead-in phase. This is -- we are putting the patient on Cobenfy for 12 weeks, and then we will assess the response with the same criteria for psychosis and CGI. And based on that, the patient will be randomized. Of course, the patient needs to have a certain degree of response to be randomized. This is important because, of course, it's a learning -- that part of the study is open label, but of course, we don't -- we will share the data in the moment in which we will release the data. Chuck Triano: Operator, if we could take our last question, and then I'll ask Chris to make some closing comments. Operator: The last question today comes from Stephen Scala with TD Cowen. Steve Scala: I'm curious if you have concluded the IRA negotiations for Pomalyst and how did the results compare to expectations? GSK indicated yesterday that its negotiations concluded for one of its drugs, and they did not sound troubled in the least at the result of those negotiations. And I'll leave it to one question given the time is short. Christopher Boerner: Steve, Adam, why don't you take that? Adam Lenkowsky: Steve, thanks for the question. Appreciate it. The IRA negotiations officially conclude tomorrow. And so we are currently finalizing that. There's not much I can say about the negotiation, except for the fact that, as you know, the negotiations for Pomalyst. And so Pomalyst by the time the MSP is effectuated in January 27, Pomalyst will have lost exclusivity in the U.S. So again, we don't feel like this will have any impact on the company and the outlook of the company. And we believe that this -- the price will be made public at the latest, November 30. What we saw last year is that it should come earlier. But taken together, we feel good about the negotiation and where we'll be at the end. Christopher Boerner: Thanks, Adam. And thanks, Chuck, also for choreographing today's call. We know it's a busy morning for all of you, given that there are several companies in our sector that are going to be reporting. So I want to thank you all for joining the call this morning. In closing, our year-to-date results, I think, reflect the focus that we have on execution with strong performance from the growth portfolio, our business development activities that we spoke about during the call, continued progress on our strategic productivity initiatives and solid free cash flow generation, we're doing what we said we would do. We look forward to the clinical data readouts accelerating into 2026, which, as discussed, have the potential to, we believe, shape the potential of our pipeline and provide more certainty on the shape of our growth trajectory. So again, thank you all for calling in today. And as always, the team is available for any follow-ups. So have a great rest of the day. Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Jakub Cerný: Hello and good afternoon, ladies and gentlemen. Welcome from Komercni banka, and thank you for sharing your time with us. Today, it is the 30th of October, 2025, and we are going to discuss the results of Komercni banka Group for the first 9 months and third quarter of 2025. Please note that this call is being recorded. Our speakers today will be Jan Juchelka, Chairman of the Board of Directors and CEO of Komercni banka; Jiri Sperl, our Chief Financial Officer; and Anne de Kouchkovsky, Chief Risk Officer. Standing by in case you have questions from them are Miroslav Hirsl, Head of Retail Banking; Katarina Kurucova, Head of Corporate and Investment Banking; and Margus Simson, Chief Digital Officer. As always, we will begin with the presentation of results, which will be followed by the questions-and-answer session. [Operator Instructions] Now let me ask the CEO, Jan Juchelka, to begin the presentation. Thank you. Jan Juchelka: All right. Hello, good morning or good afternoon. Thank you for giving us the opportunity and sharing the time with us for the presentation of Komercni banka results for the first 9 months and for the third quarter. Together with me, there will be Jiri Sperl speaking and Anne de Kouchkovsky speaking either for financial performance or for quality of assets. We can jump directly into Page #4, please. So Komercni, in the first 9 months, was growing nicely its loan book by 3.6% on a year-over-year basis with a strong driver coming from housing loans. Here we were achieving, on a year-over-year basis, almost 50% growth. And we are -- in nominal values, we are coming back to the record high numbers on that particular product. Let me also reiterate for the fact that it's Modra pyramida, the subsidiary which is completely and entirely in charge of this product, and that we have, in parallel with this strong business performance, achieved super high productivity gain when joining together or merging together the 2 product lines, the historical product lines: one from the bank, one from Modra itself. I will come back to it in detail. Deposits were up only mildly by 0.1% on a year-over-year basis. The third quarter, though, injected 2.6% growth. And what we are happy to see is that current accounts are growing by 3.2%, and we hope it's the beginning of a trend, it's not an ad hoc event. Other assets under management, which is, in our case, is pension schemes, insurance schemes, Amundi product, or private banking products were growing by 6.6%. Inside this category, the mutual funds were growing by almost 10%. The bank remained very strong on capital, so 18.4%. Core Tier 1 was 17.6%. Loan-to-deposit ratio in very, I would say, safe territory, 82%. Both short-term and long-term indicators of liquidity being safely high above the required levels. Obviously, and this is something what we will present in detail, there was the asset quality playing important role in the composition of the net profit. The net profit was totaling at CZK 13.6 billion. On reported basis, we are growing by 8.3%. If we take out the one-off effect of sale of our headquarter building exactly in the third quarter of 2024, on a recurring basis, the net profit would be growing at the level of 35.1%. Cost-to-income ratio, also thanks to very strict cost management, was landing at 46.4%. ROE, 14.5% on a standalone basis. What happened also on the side of our business and our financial performance is that we are successfully approaching the very last stage of transferring clients from old to the new world. As of end of September, there was 1.46 million customers already in the new systems, out of which almost 300,000 were newly onboarded customers, so numbers which have never been seen before in the reality of KB. We successfully continue on that front, we are above 1.5 million, and we are above 300,000 newly onboarded clients. On the corporate governance side, we have a new Chairperson of our Supervisory Board, Cecile Bartenieff, also recently appointed Head of Mobility and International Banking and Financial Services at Societe Generale. And we will -- we have announced a new CFO, Etienne Loulergue, to some extent, alumini of Komercni banka because he used to serve as Deputy to Jiri Sperl approximately 5 years ago, will become the CFO of KB Group starting 15 of December, 2025. And as we have Jiri Sperl at his probably last presentation of results today, I wanted to thank him warmly for his professional service, and I am encouraging everyone around this call to enjoy Jiri's presentation today. We were ranked #1 cash management bank in Czech Republic by Euromoney survey, which was conducted in the third quarter of this year. We can move to next page. As we are approaching the advanced stage or very final stage for retail banking of the transformation program, we wanted to refresh everybody's memory of how monumental piece of work is behind us and where is it heading to. So let me say that the light motive of our transformation was simplification. The significant simplification of products and the clients' proposition, including the same users' environment in the mobile phone, in the desktop solution, and in the branch, i.e., relationship manager solution, is one of those aspects. You know, probably, that we have replaced -- we have put in place a new core banking system. We have completely created the analytical layer above that, and as I have already mentioned, these front-end solutions including. The application, which is named KB+, is bringing a new customer experience to either our existing customers or future customers. When a person is equipped by bank ID, which is a dedicated identity, digital identity provided by a joint venture established by banks in Czech Republic, the onboarding takes less than 10 minutes and there is fully functional account immediately at hand to the new customer. The account is, depending on the subscription plan, multicurrency. It's covering 15 currencies and it is holding also, I would say, dynamic exchange rate functionality inside. We are fully equipped with this mobile application by instant payments in Czech koruna, incoming and outgoing, instant currency exchange with preferential rates for those who are paying for their subscriptions. We have terms and saving deposits embedded, building saving embedded, domestic and international ATM withdrawals, and deposits free of charge, travel insurance, insurance of personal belongings, and payment cards. We have a dedicated button for chat and video call. We have virtual assistant insight. We have dividend credit cards, overdrafts, mortgages, consumer loans, loan consolidation inside the solution. We have pension savings, mutual funds, and investment contracts inside the solution. We have periodic cash flow reviews inside the solution, and we will chip in the online brokerage soon in 2026. All of this, because we were launching the new bank in April 2023, was built from scratch, in fact, as a greenfield solution, and I'm very proud of everyone who contributed into this monumental piece of work in favor of our clients. How our clients are liking it? The Net Promoter Score is at 38 positive points. More they use the application, higher the NPS score is recorded. It is #1 most downloaded banking application in the country. We are currently beating also the international challengers and all our competitors. In App Store and Google Play, we are getting 4.3 or 4.5 respectively as a feedback on the quality and satisfaction from the users. One of the less attractive indicators, but super important for us and even more important for our clients is the vital process availability for KB+ customers, which is achieving 99.8%. And again, something what is given or perceived as automatic, I would praise highly everyone who is in charge and who is behind this excellent process stability and availability for the customers. On the side of marketing, we brought to the market, amongst the first banks, the dedicated bracelet for kids and youngsters where they can get the first impression and feelings about taking care of their own money without using mobile phone, without using any other feature. We went out with a series of excellent, if not even artistic set of cards, of payment cards, in co-operation with students of one of the famous artistic universities in Prague. Obviously, as we are staying the ice hockey bank of the Czech Republic, we are also coming out with a dedicated card, payment card, which is dedicated to ice hockey and ice hockey in the Olympic -- in combination with the Olympic Games. Next page is bringing us a bit closer to the numbers and graphs sort of related to the transformation story. So on the left-hand side upper part, you can see that we are sprinting to the finish line of transferring, or migrating if you wish, our retail clients from the old world to the new world. We are almost there. We are confident that we will be delivering what is the key indicator for that, which is 90% of the total number of our clients, whilst onboarding heavily new clients in the system. The predominant share of mobile banking in the new solution is sort of given. So the numbers are very high. 84% of the total interactions with the bank are done from mobile, only 16% from the PC, and 1% from other channels. We are increasing number of clients interactions. So, we have more often and more frequently our clients in the application, which is a great news because it seems that it's designed as more like user-friendly, the ergonomy of the solution is better, and we don't use it only as a service tool, but also as a sales channel. When speaking about sales through a digital solution, let me bring your attention to the lower part of the -- the lower graph at the left-hand side, where we have a school case, if I may say, from both the growth of digital sales and the productivity gain stemming from that. So we have started back in 2020 somewhere around 16.5%. If we moved the X close to 2018, it was probably 14% of our capability of digital sales, which was growing and massively growing after the launch of new era of banking in 2023 to the today's levels of 54%. In parallel with that, thanks to very hard work of our management in retail banking, but also in operations and other parts of the bank, we were constantly pushing down the number of FTEs related to the same activities. So here, you see the results. As far as digital sales per product are concerned, you see that, for example, investment contracts are fully digitized by 100%, overdraft 65% or 66% respectively, et cetera, et cetera, when reading from the right to the left. Starting recently, we are putting the target numbers for digital sales for each of those products individually. Not always, we will be trying to achieve 100%, but what is probably more important that the overall number of 54% will be further growing. And it will be us deciding what is the targeted level. Next page, please. So when speaking about the transformation, it's digital, it's simplification, but it's also searching for other efficiency gain and productivity gain inside the group. One of them, one of the cases was the complete adoption of KB Poradenstvi, which is the network of tied agents originally acting below the name of Modra where we were unifying the brand, where we were simplifying the product portfolio, where we were engaging with the agents and equipping them with the proper proposition, not only from Modra but from the entire KB Group, harmonizing the IT environment for them in order to make them fully integrated into our system, centralizing the -- everything what is back office on that particular activity, and bringing them to the campus of the headquarter of Komercni. We did it also with other companies. Everyone who is 100% owned went through the same process. Modra on its own went through an incredible story for the last couple of years when we were changing the systems, fully digitizing the customer journey, or almost fully digitizing because we don't have still digitized solution for the [ cadaster ] of real estate, but soon to be there. And we have merged everything what was mortgages with Modra pyramida. So instead of having 2 product lines, we are having 1 product line. And again, the achieved productivity gain will be above 100% once the overall transformation is being finalized. SGEF, SG Equipment Finance, Czech and Slovak Republic was fully acquired by KB Group. You probably know that above our heads, there was the disposal of SGEF International by Societe Generale. And as a result, we are 100% owner. So again, the OneGroup principle will be applied, and we will unlock additional potential for both commercial and business activities, as well as the synergies on the side of the back offices. We have picked up also upvest. Why? Because it's a super successful platform for raising money and investing them into real estate development. These guys are able to subscribe high multiples of the previous year, and they do it for a couple of consecutive years already, and we became 100% owner here. So we can move to the next page. And here, I'm bringing you back to the reality of today. So Czech Republic, Czech Republic is a very stable country from both economic and I hope we will confirm also from the political point of view. We are like a couple of weeks after the general elections and the new government is to be established. When speaking about the new government, what we hear from the nominees or from the main representatives of the political movements and parties who won the elections, there should be a fiscal stimulus for Czech economy stemming from this new government. So we will see how that will work. But we very much see investment-oriented -- or public investment or infrastructure investment-oriented group of people preparing themselves to step into the government. If you combine that with the expected or already existing fiscal stimulus for German economy, the overall environment of making business in Czech Republic is being improved more or less as we speak. In combination with that, the representatives of the winners of the election -- of the general elections are also speaking about compressing the energy prices, which might help also with lower level of imposes towards the inflation. So let's see, but at least the first signals are from, let's say, business perspective, pretty promising. The GDP was growing by 2.6% on a year-over-year basis. Industrial production was down, a combination of weakening Germany performance plus a bit of mess on the supply chain part and the impact of tariffs imposed by the United States is bringing a little bit down the industrial production, which is perfectly balanced by strongly growing construction output by 17.1% back in August 2025. This is stemming from infrastructure investments and also pretty booming investments on the side of real estate housing, but not only. The unemployment rates remains very low. On the other side, the wages are growing and beating the inflation. So 7.8% nominal value -- nominal growth, but 5.3% real growth of wages in the country, which is also giving the answer of who is the main engine of the growth of GDP, which is the title remaining in hands of Czech households. The inflation, as I have mentioned, was at 2.3% level in September. Czech National Bank is remaining calm for the time being and is keeping the repo rate at 3.5%, which is minus 50 bps on year-to-date basis, but was not changed for -- at the latest pricing session of the Board of [indiscernible]. Czech koruna is strengthening vis-a-vis Europe and even more vis-a-vis U.S. dollar. Probably, we can move to next page. And this is already the business performance. So as I have already mentioned, the gross loans were up by 3.6%, very strong dynamics related to mortgages and Modra loans, so housing loans in general, 55.2% when you compare Q3 '24 versus Q3 '25. We believe that the finetuning of the capacity of processing the new requests, combined with the fact that the dynamics of the market will remain strong, will bring us to slightly higher market share as KB Group. The rest of the segments were growing at approximately -- we're growing at around 2%, 2.5%, 2.6%, 2.7%. So, I would say, in general, the businesses, the households were taking, let's say, appropriate part of the new financing from KB. When zooming on corporate financing or corporate loans, we are witnessing the growth of 2.7% Q3 versus Q3. Inside that, the SGEF solutions were growing slightly higher than small businesses and corporates. So next page, please. All of this obviously was translated into KB being at and servicing its clients with the main transformative transactions. You can see public sector represented by Elektrarna Dukovany. Also private sector represented by almost the entire rest of the transactions you see in front of you with the exception of 2, which are municipal driven. Everything what is green here represents the format of green financing or green bonds. We can move to the next page, which is bringing us to deposits. It remained stable, plus 0.1%. I would say we would love to see that higher, and we took appropriate measures and established concrete tasks to get higher portion from deposits. When decomposing the deposits on the side of -- by the category, we are happy to see that the dynamics of growth of nonpaid, i.e., current accounts, is coming back to, let's say, better levels, 3.2%, whereas the saving accounts are in competition, mainly with investment solutions. When speaking about investment solutions on the left-hand side, you see that overall, we were growing by 6.6%, the assets under management in mutual funds by almost 10%, whereas the life insurance and pension schemes 2.1% and 2.3% respectively. So next page is bringing us to financial performance, and it's my pleasure to hand over the word to Jiri Sperl. Thank you. Jirí perl: Thank you very much, Jan. Indeed, a very good financial performance in Q3 and first 9 months of the year. I want to repeat key figures once again. So KB Group generated almost CZK 13.6 billion net profit after tax, which is 8.3% more than 1 year ago. And if we put aside the one-off coming from the sale of Vaclavske namesti in Q3 last year, the growth would be even much higher at 35%. It's visible from the waterfall chart on the left-hand side that basically all categories contributed positively. That's true that highest year-on-year impact is coming from super positive cost of risk that thanks to excellent asset quality of KB loan portfolios and also due to release of part of retail overlay provisions switched from the creation of the provision in 2024 to net release in 2025. And so the impact is massive. It is around CZK 2.3 billion. It's also very much worth to mention that also the top line was growing in first 9 months by almost 3%, while costs went down by 4.3% and thus generating very strong positive jaws. Also the quarter-over-quarter perspective, our trend is positive, that's right upper chart, and growing as seen there, i.e., quarter-over-quarter plus 3.3%. Naturally, the very good P&L result transposed also to the solid profitability indicators, ROTE being at 16.5% which -- and this should be reminded as well. At the same time, strong CET1 ratio at almost 18%, exactly 17.6%. This is bringing me to the balance sheet evolution. So the balance sheet shrink a bit year-on-year by 2.3%, which is, however, almost solely due to the very volatile repo operations with the clients. So if we compare the balance sheets year-over-year, it would be roughly CZK 80 billion less in Q3 this year versus 1 year ago. So this is basically explaining full variation. On the liability side, still, there is not a covered bond worth roughly -- or exactly EUR 750 million that was successfully issued in mid of October. And of course, you will see it in the balance sheet during the Q4 results presentation. On the asset side, there are basically no changes in trends, only to mention that the volumes of the [indiscernible] continue to decline a bit year-to-date as we are preferring for the time being investments into repo with the Czech National Bank, and of course, swapped into longer maturities following the long-term duration of our liabilities. Now let me go briefly through the main categories as usual. Although I would say there are not too many surprises, the positive trends do continue and will continue, including mainly positive jaws generation. So let's start with the net interest income. So, to say, despite the fact that NII was, I would say, severely hit by doubling of mandatory reserve requirement as of January 1 this year, it is growing. It is growing solid pace by 3.3% year-on-year. And it's basically the case both for key categories, [ checklist ]. So what I mean is income from the deposits and income from the loans, and both growing by roughly 4%. The drivers behind are, however, a bit different. NII from deposits is positively influenced mainly by spread effect -- by spreads, supported by improved structure of the deposits, while the income from loans is driven solely by volumes and the spreads remains basically flattish. Similar trends are visible also from the quarterly perspective, that's right bottom chart. On quarterly perspective, NII is growing by plus 1.5%. NIM, the chart on the upper left-hand side, on a year-to-date basis, it is 1.70. It is flattish quarter-over-quarter, but positive year-on-year by 6 bps, which is a positive news after some time. On top of that, we are expecting that the trend of the rise is going to continue also in Q4 this year, and I can touch it during the Q&As if needed. Let's move to the fees income. So income from fees and commissions is also growing by plus 3.4%. And there are, again, the usual suspects in terms of growth, i.e., mainly fees from cross-selling and specialized financial services, both growing on a 9-month basis by 13% to 14%. In the area of the cross-sell fees, it is a reflection of both volume growth of nonbank assets under management, but also improved structure, which is still continuing improving. And what I mean is that there is kind of [indiscernible] from more money market type of mutual funds to more dynamic. Quarterly perspective, that's right bottom chart, it's growing 1.3% quarter-over-quarter, and here almost solely supported by the cross-sell fees. At the same time, we also see first signs of improvements on the deposit product fees where the income from new packages/tariffs are classified. The mirror of course can be seen in the transactional fees. Financial operation is growing pretty dynamically year-over-year by 7.6% again on 9 months basis. And here it is solely influenced by the capital markets activities and mainly boosted by interest rates hedging activities, while the FX income from the payments is more or less flattish. That's the blue part of the chart. The dynamics is even higher on a quarter-over-quarter basis, growing by strong 15.4%. And here both elements contributed strongly, including those of the FX from the structured book growing by a strong 10%. Here, to say the jump in FX income from the structural book was somehow expected due to the seasonality or seasonally strong FX convers as I was somehow indicating over 3 months ago. And finally, before passing words to Anne, OpEx. So on 9 months basis, OpEx is declining strongly by 4.3% year-on-year, supported by -- basically by all components, except the depreciation and amortization. So let's go briefly into the structure. So personnel expenses, it's almost solely down on character by the decrease -- by the increased efficiency of the bank and thus decreased the number of the employees. So year-on-year, the number of FTEs is by almost 6% lower. First. Second, administrative costs also declining by minus 4%. But here, that is not the main, let's say, candidate or driver of the growth of the decline. And basically the savings go across all main categories. Skipping to regulatory funds, it was already commented in detail during the Q1 this year presentation, and the exception is depreciation and amortization. And again, here, no surprise. It is still reflecting main investments in digitization and our transformation in more general sense. All in all, this led to the further improvement of our cost-to-income ratio to the level and here commenting 9 months basis as well of 46.1%, while 1 year ago it was 49.2%. And that's the output of the positive jaws as I was commenting briefly before. Having said that, simply the trends are further continuing even in this chapter, and a good evidence is that the quarterly cost-to-income ratio, that's the very bottom part of the chart, that the quarterly cost-to-income ratio in Q3 into this year is the lowest at least since last 2 years. Now let me pass the words to Anne, who is going to comment quality of the assets and cost of risk. Thank you. Unknown Executive: Thank you. Good afternoon to everyone. So as it was mentioned, the loan portfolio grew up by 3.6%, and this is in the context of a very stable credit risk profile. So this is attested in several metrics. So first of all, you see that stage 2 is now below 10%. So this is obviously driven by the release of the inflation overlay that was put on the retail in 2024. So we decided to release in Q3 the part related to the small business segment. We also have a very, I would say, stable NPL share at low level, which is at 1.8% this quarter. And together with this NPL provision coverage ratio is very stable as well. It shows that the portfolio is well performing, well covered, and demonstrating the asset quality. If I go in more, I would say, maybe brief details in the segment on SME and small business and consumer loans, it's a very resilient portfolio. And mortgage loans and large corporates, we are in the low -- even 0 default area. So if we can move to the next slide. Cost of risk, as it was mentioned, it's -- release of cost of risk at CZK 328 million this quarter. I already mentioned and it was also mentioned by Jiri that it's very well driven by the release of this overlay that we had on the retail. But it's also driven by some successful recovery on the non-retail exposures, which led us to recover 100% of our exposure and consequently release the provisions. So all in all, we end the -- for the 9 months at cost of risk of minus 20 basis points. And for the next quarter, we intend to continue to release the remaining part of the inflation overlay on the retail, which is still in place for consumer loans, that will be then released for the fourth quarter, and will lead us to the minus low-teens in the cost of risk for the full year probably as we do not expect, as attested by the portfolio quality, any big event before the year-end. So that's about it on my side. Jirí perl: Yes. Thank you, Anne. And let me complete the presentation with last 2 slides, first one focusing on the capital. So capital remains very strong at 18.43%. There is a slight decline year-to-date, mainly due to the slight negative impact on OCI related to the release of the provisions as commented by Anne, so-called lack of provisions. Still, however, the capital adequacy is safely in the upper part of our management buffer, maybe better said almost at the upper edge of the management buffer, despite accruing [ 100% ] net profit as a dividend and the new methodology, i.e., Basel IV. Also MREL, adequacy is safely within regulatory limits at 28.8%. And this is bringing me to the full year outlook as usual. So there aren't too many changes in the macro, only 2 slight adjustments. First, no cuts of repo rate is expected by the end of this year, which was the case 3 months ago in terms of outlook. And second, there is slightly positive adjustments in the economic growth from 1.9% to 2.1% this year and also for next -- for the years to come. In terms of banking market growth, we keep fully the guidance, i.e., both lending and deposits, at a mid-single-digit pace. In terms of growth of KB, we stick to the original guidance at lending side, i.e., mid-single digit. In terms of deposits, we downgraded the guidance from mid-single digit rather to low- to mid-single digit, but at the same time, the structure of the deposits is expected to improve further. Revenues and OpEx are basically confirmed. Maybe one comment to the top line, probably more precise would be to say lower edge of low- to mid-single digit growth. OpEx as confirmed, i.e., mid-single digit decline -- decrease. And finally, cost of risk guidance, Anne has briefly touched that before, but it significantly improved from around 0 3 months ago to the level of low-teens. Well, that's it. Now before passing word back to studio, probably let me use this opportunity and to say also a couple of words on my side. First, thank you, Jan, for your kind words, and thanks also to all you connected. Indeed, this is my last earnings call in a position of KB's CFO. I have to admit that it has been a great 10 years serving at this position. And I truly appreciated every opportunity to meet with you and discuss the bank's performance and time to time also everything around. As Jan mentioned, Etienne will be stepping into the role as my successor starting mid-December, and I don't have any doubts he will successfully take over. He knows the bank perfect well and has all the qualities needed to help lead KB towards, how to say that, towards its bright future. So, Etienne, all the best in this exciting position. Thank you all once again. And now returning the word to studio. Jan Juchelka: Okay. Thank you. Thank you, Jiri. I will just conclude the call very -- the presentation part of the call very quickly. So we can say that the combination of strong capital base, the already delivered very strict management of costs, the fact that we are approaching the very final stage of the transformation and we have fully functional, very stable, and attractive solution for our retail clients, combined also with the operating efficiency, further, let's say, simplification and scalability of the new digital platform will create a good base for improvement in the commercial momentum of the bank further on. We believe that the cost of risk, which is in negative territory and is commenting by many of you as the good contributor but not like sustainable contributor into the profitability, will turn into enabler for further commercial and business growth in the next months and quarters. We will also free up additional energy and time of our bankers. They were super busy with assisting our clients with migrating from the old to the new world. They will now put all their energy on sales and servicing the clients in day-to-day reality. This is what is somehow framing our hope for the next -- and determination for the next steps, which will be driven by our activity and our, I would say, full dedication to -- for the growth of the bank on the side of business and commercial and financial performance. Thank you very much. I'm giving back the words to Jakub Cerny, and we are ready to answer your questions. Thank you. Jakub Cerný: Thank you to all the speakers. Let me add that we have been also joined by Jitka Haubova, our Chief Operations Officer. So we have the complete Board of Directors with us today, and you can ask Jitka as well. It means that in the next part of today's meeting, we will be happy to answer your questions. Let me remind you that this meeting is being recorded. [Operator Instructions] So our first question comes from the line of Mate Nemes from UBS. Jan Juchelka: We cannot hear you, Mate. Mate Nemes: Can you hear me now? Jan Juchelka: Yes. Mate Nemes: Excellent. Perfect. First of all, I wanted to say thank you to Jiri for years of hard work, transparent commentary and help you provided to analysts in capital markets, and we'll be dearly missing you. My question would be on loan growth. It's good to see that there is acceleration quarter-on-quarter and also year-on-year in loan growth. I think you've been quite clear that that's a focus area for the second half of the year, Jan, to your comments about freeing up time for the bankers, certainly starting to be visible and sales volume of housing loans visibly picking up. I'm wondering if you could give us perhaps some flavor of what you're seeing in the last quarter of the year and expectations also going into 2026. Can we expect this momentum to continue and maybe also see a much awaited recovery in business loan volumes? I think, Jan, last quarter, you were quite positive about potential infrastructure projects and lending towards that. When can we see that in the numbers? Jirí perl: I can probably start and then my colleagues, the heads of business [indiscernible] will complete me. So a couple of comments on first 9 months of the year. I would say that the retail loans were growing relatively strong. It's mainly the case of mortgage loans. So I gave you through that there is a space for improvement in the area of consumer loans. That's one thing. In terms of corporate loans, to say the growth was a bit subdued, but at the same time, we are expecting by the end of the year relatively dynamic move. Why? Because the pipeline is relatively rich and strong. And I'm sure Katarina is going to comment on that. In terms of 2026, we are providing the detailed guidance at the end of the year results, i.e., end of January next year. But I can indicate that the strategy of KB is very much growing, and it will be very much the case for retail as currently all tools are available. So retail is going to be the market shares growing mid- to high-single digit. In terms of corporate, it will be more about the sticking to the market shares, at the same time gaining a bit, but definitely not as dynamic as retail in 2026. Now I'm passing words to my colleagues who will probably go into deeper details of component to me. Thank you. Unknown Executive: Okay. So if I might add a few words on the corporate, not to repeat what was already said. We do see strong pipeline. We are actually seeing acceleration in the lending business for the SMEs. So we are pretty confident towards the year-end. In terms of the large corporates, it's kind of a little shaky market because we are seeing a strong and very lively bond market, which is nice on the fee side also for us. But it also has a negative impact because some of the loans are being refinanced by the bonds issued by the big groups, and also there is a strong pressure on the margins arising from the high appetite on the bond side. So on the large clients, we are optimistic more towards the next year because as you mentioned yourself, there is still quite a huge infrastructure project loading up in Czech Republic, and we are confident to be participating in those. And that should be definitely a very nice contributor to the large segment of our clients in terms of both volumes and profitability. Jan Juchelka: I will probably add one sentence. You probably saw the pages with the tombstones that we were the instrumental bank when financing the preparation of the new nuclear project of the country under the name of EDU II together with other banks, but we were, let's say, the main driving force there. There will be more to come on this side of energy sector. You might recall that there were 2 large transactions. One of them concluded beginning of the year where state was taking over part of the storage capacities and transmission of gas, whereas [ Czech ] as the state-owned -- majority state-owned company was taking over GasNet, which is a distribution of -- regional distribution of gas, et cetera. So we are around these transactions. We will be continuing with that. What is slightly delayed on that front is the transport-related infrastructure project, which partly maybe also because of the elections we're a little bit lagging behind the original schedule and original calendar. The rhetoric of the new representation of the majority in the parliament, at least, is that they will continue intensively on that front, and we want to be part of it as well. Mate Nemes: That's very helpful. Can I have a follow-up perhaps, as you mentioned, the new forming government? Can you share your thoughts on probabilities around a more effective banking tax? Jan Juchelka: With strong disclaimer that we don't have the crystal ball and we don't see the future, the reality is that we don't evidence any strong push on that front and/or any traces of planning or projecting that into the budgetary exercise or in the preparation of the budget. So the Czech Banking Association is obviously acting preventively and trying to get the right feeling about -- around that because rightly you are picking up one of the potential risks for the entire market. For the time being, we don't see anything happening. Jakub Cerný: Our next question comes from the line of David Taranto from Bank of America Securities. David Taranto: I have a quick one. Are there any regulatory headwinds or tailwinds on the capital side over the next year? Anything that could affect the Board's appetite to sustain the 100% payout aside from the internal capital generation? Jirí perl: Should I take it, Jan, or you will? Okay. Well, there was a big methodology change starting this year. I mean, implementation of Basel IV. Probably, you noticed that at the end of the day, the impact of Basel IV for KB was basically neutral. Having said that, almost all components of that have been incorporated even before. For the time being, we are not expecting any regulatory changes. But with the same disclaimer like I was mentioning before, we do not have a crystal ball, but currently nothing is on the table. Maybe here to mention that Basel IV was implemented starting from 2025, but not fully, i.e., it was related to credit risk and operational risk. But still the capital needs for market risk is coming, and you will see that at the beginning of next year. I can just indicate that the impact will be rather positive. Thank you. Jakub Cerný: So the next question comes from the line of [ MC ]. So I would like to ask you to introduce yourself and then ask your question. Jirí perl: That's Marta Czajkowska? Marta Czajkowska-Baldyga: Yes. Sorry. No, it's Marta Czajkowska-Baldyga from IPOPEMA. Sorry for that. So I have 2 questions. [ Audio Gap] Jirí perl: We cannot hear you. Jakub Cerný: Sorry, Marta, could you unmute yourself? Sorry. Marta Czajkowska-Baldyga: Yes. I think that it's -- do you hear me now? Jakub Cerný: We can hear you now, yes. Marta Czajkowska-Baldyga: Okay. So, first of all, thank you, Jiri, for your transparency and your hard work. And 2 questions from my side. First, on the deposit market and the situation right now. Could you please discuss this? I mean, we hear from the competitors that there is increased competition on this market and KB itself lowered its outlook for deposit growth this year. And could you please discuss this development in the context also of potential pressure on the margin? And the second question is on the cost of risk. Could you please disclose how much of the management overlays related to retail segment do you still have on your books to be released in the fourth quarter? And just related to that, would you say that 2026 outlook would still be below the -- through the cycle level in terms of cost of risk? Jirí perl: If I may, I will start again about the deposits, and again, no doubt my colleagues will complement. So based on the growth of deposits in first 9 months or even year-over-year was rather subdued. We are partially commenting on that same answer ago. And by the way, it was the case both for retail and corporate. And one of the reasons on the corporate -- on the retail side was that the branch network was heavily migrating according to the plans and succeeded. We are getting -- or the migration is going to be completed by the end of the year. I'm talking about individuals. But of course, it was about not negligible capacities on our side. For corporate, and that's probably what you are referring to, there was -- in the first half of the year, specifically [indiscernible] competition on the market. And our interpretation at the time was that this was linked to the fact that not all incorporated the impact of the doubling of obligatory reserves as of January this year into the client rates pricing. Now it seems it is going to be normalized. And I believe that at the end of Q3, we can see the first fruits of the change. The Q3 dynamics is much higher. On top of my head, that is around 2.6% where both key segments are growing. And to be frank, we expect that this trend is going to continue. Maybe, to mention here one more point. This was also visible in the market shares for the last 3 months. I don't have in front of me September ones. They should be available by the way today, but August, July and June, KB was gaining market shares in terms of deposits. And now I will have my colleagues to comment further. Thank you. Unknown Executive: So, on retail side, I don't have much to add. Maybe to give you a few details from inside the structure of the deposits, we are doing pretty well on unpaid deposits, current account balances, and you saw it in the presentation. Recently, we stabilized the development of term deposits. So we are now, like, flattish to slow growth again. We are doing really, really well on saving accounts. And I have to admit that some time ago, we probably slightly underestimated the role saving accounts play in collection of deposits. It was all fixed. And now we can see basically week by week how well we cumulated deposits on saving accounts. And we have a few more bullets to shoot to make it even faster. So I'm rather on optimistic side for deposit development on retail. Jan Juchelka: But probably in more general terms, what we see, what is happening on the deposits, we can probably confirm what you heard from the other players that the hunt for the deposits is more visible on the market, plus the clients have changed their management of spurred money, if I may say. They do search for returns. By definition, we are in the Czech Republic. They are searching the safe returns, if I may say. So saving accounts highly probably will be the field where the whole battle will be happening at the highest intensity. There was also one sub-question on overlays and cost of risk until the year-end. I don't know, Anne, if you want to react on that. Unknown Executive: Yes. So your question was the remaining part on the retail, right? So I don't know if the amounts were mentioned earlier, but -- yes, it was mentioned earlier. So we have remaining CZK 100 million, if I'm not mistaken. Jiri, please help me because I'm still struggling a bit between euros and Czech koruna, sorry, as I just joined 2 months ago. And as I said, it is on the consumer lending and we intend to release. And then we have still an overlay on corporate, which is in a bigger amount. This is under discussion because it was created as well on inflation assumption that are not, today, really relevant. But still, given the very unstable environment we are living now in, we will intend to keep overlay on the corporate part. But I cannot really comment because it's really under discussion on the, I would say, which amount, but it should be more or less the same as we have today, but on different assumptions, broader assumptions, like more international geopolitical instability, tariff threats, not only inflation. Jirí perl: Exactly, as Anne was commenting on that. Maybe let me complement by 2, 3 sentences because one of the questions was that the years to come. That [indiscernible] is not sustainable to be in a materialize part data sustainable. So starting from 2026, we are getting back to normal cost of risk, i.e., reverberation. Some of you might remember that according to risk [indiscernible] statement, some are [indiscernible] like through the cycle cost of risk, we are targeting 25 basis points, but it's very likely will not be the case for next year. If I should indicate, you should probably expect, let's say, high-teens in terms of bps. Unknown Executive: Complement -- as it was mentioned by my colleagues from business, we want to push on some segments that are, by definition, creating more cost of risk, which is small business, I mean, SMEs in the corporate and consumer lending in the retail. So that's why we expect to go back more in our limits that are in the risk appetite of the bank. Jakub Cerný: So we don't seem to have further questions as through the platform. So now I would like invite participants who are connected through telephone. [Operator Instructions] So, Marta, you have the floor. Marta Czajkowska-Baldyga: If you could discuss the outlook for remaining part of the year for NII, and if you could be kind enough to tell us if there is any change in that for 2026 going forward? Jirí perl: Yes. I was talking to [indiscernible]. Well, again, I will start – probably, let's start with the main drivers, which are, first, growing of the client base -- further growing of the client base. Of course, critical will be to make them active, first. Second, material increase of the digital sales. First one I would mention would be the continuing change in the structure of our deposits in favor of current accounts. At the same time, let me be very clear that we are not aggressive in that regard. Of course, 5 years ago, it was current accounts portion, and the total deposits was 80%. Now we are closer to 50 and are using very conservative assumptions. On top of that, we are expecting continuing growth of the volumes basically in line with the dynamics visible in Q3, and it is relevant both for loans and deposits. And probably last point to mention is slight improvement of NIM. If I'm saying slight, I compared to, let's say, year-over-year. It will be around, let's say, 5 basis points plus/minus. And the main drivers here will be already mentioned improved structure of the deposits. That's -- for 2026, the story is a bit similar, i.e., the main driver of the growth in the area of net interest income will be shared volumes. As I was mentioning before, a very dynamic growth of both loans and deposits. And also we will see there, let's say, outputs or results of the improved structure of deposit because it is in the P&L for the time being only partially. So in 2026, we should see more visible impact. So in terms of NPIs, we are expecting mid- to high-single digit, and of course, the main driver of that, at least in absolute terms, will be income from net interest income. I'm not sure. Did it help? Or -- okay, [indiscernible]. Jakub Cerný: So let's wait a few moments if anyone has another question, either through the platform or directly asking via telephone. There does not seem so. So I would like to hand back to Jan for a concluding remark. Jan Juchelka: All right. Thank you, everyone, for being with us today. It was a big pleasure for us to share with you our views on not only the results, but some of the key aspects of making banking business in the Czech Republic in the context of the macroeconomic reality. And we do believe that going forward towards 2026, there might be new emphasis for the entire market, and we want to play a significant role as we have done until now. Obviously, and thank you again for very precise questions. You somehow spotted the main aspects or points of our interest of -- not only interest, but of our activities. So we will definitely hunt for higher volumes on both the side of financing, as I will just repeat the words of Anne, mainly in those categories where we are lagging behind our natural market share. So it's more like consumer lending and financing the small businesses and mid-caps. On the side of hunt for deposits, we will definitely continue making our improved propositions for the clients, and work on the appropriate balance between paid and unpaid deposits. Speaking about all the means how to get there is mainly, I would say, favorable starting point on the side of cost of risk and the normalization Anne is mentioning is simply stemming from the fact that we are constantly flying below our line of risk appetite statement. So we have space to grow and the space to grow is mainly in the categories I have already mentioned. Let me also reiterate on the fact that we have made very hard work and series of unpopular decisions on the side of cost management during 2025. Some of the effects will be visible a bit later than in the third quarter. But I need to thank all of my colleagues who have implemented the necessary measures on keeping the positive jaws in place. We feel strong on that discipline and we will continue working on it further on. So we are very much looking forward to meeting you a quarter from now or at your request any time in between you would be interested in knowing more about Komercni banka. Thank you very much for paying attention to our bank, and we are super committed, and we are looking forward to speak to you soon. Thank you. Unknown Executive: Thank you very much. Jakub Cerný: Thank you. This concluded our call today. You can now disconnect.
Operator: Greetings, and welcome to the Gibraltar Industries Third Quarter 2025 Financial Results Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Carolyn Capaccio of Alliance Advisors IR. You may begin. Carolyn Capaccio: Thanks, Kate. Good morning, everyone, and thank you for joining us today. With me on the call is Bill Bosway, Gibraltar Industries' Chairman, President and Chief Executive Officer; and Joe Lovechio, Gibraltar's Chief Financial Officer. The earnings press release that was issued this morning as well as a slide presentation that management will use during the call are both available in the Investors section of the company's website, gibraltar1.com. Gibraltar's earnings press release and remarks contain non-GAAP financial measures. Tables of reconciliation of GAAP to adjusted financial measures can be found in the earnings press release that was issued today. Further, please note that continuing operations exclude net sales and operating results of the renewables business, which was classified as held for sale and as a discontinued operation with second quarter 2025 results, and that adjusted results exclude net sales and operating results of the Residential Electronic Locker business, which was sold on December 17, 2024. Also, as noted on Slide 2 of the presentation, the earnings press release and slide presentation contain forward-looking statements with respect to future financial results. These statements are not guarantees of future performance, and the company's actual results may differ materially from the anticipated events, performance or results expressed or implied by these forward-looking statements. Gibraltar advises you to read the risk factors detailed in its SEC filings, which can also be accessed through the company's website. Now I'll turn the call over to Bill Bosway. Bill? William Bosway: Good morning, everyone, and thanks for joining our call today. We're going to take you through third quarter results, and then we'll review our guidance for continuing ops, and then we'll open the call for questions. So let's turn to Slide 3 titled Third Quarter 2025 Review. I'd say in a relatively dynamic business environment, we've continued to deliver solid performance and stay on track to deliver good revenue margin and cash flow performance from continuing ops for the full year. In the quarter, we delivered 13% adjusted net sales growth, first and foremost, with our Building Accessories business delivering 2% growth in a soft residential roofing market, which is down between 5% and 10% depending on the channel. And secondly, from our Acquired Metal Roofing and Structures businesses delivering revenue per their plan. That being said, the ongoing delay of a large CEA project in Arizona and lower demand in our Mail and Package business caused revenue for the third quarter to come in below plan. And we'll discuss each of these in more detail as we review the results for each of the segments. The impact of lower sales in Agtech and Mail and Package created a bit of a business and product mix effect during the quarter. And as a result, adjusted EPS and operating income came in slightly below prior year, down less than 1% and adjusted EBITDA was flat to prior year. We did deliver strong cash performance, generating $57 million in cash from operations, an increase of 39%, and $49 million in free cash flow, achieving 16% of sales. With respect to portfolio management, the sale process for our renewables business is progressing, and we continue to target its completion by year-end. And our newer acquisitions in structures and metal roofing are performing as planned and accelerating through their integration initiatives. And finally, our pipeline of potential additional M&A remains very active, particularly in the Building Products segment. So let's jump into the business segments, and Joe will get us started with Residential. Joseph Lovechio: Thanks, Bill, and good morning, everyone. Let's start with Residential on Slide 4. Adjusted net sales for our Residential segment increased by $20.5 million or 9.8%, driven by our Metal Roofing businesses, which were acquired at the end of Q1, as well as growth in our Building Accessories business. We continue to gain participation in the U.S. residential roofing market as we grow with customers, expand in more local markets and benefit from new products recently introduced. We did experience lower demand in our Mail and Package business, specifically for our centralized mail solutions, which were down 8% in the quarter. Historically, given a centralized mail system is one of the last things installed in a multifamily property, we tend to see revenue materialize approximately 1 year after a new build has been started. So to put this in perspective, in 2024, starts for multifamily new construction were reported down over 35%, which resulted in less demand and revenue for us in 2025. Given our sales were down 8% in a market down over 35%, demonstrates our team's ability to drive significant participation gains in challenging market conditions. Overall, Residential segment organic revenue was down 1%. Now turning to margins. Adjusted operating and EBITDA margins decreased 200 basis points and 130 basis points, respectively, driven by business and product mix and accelerating system, supply chain and customer integration initiatives across our Metal Roofing businesses. We also remain on track to complete business system conversions to a single system across the Residential segment by the end of 2026. William Bosway: I thought we'd take a little time and talk about the U.S. roofing market. So let's turn to Slide 5 for an update. What you see on the left is data from ARMA. So according to shingle shipments reported by ARMA, Q3 shipments were down 10% in the quarter and are down 5.4% year-to-date, as well the top 10 states for shingle shipments, which represent 54% of the total shipments in the U.S., were down 12.1% in Q3 and 3.3% year-to-date. Interestingly enough, Texas, the largest market for shingles, was down 25.2% in the quarter and 12.5% for the year. Another data point to think about is retailer point-of-sale results were also down in the quarter by approximately 4.5%. In general, there seems to be a few reasons for -- a few reasons driving the market today. First, we do see inventory rightsizing happening in both the wholesale and retail channels, which we expect to continue in Q4 and maybe into early Q1 2026. Secondly, I think weather events in 2024, like California rains and Texas hailstorms, et cetera, really haven't occurred at the same level of frequency in 2025, specifically in the third quarter. And third, labor availability may be becoming a challenge for general contractors operating in certain states like Texas, California, Arizona and Florida. So as the roofing market continues to be less active than we prefer, our Building Accessories team has found ways to outperform the market and deliver organic growth, which we did in the quarter, up 2%, and have done for the first 9 months of 2025, up 2.5%. And despite today's market situation, we still believe there is more opportunity to grow, and we will maintain our playbook going forward. Now I want to move to Slide 6, and I'll give you an update on our expansion initiatives that we executed in the quarter. First, we added capability in both Denver and Boise to support local retailers in these areas. And in an effort to provide better service and support for retailers in the Greater Salt Lake City area, we redeployed manufacturing capability from our other facilities to our Salt Lake City operation. In late July, we also acquired Gideon Steel supply -- panel supply based in Oklahoma City. Gideon's last 12 months of revenue are about $10 million with EBITDA margins of approximately 20%, and Gideon is a leading provider of metal roofing systems and roofing accessories in the OKC market. So in 2025, we entered 9 MSAs through either organic or M&A investment, and we expect to expand further with additional operations coming soon in the Western region. So let's switch gears and let's move to Agtech. Joseph Lovechio: So turning to Slide 7. Agtech net sales grew $16.1 million or 38.8%, driven by the acquisition of Lane Supply, which continues to see solid demand. The strength at Lane helped offset the impact of the delay of a larger CAA project, which we highlighted in our Q2 earnings call. Demand remains strong with bookings and backlog continuing to grow substantially. Adjusted operating margin decreased 440 basis points, driven by the lower volume in the quarter and the impact of accelerating integration activities for Lane Supply. Adjusted EBITDA margin decreased 280 basis points as it excludes the impact of higher amortization resulting from the acquisition of Lane and its related intangible assets. William Bosway: So if we move to Slide 8, I want to give you an update on a couple of the CEA projects we shared with you in our Q2 earnings call, Houwelings Arizona, which we've already referenced once and, Pomas Farms. So on the left, let's start with the Houwelings project. Phase 1 of the project, the design, engineering work, has been completed and maintenance services continues to support existing growing operations and product shipments for retail customers. Phase 2 of the project, the retrofit portion of the project, remains on hold as the team awaits final approval of its USDA loan. And this phase of the project is currently expected to start in December, effectively a 6-month delay from its original schedule. For Pomas Farms, on the right, there were 2 projects representing approximately $14 million in contract value. The Greenhouse Lift project is nearing completion and the Phase 2 18-acre Bell Pepper expansion project has recently been started. Both projects experienced initial delays related to water rights permitting, but we are pleased they are now active and moving forward. Now I want to move to Slide 9. Let's talk a little bit about bookings and backlog acceleration. Bookings and backlog continue to accelerate and grow as we expand our customer base and increase our win rate with customers. Total bookings on a year-to-date basis are up 121% with organic bookings up 44%. Our average backlog is up 110% over prior year with our organic backlog up 70%. Our effort to broaden our customer base over the last 12 to 18 months is also gaining traction as we have secured business with 15 new CEA growers, 24 commercial classic growers and 20 customers focused on institutional operations like ag research and botanical gardens. We have also been rebalancing the business across end markets and between new construction and retrofit and service, and all of which will provide positive impact for the business going forward. Now finally, let's move to Slide 10. I just want to share a couple of customer wins in the commercial, institutional business. We were recently awarded a design and build contract to retrofit the Franklin Park Conservatory and Botanical Gardens in Columbus, Ohio, which we expect to begin in Q1 2026. And we are equally excited with our recent win for the Kaplan Orchid Conservatory and research facility, a design, build contract to build a new conservatory and also a separate research facility in Norfolk, Virginia. These projects are expected to begin in Q2 2026. So I'd say a lot of positive customer and demand activity happening across the Agtech business. And as more projects come into the pipeline and our operations cadence smoothens as a result, we are looking forward to generating more consistent predictable performance accordingly. So let's now move on to Infrastructure. Joseph Lovechio: So let's move to Slide 11. So Infrastructure net sales decreased $0.1 million or less than 1% as a result of a now resolved supplier transition that shifted revenue from September into the fourth quarter. Backlog decreased 2% in the quarter, but strong order inflows are being booked in October. Both segment adjusted operating and EBITDA margins decreased 740 basis points, driven by lower volume and inefficiency related to the now resolved supplier transition. Let's now move to Slide 12. As we are excited to share a new patented technology that D.S. Brown recently launched to protect telecom fiber optic cables installed in shallow depth trenches in asphalt pavement and roadways. Shallow depth trenching for fiber optic insulation with our seal provides significant benefits in the expansion of fiber optic networks. It improves installation speed, minimizes roadway closures, creates less traffic disruption while providing a more durable seal solution. Since late Q2 2024, we have sold 350 miles of seal to support fiber optic installation projects in 13 different states, and we are excited to see this product solution ramp and grow as cities, states in the U.S. continue to build and strengthen fiber optic infrastructure. So now let's move to Slide 13 to discuss our balance sheet and cash flow. At September 30, we had cash on hand of $89 million and $394 million available on our revolver. During the quarter, we generated approximately $57 million in cash from operations from net income and cash generated from working capital. Free cash flow generation again expanded on a sequential basis to about 16% of sales as expected, and we are on track to hit our 2025 target of approximately 10% of sales. Our revolving credit facility remains untapped and we remain debt free. We expect to continue to generate strong cash flow in 2025 and in the coming years. Our capital allocation priorities for 2025 are to continue to invest in our organic growth and operating systems for scale with capital expenditures at approximately 3% to 4% of sales for the year. We continue to explore inorganic growth opportunities with a focus in our current residential end markets and have an active pipeline of high-quality M&A. Our strong balance sheet supports this effort and provides optionality and flexibility. Lastly, we plan to continue to deploy capital for value creation through opportunistic share repurchases and have $200 million remaining under our stock purchase authorization. Now I'll turn the call back to Bill. William Bosway: So now let's move to Slide 14, and we will review our guidance for the rest of the year. Let's start with our assumptions for end markets. In Residential, we expect current market conditions to persist and adjust for normal seasonality in Q4. We assume interest rates will become a bit more attractive, affordability will improve slightly in certain regions and inventory rightsizing will continue in the channel. We will continue to drive participation opportunities in both our Building Accessories and Mail and Package businesses. In Agtech, we have solid backlog and expect to add more bookings in Q4 with some impact from these projects in the fourth quarter while also setting us up for a good start in 2026. We also expect demand in our Lane Supply business to continue as the team supports new store and retrofit initiatives across its core customer base. And finally, we expect Infrastructure margins to return to normal levels in Q4, accelerate bookings in the quarter and build backlog as we exit the year. So with that, let's review our 2025 guidance from continuing ops. We expect net sales to range between $1.15 billion and $1.175 billion, up approximately 15%, adjusted operating margin to range between 14.1% and 14.2%, adjusted EBITDA margin to range between 17.1% and 17.2%, GAAP EPS to be in the range of $3.67 to $3.77, down from last year, but driven primarily by the gain on sale from the company's Electronic Locker business that we executed at the end of 2024. Adjusted EPS to be in the range of $4.20 to $4.30, up approximately 10% to 12%, and free cash flow as a percent to net sales of 10%. So in summary, we're on track to deliver a solid year in 2025. We will continue to navigate through a sluggish residential market, execute on growing bookings and backlog in Agtech and stay on course to complete the sale of Renewables business by year-end. Transforming our portfolio and focusing more on residential and structures businesses will drive improved performance for our shareholders and customers. I'm really proud of the work our team is doing to execute in this environment each day while simultaneously transforming the company for the future. So with that, let's open the call up, and we'll take some questions. Operator: [Operator Instructions] Our first question comes from the line of Walt Liptak with Seaport Research. Walter Liptak: I wanted to ask first about the guidance for this year and the lower EBITDA margin that you're forecasting. Is it related largely to the lower margin this quarter? And if it is, it's largely probably in the Agtech segment. And then kind of the same thing for the fourth quarter. Is the fourth quarter -- is the margin overall coming down because of the Agtech outlook? William Bosway: Yes, Walter, I think there's probably 2 things there. One, we referenced the lower volume in Agtech. And so you saw that particularly in the third quarter. And then the second part is kind of the impact of the business and product mix, particularly in the residential segment. So I'd say those are the 2 drivers that you're seeing impact the margins for the balance of this year. Walter Liptak: Okay. Great. And just to drill into the Agtech segment. You referenced some new customer wins, and that's great. I wonder if you can provide us with some details about the sizes of these new projects, sort of the implied margins and what the future margins for Agtech could look like? William Bosway: Yes, it's a –- no, it's a variety of customers. As I mentioned, whether it's CEA, so the things that you've seen, Walt, in person, or institutional, commercial. It's been a pretty broad increase. But in CEA, as an example, we've really broadened out, and it's a combination of new and retrofit type projects in the U.S. as well as in Canada. And the margin profiles vary a little bit depending on the scope and size of the project itself. But we still feel really good about moving this business towards 15% operating income, maybe a little bit higher EBITDA margins in the relatively near term. Our U.S. -- when you get into commercial and institutional, the reason that's important is because those margins are even a little bit higher for us because of the uniqueness and the customization around some of the things we do there. So the more we can mix our business between types of business, individual channels or markets, geographic markets, and then scope range, makes a difference in how we drive our margins up. So broadening the base is great from the standpoint of getting the cadence around operating cadence. And secondly, mixing our business is also really important. And the one thing about construction that we all know and the frustration about it sometimes, when you depend on 1 or 2 large projects and they move, your costs don't -- they're not as variable as you like them to be like in a manufacturing build and ship type environment. So we're trying to emphasize to everybody and –- and in broadening your customer base and broadening the number of projects we have, it does smooth out that, but it also helps keep your costs more in line as you go through the course of the year and the course of various projects. So I'm excited about the fact that we're adding more because that's the balance that I think will give us more predictability, not just for you, but for us and everybody else that's interested in the business. But I'm pretty excited about how that's evolving. That's why I wanted to share with you guys what's happening in the bookings and the backlog and the customer expansion. It matters a lot going forward with margins. Walter Liptak: Okay. Is there a change now in the sizes of these projects? Are there -- is it more diverse smaller projects that inherently have less risk? Is that what you're commenting on? William Bosway: Yes, I think so. If you -- in our organic business, yes, commercial and institutional inherently are smaller than they are the largest CEA. They're smaller in scope, and therefore, take less time. So you stack up more of those. And we inherently do more of those in a given year than we would CEA just because of the size of CEA. And then Lane is a little bit different in the sense that their average project is 7 to 10 -- maybe a week to 2 weeks depending on how intricate it is. So the cadence they bring to the segment is helpful on that front as well. So think of Lane as probably your fastest flip and turn on projects, size and turn. Commercial, institutional in the middle and CEA is your bigger and larger and longer projects. And so mixing that is important to us relative to driving the cadence. Walter Liptak: Okay. Great. And then I think you called out that Lane Supply had some onetime costs this quarter. I wonder if you could quantify those for us? William Bosway: Yes. Well, a reference there is we're trying to accelerate a little bit faster on the integration. So we're doing incremental systems work to pull that up faster than we had originally thought. So getting them on the Gibraltar systems, not just for financial reporting, but other systems like our HRS system, supply chain and things of that nature. And so we're just putting a lot of effort to accelerate that at a faster pace than we originally planned. And that's the bulk of it. In terms of quantifying that in the quarter, I don't have a solid number for you, but it's -- that's a decent amount of effort. Operator: Our next question comes from the line of Daniel Moore with CJS Securities. Dan Moore: Maybe talk about just backlog up 50%. What was that -- was that organic? I know you referenced 70% organic growth in Agtech. Just wanted to parse that out a little bit better. William Bosway: Right. Well, the backlog I showed you on the one page is all Agtech. And so the organic was up -- average backlog up 70% year-over-year. You got to do an average because it's -- every quarter changes your backlog. But the bookings is probably more indicative. That was up 44%. That's all organic, just flat year-over-year. And that's just a combination of adding more customers and winning more projects are having a better win rate. So we've had a concerted effort in the last couple of years to work that hard, not just in CEA, but also in commercial, institutional, and it's exciting to see it's starting to happen. And I didn't reference a whole lot of what's in front of us, the projects we're working on, but there's a lot of interesting activity in front of us as well. So yes, it's starting to pay off for us. And that's part of that whole intent of how do you drive more cadence, consistency quarter-to-quarter. You got to stack the projects and you need more of them. And we're starting to see that build for us. So excited about what that's going to do in Q4, but also as we go into 2026. Dan Moore: That's helpful. Can you remind us kind of roughly what percent of your Agtech revenue runs through backlog? Just trying to get a sense for how meaningful -- I mean, that's a very significant step-up in order rates. How meaningful that is in terms of translating to growth next year? And in terms of lead times, when we should start to see that translate to faster revenue growth? William Bosway: Yes. So a very high percentage of our revenue comes from our backlog, if you will, in Agtech. There's a little bit where we'll do some repair and maintenance type stuff that turns and flips that doesn't really go into the backlog, but the bulk of what we do goes into backlog and then translates into sales. So I'd say probably 90% of our revenue comes from and is driven by the backlog that is in front of it. And so as we stack these projects, as I mentioned in the call, we'll start to see impact of some of that in Q4. And then those projects depending on the mix between commercial, institutional and CEA and Lane, all have a different time element around it. So if you look -- if you -- the 2 I showed you guys in commercial and institutional, those will start in Q1 and Q2 as an example. We'll turn and flip those in 3 to 4 months. CEA projects can be up to a year. Lane will be 10 days to 2 weeks. And so it's that mix that we think will get us off to a good start in the first quarter, but it's going to be helpful in Q4 as well. So what I probably need to provide you a better view of, Dan, honestly, is breaking the backlog down into those various groups so you get an idea of churn, which I didn't do for today, but we can follow up with you on that as well. Dan Moore: Makes sense. Appreciate it. We don't talk as frequently these days about Mail and Packaging. It's been a few years of obviously slow housing turnover. What's your updated outlook for growth for that business and margin profile and opportunity over the next few years? William Bosway: Yes. Well, the one thing about -- Mail and Package is different than our Building Accessories. So Building Accessories is 80% repair. And so that's a different -- a little bit different world than obviously new start construction, which is what Mail and Package is typically driven off of. And so as starts have been down in the last 2 years, the business has been navigating through that. So we've worked really hard to outperform a down market. But it really is starts driven. So as you start to see interest rates and affordability kind of come in line a little bit better than it has been, then you'll start to see starts pick up. You'll start to see then that drive into our business. So there's a lot of activity out there where our dealers are quoting on developments, but those developments are the things that need to actually start kicking in. So we see a lot where civil has been done, but the new construction guys are holding off on that. And I'm talking about the larger neighborhoods, whether it's multifamily or single-family because we put them in both. But that -- we need to start seeing that activity move forward for that to translate into business for us. We're the leader in that space. We're not -- we haven't fallen down as much as everyone else has. It doesn't make us feel any better, but it really is a start thing. And I would say a lot of our dealers are -- they're pretty optimistic. But we need those starts to start picking up for the business to start picking up. I don't think we'll see a dramatic fall going forward per se. I think we're bottoming out. But I think we're going to mirror what you see in the new construction from the builders. That's traditionally what's gone on in the business, particularly in our centralized mail. Dan Moore: Got it. And margins pretty steady state kind of on a run rate basis, not necessarily this quarter, but fiscal '24? William Bosway: Yes. Yes, I think so. Yes, the –- particularly, in Mail and Package. But I'd say in residential, we've done a pretty good job of -- you think about a sluggish market, whether it's repair or new. Some of the tariffs we've all been dealing with, we've made it somewhat of a nonissue, but you still got to go execute things like pricing, cost reduction, 80/20 initiatives. And I think the team has done a pretty good job of neutralizing as much as they can in that macro environment and delivered pretty solid performance relative to the rest of the world. But again, it doesn't make us feel great. It just gives us some confidence that we can plow through what's in front of us. And as the market recovers, then we should be in a good position to accelerate maybe a little bit quicker than everybody else. Dan Moore: Helpful. Last for me. Adjusted -- looking at the tweaked guidance, adjusted pro forma operating margins kind of 14%-ish for the overall business implied by your fiscal '25 guidance. And we just talked about some of the pieces here. But in terms of opportunity for '26 and beyond, not looking at guidance per se, but where do you see the biggest opportunities to improve that? And what should that look like given the new portfolio of businesses if we look out, say, 2 to 3 years? William Bosway: Yes. No, good question. So believe it or not, we're starting our budgeting process and our 3D look process next week. But I'd say, in general, from the 20,000-foot view, we would expect things in the residential space to get better from an end market perspective. We're in our third, maybe fourth year of a depressed market. At some point in time, that's going to turn back. And I think from a growth top and bottom line, that's going to contribute nicely. And as we get bigger in that space, either Building Accessories, Metal Roofing, Mail and Package, all of those things, I think, are going to -- we're in a good position to drive better performance. The other big one for us is obviously Agtech. So this backlog and the bookings rate that we've been demonstrating here recently, I think it's going to matter a lot relative to contribution over the next couple of years. That business is going to contribute a lot more in the top line. But as we get the cadence going, the mix of projects, as I described, you're going to see a margin improvement that's going to be a nice contribution to overall Gibraltar. And lastly, although it's a relatively small business, what's interesting about the new technology Joe referenced, that's an interesting technology that's patented and unique. And we're just getting started, but that will be a nice growth engine for us if it continues to accelerate and, at a minimum, support the margin profile of the business today and maybe help us a little bit more on that front, too, going forward. So we got -- I think we have a lot of good things in front of us. I think we're doing a pretty good job right now in this environment. But as some of these markets turn for us, some of these new products really take off for us, we're pretty excited about what we can do in the next 2 to 3 years for sure. And let's not forget, we're going to continue to put our balance sheet to work, whether it's through opportunistic buybacks, but there's some really interesting M&A opportunities that I think are going to help us position in our existing swim lanes to be even in a stronger position than we are today. So we're working that pretty hard, more to come on that. So we got, I'd say, 3 or 4 cylinders kind of clicking. They're just not showing up as well as we'd like just yet, but they will. And they're starting to -- we're starting to see that. Dan Moore: Very helpful. Maybe last one, and I'll jump out. It sounds like you still expect the sale to go through between now and year-end. Anything that might be delaying that? Just maybe -- I guess the question is your confidence around that timing relative to where we stood maybe 90 days ago. William Bosway: Yes, I'd say pretty good. No, we're moving forward. So these processes have stages. And I'll use my baseball analogy. If it's a 9-inning game, we're in the later innings, not the early innings. So we still feel good about that and like to get that done. That's important to us for a lot of reasons as well. So good progress. Operator: Our next question comes from the line of Julio Romero with Sidoti & Company. Julio Romero: On residential, you talked about some of the trends in that segment across the different business units, outperforming some of the end markets in building accessories and also in centralized mail, talked about retail point of sale down 4.5%. I was hoping you could talk about trends by geography a bit and just call out any areas of strength and weakness that you saw in the quarter and heading into fourth quarter. William Bosway: Well, from a market perspective, that army of data is kind of interesting because you think about the largest markets between Texas, Florida, California all being down, that's where you've had in the recent years a lot of migration and/or build happen or just sheer size of those respective states. I think Texas is -- which is important to us, but I wouldn't say that's a place that we're incredibly well positioned. We've been making strides there. But I think that's a location or I'd say a region that -- and generally the Southeast is probably going to see some recovery in the next year or so. And the reason I think that is, a, Florida is coming off -- came off of a very strong set of series of storms. We saw a big reduction last year in year-over-year type of performance. And I think it's now normalized and what now you're starting to see is -- I think they're positive for the year or year-to-date so far. I think you'll start to see that settle in and be a little bit more positive growth. We're pretty well positioned there, but we are coming off of a year or 2 where it was -- once you get past the hurricanes, it was really depressed. So we'll see how that evolves. I think the Southeast in general -- states like Georgia are still pretty strong, Alabama and that whole area. The Carolinas are pretty strong. We've been expanding into the Carolinas, if you saw the dots on the map, through metal roofing, but now we're actually running some of our building accessories through those metal roofing locations because those are areas -- those -- that region is -- that Mid-Atlantic or Carolina region is underserved. So we're seeing some opportunity there. So it really is somewhat surgical for us, but I would say how do you continue to do well in Florida, how do you expand in the Southeast, get the Carolinas going. And we'll continue to expand our presence in Texas. We've been doing a lot in the Rocky Mountain region as you see with Colorado, Idaho, Montana area, and we still think that has got some pockets out. Salt Lake has been pretty good for us. We've done some things in Boise, which seem to be a pretty decent market. So yes, really, the places we've gone, Julio, are places we think, a, are underserved, and b, have decent markets. And I can't tell you specifically what every MSA is going to do in the next 2 years, but I feel like our coverage today is better than it was 2 years ago and we're in more places than we would have been otherwise. And so as these regions return, I think that's important. And I think the other thing to think about is it's not just the region, it's being with the right channel in the region. And so part of our localization effort is to be stronger with wholesalers where 80% of what contractors need, they typically buy through. But there's also cases where we want to be in certain regions where we're doing really well with retailers and wholesalers. So there's a lot more under the curtain, if you will, in terms of how we're trying to drive our participation. But I think all of that is kind of working for us right now. We have more work to do. But that's a long answer to your question. But we're trying to skate to where the puck is going to be. Right now with the market, it's a little challenging to figure out exactly where the puck is going to be. But we think about it more than just the next year or the next quarter. We're trying to figure out migration patterns, where investments are going, where the new construction guys are going, as well as the inventory stock that's out there. So it's a combination of a lot of things. But sorry for the long answer. Hopefully, that helped a little bit. Julio Romero: Yes, very helpful. And just thinking about the Residential segment adjusted operating margin and Residential EBITDA margin trended down a bit year-over-year and sequentially here. Can you kind of help us unpack the drivers of the decline? And just help us think about is that primarily from the increased noise from the acquisitions in metal roofing? Or is the noise -- or is there some noise in there from inventory rightsizing and less weather-related, et cetera, activity, et cetera? William Bosway: Yes, I think it's -- we talked earlier about our revenue being less than planned in the quarter. There's a little bit of that in our -- outside of Mail and Packaging and our core Building Accessories, yes, we were up 2%, but we went into it thinking that we would grow a little bit more. We did not anticipate the rightsizing. And I think after Labor Day, that's when we started to see it. And we're hearing that consistently from wholesalers and the big box guys trying to get that right. You think about going into the third quarter, that's usually the biggest quarter. It didn't materialize as people thought. So I don't think the market is down -- inherently structurally down 10% to 12%. I think it's more like the 4%, 5% that I referenced, because that's the point of sale that reflects what's actually being sold. But I do think that created some noise for us in the Building Accessories that contributed to a little bit of the margins impact. Mail and Package, obviously, being down impacted the margin compression. Metal Roofing is really more of a short-term issue as we're trying to accelerate faster than we planned. So we are making investments in that now to get things integrated at a faster pace than we originally thought. And that's really around systems. It's the supply chain things that we're doing. And I think that's all good stuff, but those investments need to be made, and we're making those as we go. So we're in a stronger position as we go forward in 2026. And the reason we're doing that now -- you might say, well, why? Well, if you have other ones that you want to bolt-on, having that system structure in place makes a difference on bringing the next 1 or 2 or 3 into the family a little bit more efficiently than you would have otherwise. So we've got to get that going, and that's part of the investments we're making. Julio Romero: Perfect. And that kind of segues into my follow-up here, is just -- and this is kind of a piggyback to what Dan was asking earlier, but more focused on residential in particular. As you continue these expansion initiatives and you invest near term into systems and integration here in the near term, how should we think about how residential margins on an operating margin and EBITDA margin basis trend over the next few quarters and into '26 to the extent that you can talk about that at a high level? William Bosway: Yes. We expect them to improve. I mean we -- like I said, we're offsetting some business and product mix simultaneously while we're integrating the things we just bought all in the same space, and we're dealing with a relatively sluggish market. So if we can get the market to cooperate just a little bit more than it has in the last 3 years, I think that's a big deal so we're not chasing a falling sword for all of 2026. And we can't control that I get it, but I think there's some movement that we've been tracking that -- have we hit the bottom? I can't tell you for sure or not. But I feel like getting that piece a little bit more stable makes a difference as we execute our base plan. What we can control, yes, things like how we drive participation, our 80/20 product mix, new products. Things that we've been doing, I think, will all matter towards contribution. And I think as you think about some of these new locations and our strategy around getting closer to wholesalers and serve on a local basis, those inherently are higher-margin operations than what we traditionally would have done trying to serve them from distances. So there's a lot of things I think that will contribute to margin improvement in the space going forward. The addition of metal roofing is going to matter. That's why we got into it in the first place. But I think there's a lot of things that will start contributing as we get into '26 and '27. The thing that we haven't talked a lot about, and I won't be able to quantify it for you yet today, but this systems integration -- inherently there's a lot of frictional costs when you don't have any of those systems in place for the respective teams to leverage. And we've been working on this for quite a while. But by the end of '26, we'll have the entire residential business on a system, one system. So we've got a few more locations to do. But that's going to matter as we think about scaling up using technology of leveraging our cost structure in a much different way than we have in the past. So we still have things like that, that I think are going to make a difference for us going forward on margin as we move forward. Julio Romero: Very exciting. The last one for me here would just be if you could talk a little bit about the M&A pipeline for residential in regards to your expansion initiatives and kind of where M&A multiples are going for in the residential space. William Bosway: Yes. And I'm not trying to avoid the -- I'd say all over the map on the multiples. But what's -- as we've talked before, the thing that we're trying to do is stay in our swim lane when you think about residential. So we swim in certain lanes. Our M&A focus is on staying in those and building out our presence, because the synergy opportunities around that tend to be better, and secondly, the return profile on the investment you make and something that you do every day tends to be better and less risky than if you're doing something on an adjacency basis or something that's adjacent to your core. So I'd say the pipeline, number one, is pretty robust right now in our swim lanes, whether that's core building accessories type stuff. Metal roofing is quite interesting right now as well. And those are the 2 areas that we're, I'd say, effectively 100% focused on right now relative to M&A for all of Gibraltar. And so we'll continue to drive that. But yes, we are engaged and involved in a couple of interesting things, and we'll see how those things play out here in the relatively near term. Operator: This now concludes our question-and-answer session. I would now like to turn the floor back over to Mr. Bosway for closing comments. William Bosway: Well, guys, thanks again for joining us today, and I appreciate the support. I appreciate all the questions. It's an interesting time. I think we're doing a pretty good job of navigating through some things. And looking forward to catching back up with you guys next quarter. And we know we'll do some one-on-ones here shortly as well. So thanks again, and hope you have a good day. Operator: Ladies and gentlemen, thank you for your participation. This does conclude today's teleconference. You may disconnect your lines, and have a wonderful day.
Operator: Good morning, everyone, and thank you for participating in Magnolia Oil & Gas Corporation's Third Quarter 2025 Earnings Conference Call. My name is Danielle, and I will be your moderator for today's call. [Operator Instructions] Our call is being recorded. I will now turn the call over to Magnolia's management for their prepared remarks, which will be followed by a brief question-and-answer session. Tom Fitter: Thank you, Danielle, and good morning, everyone. Welcome to Magnolia Oil & Gas' Third Quarter Earnings Conference Call. Participating on the call today are Chris Stavros, Magnolia's Chairman, President and Chief Executive Officer; and Brian Corales, Senior Vice President and Chief Financial Officer. As a reminder, today's conference call contains certain projections and other forward-looking statements within the meaning of the federal securities laws. These statements are subject to risks and uncertainties that may cause actual results to differ materially from those expressed or implied in these statements. Additional information on risk factors that could cause results to differ is available in the company's annual report on Form 10-K filed with the SEC. A full safe harbor can be found on Slide 2 of the conference call slide presentation with the supplemental data on our website. You can download Magnolia's third quarter 2025 earnings press release as well as the conference call slides from the Investors section of the company's website at www.magnoliaoilgas.com. I will now turn the call over to Mr. Chris Stavros. Christopher Stavros: Thank you, Tom, and good morning, everyone. Thanks, everyone, for joining us today for a discussion of our third quarter 2025 financial and operating results. I plan to highlight our quarterly results, which represent another strong period of consistent execution for Magnolia and continues to deliver on the capital-efficient program that we outlined during the first half of this year and one that's provided us with more free cash flow. Brian will then review our third quarter financial results in greater detail and provide some additional guidance before we take your questions. We continually remind the financial community that Magnolia's primary goals and objectives are to be the most efficient operator of our best-in-class oil and gas assets to generate the highest returns on those assets and while employing the least amount of capital for drilling and completing wells. A substantial portion of the free cash flow Magnolia generates is returned to investors through our secure and growing cash dividend and ongoing share repurchases. And we continue to enhance and expand our asset base through bolt-on acquisitions stemming from our cumulative subsurface knowledge and experience near areas where we operate and understand well. Magnolia's latest quarter is characterized by achieving these objectives, and our year-to-date performance demonstrates our ability to execute our business model despite the decline in product prices that we've seen recently. We operate a focused business with an emphasis on driving financial returns and do not plan to add incremental activity at current product prices. At Magnolia, our mission is straightforward, generating consistent and sustainable free cash flow through disciplined capital allocation, pursuing on [Technical Difficulty]. All that said, and turning to Slide 3 of our investor presentation, Magnolia delivered another strong quarter, and our overall business continues to operate exceptionally well. We achieved a record quarterly total production rate of 100,500 barrels of oil equivalent per day during the third quarter, representing year-over-year production growth of 11% with total production [Technical Difficulty] quarter saw low single-digit year-over-year growth despite a small sequential quarterly decline due to the timing of turn-in lines, while oil production at Giddings grew by nearly 5% compared to the prior year. As we are now well into the fourth quarter, our production is off to a very strong start, and we anticipate both record total production and oil production in the current period. Continued strong well performance during the year is expected to provide us with full year 2025 total production growth of approximately 10% and well above our initial guidance of 5% to 7% at the start of the year. Our Giddings well results have not only outperformed our expectations, but have exceeded levels of the last couple of years and despite a similar drilling and activity program. The outperformance led us to defer the completion of several wells into next year, allowing for a reduction in our capital earlier this year and is expected to result in a roughly 5% savings in spending during 2025. This had the dual benefit of improving our free cash flow during 2025 as well as enhancing our operational flexibility as we move and look into 2026. Our adjusted EBITDAX for the third quarter was $219 million and operating income margins were 31% during the period, while our annualized return on capital employed was 17%. Each of these metrics was supported by solid overall production volumes during the quarter in addition to strong relative price realizations for both natural gas and NGL production. Our disciplined approach around spending, a focus on financial returns, including our efforts and initiatives to improve the efficiency of our D&C program, all contributed to limiting our capital reinvestment rate to 54% of our adjusted EBITDAX during the third quarter. Our low reinvestment rate helped generate a strong level of free cash flow in the quarter of $134 million. We returned 60% of this free cash or approximately $80 million to our shareholders through the repurchase of more than 2.1 million Magnolia shares and the cash payment of our quarterly base dividend. Both our consistent share repurchase program and the secure growing base dividend are a mainstay of Magnolia's ongoing investment proposition. Incorporating these outlays, we ended the quarter with $28 million of additional cash and with a cash balance of $280 million at quarter end, which was the highest level of the year. As I mentioned, we expect to end the year on a strong note and with record oil and gas production in the fourth quarter and with capital spending of approximately $110 million. As we did during 2024, we continue to focus on our field level operating costs, which have reduced our lease operating expenses through capturing additional production efficiencies in such areas as water handling and fluid management as examples. These and other initiatives are the result of continuous improvements in how we plan, drill, complete and operate our wells. Additional drilling and completion efficiencies that we expect to realize will accrue to the business through additional learnings and the further delineation of our Giddings asset. We expect these efficiencies to accumulate at a measured pace and have no plan to accelerate our activity to pursue this. Looking ahead to 2026, we remain committed to our business model, which limits our capital spending to 55% of our adjusted EBITDAX or gross cash flow. Similar to 2025, we plan to operate 2 drilling rigs and 1 completion crew next year and expect to allocate a modest amount of capital toward appraisal activities in both Giddings and the Karnes area and to further enhance our resource opportunity set. Assuming current product prices, we expect that our 2026 program would deliver mid-single-digit total production growth with capital spending at similar levels to 2025. This also allows for significant free cash flow generation in support of our investment proposition, providing a secure and growing dividend and consistent share repurchases. We remain well positioned with ample financial and operational flexibility, allowing us to adapt within a volatile product price environment. When we ask our larger shareholders why they're invested in Magnolia, a common reply is because you do what you say you're going to do. Since our founding more than 7 years ago, Magnolia has consistently executed around the principles of its differentiated business model, which includes our strong balance sheet and disciplined capital spending philosophy designed to maximize free cash flow generation from our high-quality assets. We remain committed to our business model and our strategy that has helped compound per share value for Magnolia shareholders. I'll now turn the call over to Brian to provide some further details on our third quarter 2025 results and some additional guidance for the fourth quarter. Brian Corales: Thanks, Chris, and good morning, everyone. I'll review some items from our third quarter results and refer to the presentation slides found on the website. I'll also provide some additional guidance for the fourth quarter of 2025 before turning it over for questions. Beginning on Slide 5, Magnolia delivered a strong quarter as we continue to execute our differentiated business model. During the third quarter, we generated adjusted net income of $78 million or $0.41 per diluted share. Our adjusted EBITDAX for the quarter was $219 million with total capital associated with drilling, completions and associated facilities of $118 million, representing 54% of our adjusted EBITDAX. Third quarter production volumes grew 11% year-over-year to 100,500 barrels of oil equivalent per day while generating free cash flow of $134 million. Looking at the quarterly cash flow waterfall chart on Slide 6. We started the quarter with $252 million of cash. Cash flow from operations before changes in working capital was $247 million, with working capital changes and other small items impacting cash by $5 million. We added $25 million of small bolt-on acquisitions comprised of additional acreage, working interest and royalties that we discussed last quarter. During the quarter, we paid dividends of $29 million and allocated $51 million toward share repurchases. We incurred $119 million of drilling completions, associated facilities and leasehold and ended the quarter with $280 million of cash. Our cash position is the highest it has been all year despite lower oil prices and acquiring approximately $65 million of bolt-on acquisitions during the year. Looking at Slide 7. This chart illustrates the progress in reducing our total outstanding shares since we began our repurchase program in the second half of 2019. Since that time, we have repurchased 79.4 million shares, leading to a change in weighted-average diluted shares outstanding of 26% net of issuances. Magnolia's weighted average diluted share count declined by approximately 2 million shares sequentially, averaging 190.3 million shares during the third quarter. We currently have 5.2 million shares remaining under our repurchase authorization, which are specifically directed towards repurchasing Class A shares in the open market. Turning to Slide 8. Our dividend has grown substantially over the past few years, including a 15% increase announced earlier this year to $0.15 per share on a quarterly basis. Our next quarterly dividend is payable on December 1 and provides an annualized dividend payout rate of $0.60 per share. Our plan for annualized dividend growth is an important part of Magnolia's investment proposition and supported by our overall strategy of achieving moderate annual production growth, reducing our outstanding shares and increasing the dividend payout capacity of the company. Magnolia continues to have a very strong balance sheet, and we ended the quarter with $280 million of cash. Our $400 million of senior notes does not mature until 2032. Including our third quarter cash balance of $280 million and our undrawn $450 million revolving credit facility, our total liquidity is approximately $730 million. Our condensed balance sheet as of September 30 is shown on Slide 9. Looking at Slide 10 and looking at our per unit cash costs and operating income margins. Total revenue per BOE declined approximately 12% year-over-year due to the decline in oil prices, partially offset by an increase in natural gas prices. Our total adjusted cash operating costs, including G&A, were $11.36 per BOE in the third quarter of 2025, and our operating income margin for the third quarter was $10.98 per BOE or 31% of our total revenue. Turning to guidance. Fourth quarter D&C capital expenditures are expected to be approximately $110 million, which would bring the total capital for the year to about the midpoint of our previously reduced annual capital budget. This includes an estimate of non-operating capital that is similar to that of 2024. We are reiterating our full year 2025 outlook for total production growth of approximately 10% compared to our guidance at the beginning of the year of 5% to 7%. Total production for the fourth quarter is estimated to be approximately 101,000 barrels equivalent a day, and we expect that total production and oil production for the quarter to be at the highest levels of the year and new Magnolia records. Our price differentials are anticipated to be approximately a $3 per barrel discount to Magellan East Houston, and Magnolia remains completely unhedged on all of its oil and natural gas production. The fully diluted share count for the fourth quarter of 2025 is expected to be approximately 189 million shares, which is about 4% lower than fourth quarter 2024 levels. We expect our effective tax rate to be approximately 21%. And with the passing of new legislation during the third quarter, we expect 0 cash taxes for full year 2025. We are now ready to take your questions. Operator: [Operator Instructions] The first question comes from Neal Dingmann from William Blair. Neal Dingmann: Nice quarter and nice to be back on. Chris, my question for you or Brian, you continue to have these pretty amazing operational efficiencies. And I'm just wondering if that continues at the pace that we've seen driven by these Giddings wells, could you envision -- I mean, again, I think about, will you keep -- would you accelerate production potentially even more than 10%? Would you be able to or would you think more so about you'd even be able to cut CapEx? I'm just wondering when you toggle those 2 and if you keep having the same upside, where could we see those benefits lie next year? Christopher Stavros: Neil, thanks for the question. Good to have you back. Look, we can do largely anything we'd like to do, or we want to do within the context or framework that you mentioned. I think the point is, we want to stay true to the business model, and it is -- it works for us and it works for our shareholders in terms of maximizing the free cash flow that we have to give back to them. So rather than elevating activity levels, if you will, or rushing to get there, they will get there with time and over time. And as we continue to pursue new areas and probe around the vast acreage position that we have in Giddings and also parts of Karnes and appraise more of it and bring more of it into the fold, we will have more of the way in realized efficiencies. I'm very confident of that. We've seen it. There's a litany of things that I can tell you that the teams are working on that they currently see rather than -- I could spend 20 minutes on talking just about that, and we're going to talk more about it as a team. So that will happen as we go forward. There's no real reason to rush the activity levels or rush the production volumes or reach or stretch for higher levels that could get you into a situation where you're forced to spend that much more as your volumes sort of decline and get you on that sort of treadmill. So, we sort of live within the model, moderate mid-single-digit growth. If the assets exceed that, which oftentimes they have over the life of Magnolia, we've seen that better-than-expected performance, we'll take it. But we're not going to overstretch or overreach on the capital or activity just because we'll live within the model and we'll live within our governor of the capital. And I think in that way, everyone will be satisfied. Neal Dingmann: No, I'd love that if you're able to do that. And then just lastly, when you look at M&A, you guys have been doing a fantastic job of replacing your -- more than replacing your inventory. When you look at just sort of white space in your general area, is there still plenty of white space? Or how would you describe the -- I don't know, I guess, the ability just to continue to do these strategic bolt-ons. You guys have done a nice job, as I said, replacing the inventory as there's still a lot of potential to do so. Christopher Stavros: Yes. No, good question. There's a fair amount of white space, as you called it, and there's a fair amount of smaller private operators that -- things that we'll always evaluate. It has to be the right fit. And I will say that, first and foremost. It has to be the right fit for Magnolia. It has to, at its essence, actually improve the business, improve the company, improve our durability to fit into the model and extend what we have been able to do over the last however many years. So, if we can find something that fits that way or looks like us, we will do that or we will certainly consider it if it presents the proper fit. There may be some things like that. Not a day goes by where I don't get an e-mail or a phone call from a banker, they're transactional, so they love to reach out. But they may not like us very much because the answer is more likely no than yes. So, we haven't found any of those things. But we continue to try and chip away and these are just, over time, additive to our business. A lot of it or certainly some of it has come through the appraisal program that we've had over the years where we learn about a certain area, we like it, we tend to figure it out, and then we look for more of it in the way of filling in that white space if it can be had. So, we'll continue to do some of those things. Operator: The next question comes from Tim Rezvan from KeyBanc Capital Markets. Timothy Rezvan: I want to start, Chris, you mentioned in your prepared comments and in that last response, appraisal work going on at Karnes. There's a market perception that Karnes is sort of on its last legs as one of the earlier shale plays. So, can you talk about what you're referring to with the appraisal activity there? Is that non-op? Is it operated? Is it Austin Chalk or something else? Just curious any color you can provide. Christopher Stavros: Well, I wouldn't write Karnes off just yet. Certainly, good rock is good and tends to have a long life. So that is good rock and some of the best, they're in Karnes. We're continuing to look at that and see what else we can do, what iteration of it that we're on. And fortunately, I still think it's relatively early for us. So, there may be more to be had there, and we'll continue to probe around. I'm not going to say exactly what we're going to do, but -- or exactly what we're planning on doing, but there will be some things that we will test that may have some upside or provide some extended life, if you will, to Karnes. That would not surprise me in the least. The question is always, when you do these appraisal things, what do the economics look like? There's no unlikelihood that we're not going to find producing quantities of oil and gas. That's certain, for sure. The question is, can we do it economically and provide a good amount of duration around it. I think there's a reasonable chance around that. So, I'm not -- certainly not going to write it off. And again, I would say the same thing with Giddings, although Giddings is a lot bigger just in terms of its footprint, and we're quite active there, too, and we have some things planned as well. So, I think I'm optimistic. Timothy Rezvan: Okay. I guess, we'll have to stay tuned into next year. And then my follow-up is sort of a similar theme. The Western Haynesville evolution has been interesting and now there's folks leasing sort of up to your acreage line. I'd be shocked, I think, if you did some appraisal drilling there. But is there a discussion at the Board level about trying to understand if you think you have that resource? And do you have the deep rights? Christopher Stavros: That's a bit further afield in the area that you're referring to compared to where we are. We currently don't have an area up and around where you're talking about. There are other areas within Giddings that have extensive amounts of natural gas exposure. We've talked about that at the organizational level throughout. And again, as I mentioned earlier, it's more about, to some extent, economics as opposed to quantities of producible hydrocarbons. We know it's there. It's just, can we figure out a way to make it more economic. Operator: The next question comes from Carlos Escalante from Wolfe Research. Carlos Andres E. Escalante: I'd like to go back real quick to your discussion on appraisal -- on your appraisal program. So if -- just taking an early look at how you intend to manage your appraisal program in 2026, particularly in the event of any weakness, I wonder how you would intend to manage that and what are the levers that you could pull? Because at your current adjusted EBITDAX and CapEx, we certainly think that implies, at least in our view, that you won't touch your growth capital until perhaps anywhere close to $50 per barrel WTI. So, I wonder if you can frame the appraisal program in the context of those levers and again, in the event of a sustained oil weakness. Christopher Stavros: Yes. Thanks for the question, Carlos. Look, the appraisal program has been quite beneficial to Magnolia in terms of our resource and capabilities over time and expanding the footprint in Giddings. So, I'd be somewhat reluctant to take a machete to that program and just cut it off too harshly. You need to do what you need to do and some mix of oil and gas prices. But in the current outlook or in the current sort of price dynamics that we're seeing, there is still room for a reasonable amount of that type of activity, and we'll continue with that. Look, I say this internally all the time, few ways to find resource and you decline every day, just like all our peers, you either buy it or you find it. And we continue to look for ways to supplement our existing resource and the appraisal program for us up to now has worked out exceptionally well. And -- particularly in Giddings, we've tested some new concepts. We've tested some of the boundaries. There's almost always really -- not almost, but really always going to be producible amounts, again, of oil and gas when we drill. The question is, can we make the economics of a particular area work well for us that fit into our matrix of returns and a competitive for other -- competitive for capital. So, we'll continue to do that. It's an important element of what we do, and we'll continue to examine different parts of it and try to high-grade the program, if you will. Carlos Andres E. Escalante: Wonderful. Appreciate that, Chris. And then on my follow-up, I think that certainly to us, at least from a [ vantage ] point, one of the many sell points that Magnolia has as an organization is its ability to capitalize on natural gas realizations compared to a lot of your oil levered peers. We just had a very interesting quarter in Waha, for example. So, just wondering where you are today and considering all the reshuffling that you see just in the backyard of where you are with Gulf Coast LNG growing and growing, if there are any kind of initiatives that you have for sustaining your organizational level that may be aimed to further improve that and further gain that edge that you have over some of your oil level peers? Christopher Stavros: Well, thanks for the commercial message. I really appreciate it on the natural gas realizations. I would agree with you that we've been able to benefit from some strong realizations on a year-over-year basis and into most of '25. The answer is, I don't exactly know. I mean there's a lot of complicated factors. Had we taken actions based on some impressions or opinions that we had heard, say, a year ago and done some things to perhaps consider hedging basis or even consider options such as that, we probably would have been wrong. The impact of what you've seen up to now coming out of the Permian with it, and in some of the associated gas producing areas as we move more gas to Waha, et cetera, hasn't seemed to influence it yet. I don't know if it will, but I would have -- others said that it would have and they were wrong, and there's a lot of other variables and factors that may offset that. So, I'm not necessarily willing to lean in and make something fully deterministic on somebody's view because there's just so many moving parts. Operator: The next question comes from Charles Meade from Johnson Rice. Charles Meade: Chris, I'd like to go back to the A&D market and ask a question there. Can you offer your view? Have you seen anything different on the packages that you look at around Giddings, either in the quality of what is available, what's being brought forward or the ask that you're seeing relative to the value? Christopher Stavros: Are you referring to South Texas or Giddings specifically or just South Texas inclusive of the entire trend? Charles Meade: I was asking more specifically about Giddings, but I'd be curious to hear whatever view you want to share on the whole kind of Eagle Ford Austin Chalk trend, if you care to. Christopher Stavros: Yes. Well, let's start with Giddings. Giddings is, it's fairly -- in terms of the bigger packages or bigger concentrated assets, it's fairly concentrated. There's us and a large private player without naming names. And then there's probably a smattering scattered positions of a variety of private players. There are very few, if any, sizable or even smaller packages in Giddings that are operated by public companies, just to set that straight. In this environment, what may happen is that bigger packages may be sort of holdouts for live to fight another day or live to see a better day, if you will, on product prices, oil prices before considering a sale. And smaller things may be more reasonable as far as connectivity and alignment between a buyer and a seller because the seller may run out of patience or money or whatever. And those are small things, and they may just ultimately pop up somewhere else at the end of the day. So that smaller things may be more easy to move. I can't guarantee that, but certainly a better chance at that than a larger thing as prices come down because the bid and the ask just widen apart between the players. Broadly, in South Texas, I would tell you that, look, everything is getting generally gassier. GORs are rising and the quality is waning. There are pockets of things here and there, but I would characterize it as generally over time, gassier; generally over time, somewhat scattered and maybe less synergistic opportunities. On occasion, you'll find a private player who's done a good job. But true to form, many private equity backed players will press on the accelerator to push activity and volumes in order to create more cash and [ EBITDA ] to try to sell an asset. That typically doesn't work very well for a public buyer to acquire somebody else's declined rate while they run through the better part of their inventory. So that's sort of how I would just characterize things generally. Charles Meade: Got it. And then a question about your -- I guess, your flexibility around your activity levels. When I look at -- you guys have been really steady at 2 rigs, 1 frac fleet. But at least from the outside looking in, it looks like if you were to have to drop from there, you're kind of sitting right above the minimum efficient threshold of keeping 1 frac crew pretty much continuously busy. So, is that something that you guys think about? And is that something that you -- I mean, do you agree that it would be the case that you'd lose some efficiency if you had to cut activity in response to lower commodity prices? And how would you manage that? Christopher Stavros: Not really. I'm not all that worried about it. We have very strong relationships with the crews and equipment that we use. I don't see our activity pulling back dramatically in this environment, if at all. We could certainly adapt and do some things. From an efficiency standpoint, I'm not all that worried about it. We've entered into some contracts that give us quite a bit of flexibility to take advantage of some softness in pricing that we've seen recently, but at the same time, not so long as to take us out of play and considering things that -- if things should worsen in the market to take advantage of that later on. So, I'm not very worried about it. Operator: The next question comes from Peyton Dorne from UBS. Peyton Dorne: I know earlier you gave the indications on the 2026 budget. But I just wonder if you have any details to share on how the plan theoretically might be shaped. And I ask just because you've highlighted the 6 well deferrals and maybe targeting completions to benefit from higher winter gas prices. So, we just infer from that, that maybe the spending is going to be a bit more weighted to the first half or first quarter '26. Christopher Stavros: Yes, thanks for the question. I would say generally, and this is probably not maybe very different from any in the industry, the spending levels will probably be a little bit more skewed to the earlier part of the year, which will include some test areas and also just because we have a little bit more line of sight on pricing sooner and we'll pull forward some activity and volumes into the first half, first quarter of the year. So, if I had to skew it that way, I would say it will be a subtle heavier amount of activity and capital in the early part of the year, but not a dramatic difference, say, from 1Q to the back half. I mean on a percentage basis, it wouldn't look that way. It will be more subtle. Operator: The next question comes from Phillips Johnston from Capital One Securities. Phillips Johnston: First question is on oil volumes. Chris, I think your comments on the second quarter call suggested that oil production should grow in '26 at a rate that's a little bit below the mid-single-digit target for total BOE production. Is that still a good way to think about next year, which I think would sort of put you somewhere in the 40,000 to 41,000 a day range, give or take? Christopher Stavros: Yes, that's sort of what I would think. I mean, like I said, the fourth quarter is off to a very strong start. I anticipate sort of record volumes, BOEs, but also oil in the fourth quarter. If I had to frame it, I would say, clearly, the record was earlier in the second quarter. So, we did 40,000 a day of oil. So, if I added gas, you'd sort of be at -- 40,000 to 41,000 is a fair number. I would expect lower single-digit oil growth year-on-year full year '26 over full year '25, call it, 2% to 3%. Phillips Johnston: Okay. Perfect. And then, for modeling purposes, if we assume you sort of remain at this current 2-rig program throughout next year, would that still imply somewhere around 55 gross wells next year? Or has the annual run rate continued to sort of creep up some with the efficiencies? Christopher Stavros: Yes. I think plus or minus, that's about right. It's not a dramatic shift or change in the number of actual gross wells. Operator: The next question comes from Zach Parham from JPMorgan. Zachary Parham: You exited the quarter with the most cash on the balance sheet you've had since 1Q '24. Obviously, that's a great problem to have. But how do you think about use of that cash? If you continue to build cash, do you consider potentially increasing your buyback pace? Christopher Stavros: Well, the goal is not only to generate free cash. It's ultimately, to your point, really find a way to put it back into the business or utilize it to generate more returns over time, properly allocate it. We'll just have to see how things move out or transpire into the -- late into the year and into next year as far as the business. And I don't -- we're not going to sort of amp up activity, if you will, to reach for more volumes necessarily. That's not the point. The point is to look for pockets of maybe underperformance or disruptions in the equity. And if we have the opportunity to buy more shares, sure, we'll do that. Or if we had the -- and the shares that we repurchase actually, conveniently work in our favor and with the model in terms of providing us with a little bit of advantage on the base dividend. So, it just means we can grow per share amount of the dividend a little bit more as a result of buying the shares and have less cash outlay that way. So, it does provide us with a lot of flexibility, Zach. And I think we'll just sort of wait and see and take a lot of things into consideration on all those aspects of cash returned to the shareholders and even ultimately into looking at some bolt-on opportunities if they come along and if we can find something that's attractive and the right fit for the business. Zachary Parham: And then my follow-up, just wanted to ask on OpEx. You guided to $520 per BOE for LOE in 4Q. Can you just give some color on how you expect that to trend into 2026? I know you've done a lot of work this year to try to bring that down. Christopher Stavros: Yes. I think as I mentioned in my comments, I think that there are some things that we're looking at in terms of saltwater disposal, managing chemicals, fluid management generally, managing our crews in the field somewhat more efficiently. So, I think there's -- so far, we've had a lot of small wins and improvements in several areas. And I think some of that will stay with us. But in particular, as you know, workovers continue to represent the largest variability in the field level operating costs from quarter-to-quarter. But we're doing some good work, I think, on surface facility expenses and other things in terms of moving around both oil and gas. And I think that should generally help us. So, I said $520 for the fourth quarter. Seasonally, you start to -- you pick up a little bit in the year seasonally into the first quarter. But once you get through that, I think you can come down a little bit from the $520 level into next year, I believe, at sort of current commodity prices. Operator: The next question comes from Tim Moore from Clear Street. Tim Moore: Congrats on the great free cash flow and execution. One of the questions I have for you, Chris, or maybe even Brian, is how should we think about the gathering, transportation and processing expense going forward as a percentage of revenue? I know you commented earlier this year about maybe up-ticking a bit. Oil price came down, that doesn't help. But are there any kind of drivers you can speak to that maybe give a little bit utilization benefit for it maybe next year if the current commodity prices hold up? Brian Corales: GP&T, I think you're referring to it. It's not really a percent of revenue generally. I'm sorry, it's not -- when you look at, it should be relatively -- as long as commodity prices are somewhat stable, it should be relatively stable. If you see increases in gas and NGL pricing, you could see that cost go higher. And on the flip side, if commodity prices, gas and NGLs go lower, you may see some savings there. Tim Moore: That's helpful. And then just a follow-up. I know Chris already gave some comment on some of the improved efficiencies with water disposal, fluid handling, some of the chemicals. I was just wondering, if you're working on Giddings very well and getting some efficiencies. Are there any other kind of surface repairs or low-hanging fruit there? Or do you think it's mostly done in seventh inning? Christopher Stavros: There's always going to be some things that we continue to look at in terms of process management and doing things better. So, it's really never over. You're always turning over rocks and looking for other things to create more and more efficiencies over time, whether it's with personnel, crews, moving things -- the business of moving things in many ways. And so, moving and managing equipment -- moving and managing your products. So, there's always things to pursue beyond just what I mentioned. Operator: The next question comes from [ Phil Shen ] from ROTH Capital. Unknown Analyst: So, my first question is about the Giddings expansions. So, in the last quarter, we know that we expand by 40,000 acres. So, I'm just wondering like if any new wells were drilled in the areas? And also if not, like do you expect any potential expansion or any new wells in the future in that area? Christopher Stavros: Yes. If you're -- thanks for the question. If you're referring to some of the wells that we've drilled earlier this year and even late last year and a new area that provided us with quite a bit of the outperformance that we experienced, the answer is yes. We do plan to go back there. Those wells are continuing to perform quite good and continue to outperform with time. We will plan to go back there next year and over time in the future. There's more to go after there, and I expect it to be folded into the program partly into next year and beyond. Unknown Analyst: And my second question would be about the Eagle Ford production. So, I saw that the production from Eagle Ford was a bit up this quarter. So, I was wondering, was like any wells drilled in the quarter? If so, how was the performance for the wells? Christopher Stavros: I assume you're talking about the Karnes area. Look, we go to Karnes a couple of times a year. And again, we have one completion crew. So, you will see some -- little bit of volatility just in terms of Karnes production. So, I think you can probably assume that if there was an increase, there was probably a little bit of activity, whether operated or non-operated. Operator: The next question comes from Noah Hungness from Bank of America. Noah Hungness: For my first question here, Chris, I was wondering how are you seeing service pricing right now? And how do you see that -- and do you think it's aligned with kind of where the curve is for oil prices? Christopher Stavros: Thanks for the question, Noah. Yes. Look, I mean, things have come down into -- throughout the better part of 2025, conditions are still relatively soft, but I think the rate of change has lessened here recently for us, and probably for the sector, for the industry, for us, I mean, I would tell you, we're obviously going to see some things on the OCTG side still that's tariff related that will have some underlying upside pressure. Most, if not all of that, really probably all of that will be offset by the softness that we're seeing and the improvements that we're seeing, that combination of some of our own efficiencies, but also some of the savings that we're getting out of contractual arrangements and working with our vendors. So there still is some softness, but I would tell you that for the moment in this range of product prices, things have -- seem to have found a bit of a leveling out, if you will. That's not to say that that couldn't change if product prices were to turn south late this year or into next year. Typically, what's underpinning some of that is the industry sort of prepping itself for more activity into -- early into the new year. And so, some of that is seasonal. If that were to dissipate or as it dissipates into '26, you could see some further round of softness perhaps, but we'll see. It remains to be seen. Noah Hungness: That's really helpful. And then for my second question, could you -- I know you have the 6 deferred completions that you'll be carrying into '26. But could you maybe talk about how many DUCs that you're carrying into the new year? And then also how many DUCs you think you'll be exiting 2026 with? Christopher Stavros: We -- generally, no, we don't really carry planned DUC like DUCs. That's why, I guess, we talked about the deferral of some of these earlier this year. But outside of kind of work in process wells, we don't really plan to -- we don't usually carry DUCs. Brian Corales: We're not purposefully carrying DUCs. I mean it's really more -- it will end up being more of a timing issue than anything else. Noah Hungness: Okay. So, would it be fair to assume you're carrying the 6 deferred completions into '26, but then you'd be exiting with basically 0 deferred completions with the current plan? Christopher Stavros: Right. Outside of wells that are kind of in process, correct. [ No more ] DUCs. Operator: The next question comes from Greta Drefke from Goldman Sachs. Margaret Drefke: I actually wanted to follow up on the last one that was just asked there on your outlook for activity and the macro a little bit. In a situation of a potentially derating in oil prices through the remainder of the year or into 2026, can you provide any color around what price potentially could you see some incremental deferred completions or activity adjustments? Or if you have any sort of framework for how you could evaluate potential further completions or turnaround timing changes? Brian Corales: Yes. I mean our program, it's not a static program. It's a dynamic program. And we have, as I mentioned in my remarks and in response to the questions, I mean, we have a lot of both financial and operational flexibility, especially considering some of those deferrals that have snaked through the system in 2025. As I said, that's really provided us with a bit of a cushion, if you will, into 2026. That's a sizable benefit. Look, if we continue to see some good performance as we exit the year and going into '26, that could provide us with further cushioning and the ability for additional flexibility to respond to odd movements in product prices if that were to occur. But overriding that, we do have sort of the business model governor of our spending, which sort of limits us to the 55%. We try to stay true to form to that and keep to that plan because that does keep us honest and straight narrow. But like I said, we have a lot of flexibility in the program to maneuver around product prices. I'm very comfortable with how the business is running right now and where we sit. So, there's lots of capabilities that we've built into that process. So, you can look at the sensitivities for oil and gas prices and model it out as to what the downside-upside is, if you will. But I mean, generally -- right now, at current prices, I'm not concerned about where we are. Margaret Drefke: Great. And then just as a follow-up, as you highlighted in your update, Magnolia's 2-rig 1-crew program over the past several years has supported about 50% production growth over that period of time. I was just curious; can you speak a bit about how much of that growth you view is attributable to improved rig and crew cycle time efficiencies versus acquisitions and versus well performance improvements potentially over the past few years? Christopher Stavros: Yes. We've not acquired very much in the way of production over the 7 years we've been operating. I mean most of it has been maybe 1 or 2 transactions that provide us with any measurable amount of volumes that we can speak to. But most of it has been done organically. So, we probably produced over the -- on a compounded basis, maybe 8% sort of compound annual growth for the business. By and large, most of that has come from organic drilling completions of the business, not -- we haven't folded in a lot of PDP that I can speak to. Operator: This concludes our question-and-answer session and the conference is now concluded. Thank you for attending today's presentation. You may now disconnect.
Operator: Good afternoon, and thank you for waiting. We would like to welcome everyone to Ambev's 2025 Third Quarter Results Conference Call. Today with us, we have Mr. Carlos Lisboa, Ambev's CEO; and Mr. Guilherme Fleury, CFO and Investor Relations Officer. As a reminder, this conference presentation is available for download on our website, ir.ambev.com.br as well as through the webcast link. We would like to inform that this event is being recorded. [Operator Instructions] Before proceeding, let me mention that forward-looking statements are being made under the safe harbor of the Securities Litigation Reform Act of 1996. Forward-looking statements are based on the beliefs and assumptions of Ambev's management and on information currently available to the company. They involve risks, uncertainties and assumptions because they relate to future events and therefore, depend on circumstances that may or may not occur in the future. Investors should understand that general economic conditions, industry conditions and other operating factors could also affect the future results of Ambev and could cause results to differ materially from those expressed in such forward-looking statements. I would also like to remind everyone that, as usual, the percentage changes that will be discussed during today's call are both organic and normalized in nature, and unless otherwise stated, percentage changes refer to comparisons with third Q '24 results. Normalized figures refer to performance measures before exceptional items, which are either income or expenses that do not occur regularly as part of Ambev's normal activities. As normalized figures are non-GAAP measures, the company discloses the consolidated profit, EPS, operating profit and EBITDA on a fully reported basis in the earnings release. Now I will turn the conference over to Mr. Carlos Lisboa. Mr. Lisboa, you may begin your conference. Carlos Eduardo Lisboa: Good afternoon, everyone. It is a pleasure to be here with you again, and thank you for joining our call today. We closed the second quarter, making important decisions to position ourselves well for the remainder of the year. Reflecting on the third quarter, these choices were even more relevant as industry volumes remain softer than expected, mainly in Brazil. This quarter reflects the results of our choices. Our brands continue healthy with most of our top 10 markets maintaining or improving brand equity, particularly in Brazil. Net revenue grew, supported by resilient net revenue per hectoliter growth, up 7%. Top line performance combined with cost initiatives drove EBITDA growth of 3% with 50 basis points of margin expansion, while normalized EPS grew 8%. Looking at the film rather than the photo, in a year-to-date perspective, we are positive about the decisions we have made and the resilience of our business. Supported by the strength of our brands and our solid market share, top line grew 4%, driven by a healthy net revenue per hectoliter of 7%, which led to EBITDA growth of over 7% with 120 basis points of margin expansion. Cost initiatives continue to make a difference with cash COGS per hectoliter growing below net revenue per hectoliter and normalized EPS grew above 7%. Following our capital allocation strategy and confident on our long-term value creation potential, on October 29, the Board of Directors approved a BRL 2.5 billion share buyback program with the main purpose of canceling shares as a way to return cash to shareholders. Behind these results line the foundations of our growth strategy. Starting with Pillar #1, lead and grow the category. To be a true category captain, we must place our customers and consumers at the center of our decision-making process, being able to better understand and serve the demand, a capability that becomes even more important when the operating environment turns more dynamic, allowing us to: Number one, lead the beer category. Our core brands remain resilient even though volumes declined given its higher sensitivity to industry environment. Our premium and super premium brands strengthened and continue to grow in volumes more than 9%; and number two, shape new avenues of growth. The Balanced Choices portfolio grew 36%, including non-alcohol beers growing above 20%, continued to expand ahead of the company's volume. As leaders, we continue to develop the category, aiming not only to sell more, but to expand the consumer base and the number of occasions over the long term, ultimately creating sustainable value. As for Pillar 2, digitize and monetize the ecosystem. This pillar continues to be instrumental to our business. It provides valuable insights into our consumers, customers and operations while expanding our addressable market. The third quarter marked another solid step towards making our digital ecosystem a competitive advantage for our company. When it comes to new growth engines, BEES Marketplace maintained its strong momentum with GMV growing 100% to an annualized BRL 8 billion, driven by the expansion of our commercial partnerships. Meanwhile, on the direct-to-consumer front, Zé Delivery recorded a 7% increase in GMV even amid a softer industry, supported by a 9% rise in average order value. In revenue management, BEES continues to enable a more assertive and data-driven decisions. With a more granular view of elasticity by brand, pack and customer, we can optimize our discounts and promotions to improve the return on every real invested. For example, this quarter in Brazil, we increased the number of SKUs per pack in 5% and improved by 30% the return on promotions. And in cost and expenses management, BEES also played a key role in the SKU optimization program we mentioned last quarter. It helped us expand the distribution of our main SKUs, improving production efficiency while ensuring that our customers continue to find the right portfolio for their businesses. In summary, the combined impact of the revenue and cost management led to an expansion of our gross margin in the quarter. Speaking of cost performance, let's move into Pillar #3, optimize our business. This year, we have been emphasizing our disciplined approach to costs, and this quarter clearly shows why it matters. While we expected costs to continue to accelerate, driven by FX, commodities and the operational deleverage from lower volumes, our efficiency efforts paid off. We managed to keep costs mostly in line with previous quarter, freeing up resources to continue investing in the long-term growth of our business. Looking ahead, there is still work to be done as we pursue the lower half of our Brazil beer cash COGS per hectoliter guidance, which will support our ambition of protecting consolidated EBITDA margins in the full year. Speaking of margins, our disciplined approach to revenue, cost and expense management once again delivered results. Four of our business units expanded EBITDA margins, and all of them delivered growing or flat EBITDA consistent with the last 2 quarters. Now let's turn to the commercial highlights from our main markets. Starting with Brazil beer. This was the second consecutive quarter of industry softness. It is understandable that this can raise some concerns about the category's prospects. So before we go into our business performance, I would like to take a moment to share a few insights into what we see as situational factors, meaning either short term or cyclical and structural factors that may impact the industry over time. Over the past 2 quarters, the beer category equity has improved, which is a good proxy for future share of throat, while consumers' participation in beer remains stable. This reinforces our view that there are no meaningful short-term structural changes in consumer behavior toward the category. The industry's decline was mostly related to fewer consumption occasions, particularly in the on-trade channel, which was affected by 2 main factors: Number one, weather. The past 6 months were colder than normal, especially in the South and Southeast off a tough comp as 2023 and 2024 were the 2 warmest winters on record. This impact, according to our estimates, represents approximately 70% of the industry decline. And number two, consumer purchasing power. The macro environment, particularly in the North and Northeast, continued to constrain discretionary spending. These are situational drivers for the short-term or cyclical nature, underpinning our confidence in the long-term fundamentals of both the category and our portfolio. That said, let me share 3 potential trends and needs that can turn into structural drivers. Number one, the beer category in Brazil has evolved. We value it, and we will be part of it. However, easy-to-drink beers are still the preferred choice of Brazilians. Number two, certain groups of consumers prefer sweeter beverage. And number three, more consumers are seeking a balanced lifestyle. As a consequence and not by coincidence, we have been working to address these trends and needs. Our portfolio of brands spans a wide range of liquid profiles. Our easy-to-drink brands are relevant in all price segments and the brands that are growing the most in our portfolio address such need. We already lead the ready-to-drink space with products such as Beats and Brutal Fruit, which cater directly to the sweet-seeking consumers. Additionally, we are launching Flying Fish, a successful international brand with the aim of developing the flavored beer segment in Brazil. This segment has been growing globally, reaching over 3% mix of the beer industry in several countries. And for balanced lifestyle seekers, our non-alcohol portfolio, together with Stella Pure Gold and Michelob Ultra has a strong appeal, offering moderation alternative without giving up the great beer experience. In summary, while we read the current industry headwinds as situational, our strong portfolio and innovation agenda ensure we remain well positioned to capture future growth and keep shaping the beer category. Now let's move to our performance in Brazil beer. Over 100% of the volume decline is explained by the industry performance. Our brands once again improving equity, gaining low single-digit sellout market share according to Nielsen, while expanded net revenue per hectoliter. The market share gains came across all relevant segments. In the core segment, volume declined by low teens, reflecting the overall industry context. However, the market share progressed versus last year as relative price improved through the quarter. Premium and super premium brands once again stood out, growing mid-teens and gaining sellout market share, reaching close to 50%. After 6 years of consistent recovery, we achieved the highest share level since 2015 according to our estimates. This performance was driven by Original, Stella family and Corona, the latter 2 at the top end of the price index. And our balanced choice portfolio maintained strong momentum, growing mid-60s. Stella Pure Gold more than doubled its volumes. Michelob Ultra grew over 80%, and our non-alcohol beer portfolio expanded by low 20s, further strengthening our leadership in the segment. Moving to Brazil NAB, throughout 2025, the CSD industry has experienced a deceleration from up low single digit in Q1, to down mid-single digit in Q3 according to Nielsen, driven by similar situational factors that impacted the beer industry. In addition, our revenue management decisions last quarter led to an inventory phasing into this quarter, impacting sell-in performance. In this context, our brands continue to strengthen and our market share grew year-to-date and was stable to low single digit down in the quarter according to our estimates with a net revenue per hectoliter above inflation. Our nonsugar portfolio once again delivered double-digit growth and now accounts for more than 25% of total NAB volumes. In Argentina, the consumption environment remained challenging. Our beer volumes declined mid-single digit, underperforming the industry, reflecting an unfavorable temporary price relativity dynamics. However, brand equity remained stable, supported by the strength of our mega brands. Furthermore, we remain constructive on the long-term prospects for both the country and the beer category. In the Dominican Republic, the operating environment and beer share of throat continued to improve sequentially, supported by a healthier price relativity across categories. Presidente brand, the cornerstone of the category, strengthened its equity once again, reinforcing its leadership and cultural connection with consumers in the country. Finally, in Canada, the beer industry declined by mid-single digit in the quarter. We estimate that we outperformed the industry in both beer and beyond beer. The Ontario market continued to progress, supported by the route-to-market expansion implemented last year. Our beer performance was led by Michelob Ultra, Busch and Corona, which we estimate were among the top 5 volume share gainers in the industry. Now let me hand over to Fleury, who will walk you through our financial performance in more detail. Guilherme Fleury de Figueiredo Parolari: Thank you, Lisboa, and hello, everyone. Today, I would like to walk you through our financial performance highlights using our capital allocation framework. Starting with our priority #1, to invest in our business. Here, our focus is to allocate capital efficiently and maximize return on investments. One way we do that is by driving efficiencies across our cost and expenses baselines, freeing up resources to continue to invest behind our business and our brands, strengthening the connection with our consumers. Building on that, in quarter 3, our disciplined cost management allowed us to quickly adapt our brewing processes to a more challenging operating environment and deliver strong productivity with tighter process controls and lower conversion costs, mainly in our vertical operations. As a result, we expanded EBITDA margin in most of our business units once again. Now moving to net income. Our normalized net income reached BRL 3.8 billion, up 7% year-over-year, mainly driven by a lower effective tax rate, which more than offset higher financial expenses. Our stated net income reached BRL 4.9 billion, up 36% versus last year, reflecting one-off effects I will detail in a moment. In this quarter, our net financial expenses closed at BRL 1.1 billion, about BRL 400 million higher than last year, mostly due to 2 factors we already addressed in quarter 2. One, a higher FX hedging carry costs in Brazil due to interest rate gap between Brazil and the U.S. And two, the cost of sourcing U.S. dollars in Bolivia. On income tax, our effective tax rate in quarter 3 was 6.7% compared with 23.6% a year ago. The decline reflects mostly 3 one-offs, which totaled BRL 630 million and didn't have a relevant cash tax impact in the quarter. Excluding them, our effective tax rate would have been around 20%, consistent with recent levels. Let me go over them. One, following a change in legislation, we recognized a partial reversal of previously recorded tax liabilities associated with the 2017 amnesty program as detailed in Note 8.2 to our Q3 financial statements. Number two, fiscal incentives recognition. And number three, the Barbados divestment that generated a gain of BRL 884 million, where part of it was nontaxable in Dominican Republic. The sale of Barbados is a tangible example of our second capital allocation priority at work, evaluate inorganic opportunities. Here, we completed the first steps of the transaction, transferring control to KOSCAB, a long-term partner in the Caribbean. The transaction simplifies our structure and keeps our brands in the region. Further details are disclosed in Note 1 to our financial statements. Lastly, regarding our third priority, return cash to shareholders over time. As we approach the end of the year, I remain confident on the consistent cash generation of our business. Cash flow from operating activities remained solid, totaling BRL 6.9 billion despite softer volumes and higher cash taxes this quarter. Versus 2024, our cash flow from operating activities is down BRL 1.2 billion, mainly due to a slower monetization pace of existing income tax credits in Brazil. These credits will continue to be used over time, aligned with our tax strategy and are detailed in Note 7 to our Q3 financial statements. Lastly, during the year, we already announced a total dividend of BRL 6 billion. Also, as Lisboa mentioned, we are starting a new BRL 2.5 billion buyback program after the completion of the previous one in June. Both the dividend distribution and the share buyback program reinforce our confidence in our business and our commitment to returning cash to shareholders over time. With that, let me hand it back to you, Lisboa. Carlos Eduardo Lisboa: Thank you, Fleury. As we start the fourth quarter, I believe that we are well positioned to close the year on solid footing and to start 2026 with strong momentum. We are also excited for the FIFA World Cup next year, a great opportunity to connect again 2 of the greatest passions in Latin America, beer and soccer. To close, I want to thank our team for their resilience, especially in moments like this. Our grit and focus on what we can control are inspiring and give me even more confidence that we are becoming a better version of ourselves. Thank you for your attention, and I will now hand it back to the operator for the Q&A. Operator: [Operator Instructions] Our first question comes from Lucas Ferreira with JPMorgan. Lucas Ferreira: My question is on the COGS line. I think that was one of the positive surprises we had with the results, especially in a quarter where production probably was softer, right? I was expecting some sort of effect of a lower fixed cost dilution, but COGS came better than expected. So if you guys can explore that in a bit more details why the COGS were lower specifically this quarter? Does it have to do with the hedging strategy, some sort of a calendarization of that hedge effect or -- but also on the initiatives for reducing your cost base, if you can get into this? And then since you're reiterating the guidance, what would imply for the fourth quarter like sort of big acceleration of the cost per hectoliter, if this acceleration is also has to do with sort of the hedging calendarization or if there is anything else that we have to be aware of? Guilherme Fleury de Figueiredo Parolari: Lucas, it's Fleury here. Can you hear me well? So Lucas, let me just start by saying that, as you probably remember, I think Ambev has been known for its very strict discipline and action-driven organization. And I think that comes on over time. Working in emerging markets, we developed a capacity of navigating volatility while delivering results. Why I'm starting with that is because if you go back one step in Q2, I mentioned to you guys that most of the benefit that we were having in our COGS was related to the SKU rationalization and what we control. On Q3, it's not different from that. It comes from a series of initiatives on what we can control. That goes from production costs, to breweries footprint and production and also utilizing our vertical operations in which we normally have better costs. So in essence, I think this is what the company does well. It's really focused on what we control, a series of initiatives. And I might frustrate you, there's no one single one, but there's a collection of initiatives that has been working through the organization with PMOs, of course, with Lisboa and myself with several areas. So that's how we were able to achieve, I would say, a positive cash COGS increase compared to what we have said before. Now moving to guidance. I think Lisboa made it very clear on his initial speech, but I will reinforce. The guidance is the guidance. We are not changing our guidance for Brazil beer cash COGS per hectoliter, excluding marketplace. What is important to highlight is now with what we know, we will continue to work very hard to deliver the guidance within the first half of the range, if I may say, 5.5% to 7%, which is our ambition. And by doing that, together with our continued disciplined revenue management, I believe we could potentially look into the expansion of margins over time. Operator: Our next question comes from Henrique Brustolin, with Bradesco. Henrique Brustolin: I wanted to explore a little bit more the beer industry environment in Brazil. Very interesting, the comment you made, Lisboa, in terms of the weather representing the 70% of the decline and the remainder, the weaker consumer. I would like to hear a little bit more how you see this trend shaping up into Q4, especially if you could comment on the consumer part of this equation. And also, given that the headwinds were apparently different, right, in the North, Northeast than to the South, Southeast, if you also saw any big difference in terms of the volume performance across these 2 regions or even how the portfolio performed within the different categories? These would be my questions. Carlos Eduardo Lisboa: Henrique, nice talk to you. Thank you for the question. Let me highlight a few points here to clarify some of your doubts, right? First and foremost, everything that we see somehow is very aligned with what we flagged in our second quarter result announcement, right? So -- but having said that, during the quarter, we saw the most important driver, situational driver, which was the weather gaining even more relevance, right, since the winter time pretty much took the entire quarter, right, different from what happened in quarter 2 when mostly impacted June, right? So I think the most important point to have in mind is the following. The underlying consumer engagement, which we measure based on participation and category equity remains very solid, right? And the decline was pretty much connected to a reduce in number of occasions, right? And the reason why for that is exactly the 2 situational factors that I flagged in the beginning of the conversation in the session, right? South and Southeast, pretty much the reasons where we see accounting for majority of the volume in Brazil, pretty much 60%, impacted by colder and rainy conditions compared to a drier, right, and hotter conditions last year, right? And the North and Northeast, the other impact, right, which is connected to disposable income constraints, which, by the way, also impacted the first quarter. This was not necessarily a surprise for us. We have been measuring that since the beginning of this year, right? So it's interesting to see that especially the weather, but also the disposable income constraint impacted mostly something that we also highlight during the second quarter announcement, the out-of-home occasion, which is very relevant for beer in Brazil, right? In other words, impacting particularly bars and restaurants, right? So now moving towards your question about what's coming, right, more. So -- when we reflect about the situational end, right, which is weather and income, the weather remains in October, still a concern for us, Henrique, because we haven't seen any meaningful change. On the other hand, on the structural end, we also see a continuation of a good momentum our brands presented in Q3, right, which is what gives us confidence that we are well positioned for the quarter to come -- the last quarter to come this year, which will give us a pretty nice carryover into next year, which was the part of what we -- sorry, that we had a technical issue, but I was highlighting that we feel good and optimistic about the year to come because we're going to have the chance to jump into a year when we won't probably see that much of a hard comp impact coming from the weather, which was the most important detractor, right, situational detractor for us this year, combined with the chance to put together -- unite 2 amazing passions for Latin Americans, which are beer and soccer with the World Cup. And on top of that, as I mentioned before, this year, when we reflect about participation and occasions, occasions were more impacted by the 2 situational factors. And next year, we're going to have the chance to explore more occasions since the World Cup time will match exactly with the hardest period for us in the year. And on top of that, especially in Brazil, we're going to have a pretty interesting number of holidays that will help us create new consumption occasions for us. Operator: Our next question comes from Nadine Sarwat with Bernstein. Nadine Sarwat: Great to see your commentary about Ambev reaching nearly 50% share of Brazil premium and super premium beer for the first time in a decade, and I appreciate the comments that you made in your prepared remarks. With that benefit of hindsight now of the 6 years of seeing that improvement that you called out, can you comment on which initiatives you feel have been the most successful in getting you and your brands to this point in that segment? And what are your aspirations for your share of that segment over the coming quarters and years. Carlos Eduardo Lisboa: Nadine, thank you for your question. Very interesting. As you said, was a true V curve for us since 2015 until today, right? And just to emphasize what you said, in the last 6 years, we gained 14 points of market share, consistent every single year. And that came mostly as a consequence of our ambition, Nadine, of being a true category captain, right? A captain that will bring to our consumers, not only in Brazil, but across the board in all markets. But since your question is about Brazil, but especially in Brazil, more and more alternatives to enjoy beer in different occasions. And by doing so, expanding our portfolio, we also have a chance to bring more consumers to our portfolio, right? So if I have to answer your question with just one point, that would be my answer, right? Because we are here to build a portfolio strong enough to make our category even more appealing to our consumers. And by the way, beer in Brazil has one of the strongest equities across all markets globally, okay. And the point about the portfolio that I also like the most is the following. We know that as consumers graduate and as we bring new consumers to the category, they want to have optionalities, right? They want to attend different needs in different occasions. And that's exactly when the portfolio makes a difference, right? And today, we have a pretty interesting portfolio with complementary roles to play this mission, right, from Original to Spaten, right, in the first layer of the premium. And then to Corona and Stella family in the latter part of the pricing index with different emotional and functional benefits. And the interesting piece of that is since they are complementary, they are bringing incrementality for us instead of only cannibalization, right? And this is the, in my point of view, the magic around what we are doing here. And it's very interesting because the same way we are building premium, now we are building a new growth engine that we call balance. And the balance piece is also gaining a lot of acceleration. And on top of that, something that I'm not sure was that clear for you all, we are building a new growth engine beyond beer. And that beyond beer business during the last 3 years had been growing double digits, and we have been growing ahead of industry. And today, we are also the leaders as we are the leaders in beyond, as we are the leaders in premium, right? So in essence, we are leading where growth is and where growth will be in the future. Operator: Our next question comes from Thiago Duarte with BTG. Thiago Duarte: My question is, I'm trying to get a sense of the sustainability of the SG&A reduction that we saw not only this quarter, but I think throughout the year, although it might have been stronger this quarter. In the release, you mentioned the variable compensation accrual changes. You also mentioned the phasing in marketing expenses in CAC. So my question is, of the 0.4% consolidated organic reduction year-over-year in SG&A in the quarter, how much would you say is related to this phasing of marketing and bonus accruals? And how much you believe it's more of a sustainable gain in efficiency that you saw in expenses. Then if I may, a quick second question related to pricing in Brazil, Beer Brazil. So I think that's more to you, Lisboa. Looking at the volume performance of the last 2 quarters, how surprised are you of the demand reaction to the price hike that you guys implemented ahead of the second quarter? And how that potentially affects the implementation of pricing that you normally do historically in Q4 of every year? Those would be my questions. Guilherme Fleury de Figueiredo Parolari: Lisboa, do want me to start? Carlos Eduardo Lisboa: Yes. Guilherme Fleury de Figueiredo Parolari: So Thiago, thank you very much for your question. Let me start more broadly, then I'll go into the details. If you look into our consolidated income statement, but that applies to most of the markets in which you operate, what we've been doing is we continue -- despite the impact that we had in volume, we continue to invest in sales and marketing as a percentage of net revenue, slightly increased quarter-over-quarter, and that is the investment that we're very careful of maintaining. Why? Talking about sustainability, is that is the one that connects our brands with our consumers, and that's how we connect with our flywheel on value creation. Specifically, what happened throughout the year is like we've been, I would say, managing well distribution costs even with lower volumes. So we were able to have a better absorption of fixed costs even with declining volume. And on administrative expenses, I think here, it connects a lot with the way we compensate our executives and our employees. If you remember, Ambev is very well known for having a part of the compensation, which is variable, which is important for us, and it's very connected with the performance of the year. If I were to summarize, there are 3 parts. One is the base salary. The other one is the variable compensation, and we also have long-term incentive plans that are discretionary and distribute in order to make for the variance in value creation over time. This long-term incentive is normally share related. So the employees and executives receive with a tenure of 3 years with that. Specifically this year, when I'm talking about variable compensation, this connects a lot with our company, which is in a difficult year, even though we've been working very hard on the levers that we can control, and we are delivering still like margin expansion, so on and so forth. It's also we've been going through a difficult time that is not structured. As Lisboa said, it's conjuncture that affects the volume. Therefore, the variable compensation of our teams were aligned with that. And with what we know today, what we have done was an adjustment on the accrual that we've made throughout the year. So to summarize, we are continuing to invest on what is very important, which is sales and marketing. Our focus and discipline is also helping on the distribution and on the admin that is very connected with how we see the performance of our company with this adjustment on the variable compensation for the year. Now I'll turn to Lisboa. Carlos Eduardo Lisboa: Thiago. Let me touch on the second part. I think the most important message for you is the following. According to our modeling, industry modeling, our price increase has no impact whatsoever on the industry performance this year due to the fact that prices for the industry, for beer, they are still below inflation. What brings somehow a small impact, very small compared to the situational factors that I flagged before is the mix piece because it continues to grow way ahead of volume average growth with a higher price level. But in the end, consumers always have a chance to choose brands without such a higher price to consumer, right? And that's the benefit of having, again, a strong portfolio of brands. and that's exactly what we hold here in Brazil, right? Not only strong core brands with different competitive situations by region, which differ a lot, by the way, in Brazil. Brazil is a continent, right? And on top of that, we have the premium portfolio that also give us optionality to play around and it's very interesting because we are gaining new capabilities with our digital ecosystem, right? And BEES -- within BEES, we have an AI-powered revenue management. In other words, we can personalize promotions to boost sales, optimize discounts and increase ROI simultaneously, right? In the end, just to finalize the point and somehow addressing the final piece of your question in terms of ambition, our ambition is always to keep our prices in line with inflation because we know the pricing component is a very important accessibility for consumers in Brazil, right? And a good part of our consumers come from middle, low pyramid of the population. So it's important for us to always keep control in order to allow them to stay connected to the category. Operator: Next question from Isabella Simonato with Bank of America. Isabella Simonato: I would like to follow up on your last answer, right, about price and volume correlation. I mean, I understand that beer inflation is pretty much in line with general inflation in Brazil. But my guess is that the timing of the price increase, right, that you guys did in June, and that was followed by the competition in the middle of a bad weather season, right? I mean, how much could that have exacerbated or created a different elasticity, right, to that price increase in the moment that it was done? I think -- that's my question. And a little bit similar to what we saw on NAB, right? Because I think it was really surprising to see volumes coming down by that much, especially when we look at the competition, right, volumes move up in the quarter. So I believe you lost share, but more to understand the pricing strategy for this quarter, which unlike peers, is well above inflation, right, and to understand how you're guys seeing the volume reaction on that segment as well? And if I may, a second question on LAS. I think we saw a big -- pretty important pickup on margins. Just if you could elaborate a little bit on the drivers of that, even though volumes in Argentina were not that strong, I think, will be clarifying. Carlos Eduardo Lisboa: Isabella. Look, as you said, beer CPI in line with overall CPI, no change there, right? According to our models, no different elasticity despite -- or caused by the unfavorable weather, right? So in our point of view, the timing of our price increase was very interesting, came at the right moment for us to avoid any kind of distraction vis-a-vis what we flagged for you all in the beginning of this year in terms of ambition for us, right? We said we want to protect and evolve with the profitability of the industry. We want to keep a very tight control and disciplined cost expenses because in the end, we want to bring growth with profitability. That's what we said, and we continue very focused behind that. On the situational side, meaning weather and disposable income, both categories, both industries, right, beer and soft drinks, were somehow impacted, right? But always keep in mind that for beer, the impact is harder because it is impacting mostly the most important occasion for the category, which is out-of-home, right? And you all know what I'm saying here, right? But pay attention to the following. The point about -- I think it's a little bit tricky to compare both businesses, right? We took the price increase for beer in the second quarter of this year. During the third quarter, we saw the relativity change, right, gap shortening, and that gave us the chance to put our share back on track. In fact, we see the balance between share and relative price even in a better position today than before than last year, which is very interesting for us, right? On the contrary, actually, what happened with soft drinks, we increased -- we had our revenue management agenda impacting mostly the end of the quarter 2, right? And that brought an impact and a difference between sell-in and sell-out according to Nielsen, right? The CSD industry declined by mid-single digits, which was pretty much in line with our sellout, okay? The difference comes exactly from the inventory, and that is the consequence of our revenue management decisions in the end of quarter 2. Guilherme Fleury de Figueiredo Parolari: Now moving to, Isabella, to your question about LAS. I think when we look at LAS, their story, you need to understand of 2 different markets that consolidates into that. One is Bolivia and one is Argentina. Let me start with Bolivia. Bolivia continued to be a market that we are delivering strong results throughout the P&L, which is more than offsetting the impact that we had in Argentina, which in the quarter, if I may say, the demand was still recovering, but not there yet. So there were impacts on inventory level. And also, we couldn't fully implement our revenue management in Argentina in the quarter given the economic situation there. So it's a story of 2 markets. One is Argentina that is tougher and the other one is Bolivia. Overall, it's very important to highlight that we remain very confident about the 2 markets and specifically in Argentina, which has been a more difficult environment. Just to remember that we are operating there since 2000. And we believe that we have the best portfolio of brands that connect with the people, the right initiatives there on revenue management and cost to make it continue to be an important engine for our company going forward. Operator: Thank you. This concludes the Q&A session. And I would now like to pass the word back to Ambev's team for closing remarks. Carlos Eduardo Lisboa: Thank you for joining our call today. I would like to leave you with a final message. We are becoming a true ambidextrous company, making progress in all 3 pillars of our strategy, resulting in growth with profitability. Year-to-date, our top line grew 4%, while EBITDA was up 8% and EPS grew 7%. We are taking market intelligence to new levels, better understanding our consumers, their trends and translating them into actionable insights, making an already loved category even stronger. All in all, we are leading where growth is, especially in our main market, Brazil. Thank you, and see you soon. Operator: Thank you. This concludes today's presentation. You may disconnect, and have a nice day.
Operator: Good morning. My name is Carrie, and I will be your conference operator today. At this time, I would like to welcome everyone to the Trane Technologies Q3 2025 Earnings Conference Call. [Operator Instructions]. I will now turn the call over to Zac Nagle, Vice President of Investor Relations. Please go ahead. Zac Nagle: Thanks, operator. Good morning, and thank you for joining us for Trane Technologies' Third Quarter 2025 Earnings Conference Call. This call is being webcast on our website at tranetechnologies.com where you will find the accompanying presentation. We are also recording and archiving this call on our website. Please go to Slide 2. Statements made in today's call that are not historical facts are considered forward-looking statements and are made pursuant to the safe harbor provisions of federal securities law. Please see our SEC filings for a description of some of the factors that may cause our actual results to differ materially from anticipated results. This presentation also includes non-GAAP measures, which are explained in the financial tables attached to our news release. Joining me on today's call are David Regnery, Chair and CEO; and Chris Kuehn, Executive Vice President and CFO. With that, I'll turn the call over to Dave. Dave? David Regnery: Thanks, Zac, and everyone, for joining today's call. Please turn to Slide #3. I'd like to open the call with a few thoughts on our purpose-driven strategy that fuels our strong performance over time. The demand for sustainable resilient infrastructure has never been greater. That's especially true here in the U.S., where the AI revolution and reshoring of industry are transforming how businesses operate at an unprecedented pace. Trane Technologies is at the heart of this evolution, helping customers reimagine their operations for greater performance and sustainability. Our high-efficiency solutions help our customers save energy and reduce operational costs. We're proving that there is no trade-off. What's good for the environment is good for the bottom line. As we look ahead, our innovation and expertise continue to set us apart. With our elevated backlog, robust customer demand and strong financial performance, we are well positioned to continue to deliver long-term value to our employees, customers, shareholders and the planet. Please turn to Slide #4. Q3 was another strong quarter marked by record quarterly bookings of $6 billion, representing organic growth of 13% year-over-year. We delivered 170 basis points of adjusted operating margin expansion, 15% adjusted EPS growth and robust free cash flow. Our global Commercial HVAC businesses delivered outstanding performance. This was particularly true in the Americas where Commercial HVAC bookings reached an all-time high, surging 30% year-over-year, with applied bookings more than doubling. The strength of our Commercial HVAC business is further underscored by our Q3 ending backlog of $7.2 billion. However, this total backlog figure does not tell the whole story. Compared to year-end 2024, our Americas and EMEA Commercial HVAC backlog has grown substantially, increasing by over $800 million or approximately 15%. Excluding Revenue, residential growth remains robust, up approximately 10% in the third quarter. We are well positioned for growth in 2026, given strong execution through our business operating system and our rapidly expanding pipeline of projects in data centers and core verticals. Our leading innovation and direct sales force provide us with distinct competitive advantages. Our Services business, which constitutes approximately 1/3 of our total enterprise revenues remains a durable and consistent growth driver, up low double digits year-to-date and boasting a low-teens compound annual growth rate since 2020. Our guidance reflects the impact discussed during our September update, which Chris will elaborate on shortly. Please turn to Slide #5. As discussed in our Americas segment, Commercial HVAC continues to deliver standout performance. The team achieved its third consecutive quarter of record-breaking bookings with approximately 30% growth. We are winning in both core vertical markets and high-growth verticals such as data centers. In high-growth verticals, customers demand innovative, highly engineered solutions tailored to their specific requirements. They need customer-focused partners with the expertise and capacity to grow alongside them, which plays to our strengths. Our direct sales strategy enables us to capture a significant share of these opportunities and consistently outgrow our end markets. This is demonstrated by our applied solutions bookings growth of over 100% in the third quarter. Commercial HVAC revenue growth was also robust, increasing by low teens in equipment and low double digits in Services. Our consistent market outgrowth compounds revenues year after year for perspective. In the third quarter, our applied revenue growth on a 3-year stack was up more than 125%. Turning to Residential. Bookings and revenues declined approximately 30% and 20%, respectively, consistent with the update we provided in September. In Americas, transport refrigeration, bookings were up low teens, while revenues were flat. Despite end markets being down over 25%, we continue to outperform. Commercial HVAC strength was not limited to the Americas. In EMEA, Commercial HVAC bookings increased by high teens, while revenues grew by mid-single digits, consistent with our expectations. EMEA Transport bookings rose by high single digits, while revenues declined by low single digits, outperforming end markets, which were down mid-single digits. In Asia Pacific, Commercial HVAC bookings were up mid-30s, while revenues grew low teens in the quarter. Growth was strongest in China, rebounding from the anniversary of our credit tightening policy in the prior year. The rest of Asia delivered solid performance. Now I'd like to turn the call over to Chris. Chris? Christopher Kuehn: Thanks, Dave. Please turn to Slide #6. Dave covered many key points from this slide earlier, so I'll keep my comments brief. Our organic revenue growth of 4% aligns with our September update, where we shared our expectations for a $100 million revenue shortfall from our July guidance related to softer residential markets. Despite the challenging residential markets, we achieved strong margin expansion and EPS growth, driven by robust growth in our Commercial HVAC and Services businesses, strong productivity levels, and prudent cost controls implemented early in the third quarter. Please turn to Slide #7. In the Americas, we delivered 4% organic revenue growth, driven by strong volume growth in our Commercial HVAC business and positive price realization, offset by a significant volume decline in our Residential business. Adjusted EBITDA margins rose by 90 basis points to over 23%, supported by strong productivity and prudent cost management. We also sustained high levels of business reinvestment. In EMEA, we delivered 3% organic revenue growth, primarily from volume growth in our Commercial HVAC and Transport businesses. Adjusted EBITDA margins declined by 60 basis points as expected, mainly due to year-1 M&A-related integration costs and improved sequentially from the second quarter. We have intensified channel investments and M&A this year to support growth and future opportunities, which are impacting near-term margins but strengthening our business for the long term. We also maintained high levels of business reinvestment. In Asia Pacific, organic revenue increased 9% due to strong volume growth and price realization. Adjusted EBITDA margins improved by 230 basis points, driven by strong volume growth in China and productivity across the segment. We also sustained high levels of business reinvestment. Now I'd like to turn the call back over to Dave. Dave? David Regnery: Thanks, Chris. Please turn to Slide #8. 2025 is unfolding as expected for most of our businesses with the Residential market slowdown being the most significant change impacting our outlook. Our Commercial HVAC businesses globally are performing well, meeting or exceeding our expectations for the full year. Our Americas Commercial HVAC business is executing at a very high level, significantly outperforming end markets. As mentioned earlier, both bookings and revenues are compounding at a high rate, especially in applied solutions. Our Americas Commercial HVAC results are remarkably consistent with 3-year stack revenue growth of approximately 50% achieved in Q1 through Q3 of 2025 and expected for Q4 as well. Our Residential business outlook remains unchanged from our September update with Q3 and expectations for Q4 revenue to be down approximately 20% each. Compared to our July guidance, the combined revenue impact is a reduction of approximately $250 million, with $100 million in Q3 and $150 million in Q4 as channel inventory continues to normalize. Turning to the Americas Transport market. ACT's forecast for 2025 has softened incrementally with the fourth quarter taking the brunt of the impact now down more than 30%. Despite this, we expect to outperform in Q4, with revenues expected to be down approximately 10%. Our outlooks for EMEA and Asia remain unchanged. Now I'd like to turn the call back over to Chris. Chris? Christopher Kuehn: Thanks, Dave. Please turn to Slide #9. Our revised guidance anticipates approximately 6% organic revenue growth for the year, factoring in headwinds from the Residential and Transport Americas markets, as Dave mentioned earlier. In addition, our Commercial HVAC Americas business saw the timing of some customer desire delivery dates move from Q4 into 2026. Altogether, the total impact of these headwinds is approximately 2 percentage points on 2025 revenue growth. Our 2025 adjusted EPS guidance range is now $12.95 to $13.05, up 15% to 16% year-over-year and incorporates the Q4 revenue headwinds previously discussed. We expect organic leverage of 30% plus in 2025 and believe we're on pace for another year of 100% or greater free cash flow conversion. For the fourth quarter, we expect approximately 3% organic revenue growth, driven by continued strong Commercial HVAC growth. Excluding Residential, organic revenue growth is expected to remain robust at approximately 7%. We're targeting organic leverage of approximately 30% in the fourth quarter which includes strong business reinvestments for future market outgrowth. Consistent with our full year adjusted EPS guidance, we expect Q4 adjusted EPS to be in the range of $2.75 to $2.85. For additional details related to our guidance, please refer to Slide #17. Please turn to Slide #10. We remain committed to our balanced capital allocation strategy focused on deploying excess cash to maximize shareholder returns. First, we strengthened our core business through relentless reinvestment. Second, we maintained a strong balance sheet to ensure optionality as markets evolve. Third, we expect to deploy 100% of excess cash over time. Our approach includes strategic M&A to enhance long-term returns and share repurchases when the stock trades below our calculated intrinsic value. Please turn to Slide #11. Year-to-date through October, we've deployed or committed approximately $2.4 billion through our balanced capital allocation strategy, including approximately $840 million to dividends, $160 million to M&A, $1.25 billion to share repurchases and $150 million to debt retirement. These figures exclude $260 million from M&A and $100 million from share repurchases made early in the year, which were included in our fiscal year 2024 capital deployment targets as discussed during our fourth quarter earnings call. We have approximately $5 billion remaining under our share repurchase authorization, providing us with significant share repurchase optionality. Our M&A pipeline remains active, and we will continue to be disciplined in our approach. Overall, our strong free cash flow, liquidity, balance sheet and substantial share repurchase authorization offer excellent capital allocation optionality as we move forward. Now I'd like to turn the call back over to Dave. Dave? David Regnery: Thanks, Chris. Please turn to Slide #13. The Americas Transport refrigeration markets have been dynamic but the long-term outlook remains strong. ACT projects the trailer market to bottom in the first half of 2026, improve in the second half and grow over 20% for the full year. In 2027, ACT anticipates another significant increase with growth exceeding 40%. We are navigating the down cycle effectively and outperforming end markets. We continue to invest heavily in innovation and look forward to adding another growth driver to our portfolio when the market strengthens. Turning to Slide #14. We expect to provide 2026 guidance during our fourth quarter earnings call, but I'll discuss our early views based on current insights. We expect continued strong growth in our Commercial HVAC businesses, which make up 70% of our total revenues. Our world-class direct sales and service teams give us a competitive edge, allowing us to pivot quickly across vertical markets to capture growth opportunities. With the broadest and most innovative portfolio in the industry, we are relentlessly reinvesting to support a rapidly growing pipeline of opportunities. Our proven track record of compounding bookings and revenue growth, especially in high-growth verticals like data centers, underscores our strength as a leading climate innovator. Our Commercial HVAC backlog is not only elevated but growing, up more than $800 million from year-end 2024, positioning us well for continued strong growth in 2026 and beyond. In Residential, which represents about 15% of our revenues, we believe over the long term that the industry remains fundamentally healthy with a GDP plus framework. We expect 2026 to be a tale of 2 halves. A challenging first half due to tough comps, followed by improvement in the second half against easier comps. In our Americas Transport business, accounting for about 7% of our revenues, we also foresee a tale of 2 halves, with soft markets in the first half and recovery in the second. While the recovery slope may vary, we are aligned with freight markets recovering in the second half of 2026. Our focus on innovation yields healthy pricing opportunities and our business operating system is primed to stay ahead of tariff and inflationary pressures. Our Services business comprising about 1/3 of our enterprise revenues is a key driver underpinning our growth in 2026 and years to come. We have a proven track record of driving strong services growth. We see continued growth opportunities across our portfolio, particularly in Commercial HVAC, where our large and growing installed base and increasing mix of applied solutions carry a strong higher margin services tail. Additionally, our rapidly growing connected services portfolio is seeing increased demand for digital performance optimization and demand side management where our Energy Services business excels. Overall, we are excited about the opportunities for continued growth in 2026. Please turn to Slide #15. In closing, our leading innovation, elevated backlog and strong customer demand position us for strong performance in 2026 and beyond. Our uplift in culture continues to attract the best talent, powering our innovation. Our solutions offer strong returns to customers and also contribute to a sustainable world. This drives our consistent track record of performance and positions us to deliver differentiated value for shareholders over the long term. And now we'd be happy to take your questions. Operator? Operator: [Operator Instructions]. Your first question will come from Chris Snyder with Morgan Stanley. Christopher Snyder: I wanted to ask about Americas margins. You guys put up a 40% incremental almost in Q2. Q3 was like 50% despite negative mix away from Resi. So I guess kind of my question is really on the service margins. As the company adds technology and fixed assets to the service or aftermarket business, is there an opportunity for service incremental margins to improve versus history because it feels like we're effectively kind of replacing more variable human costs with more static fixed costs, whether it be technology or something else? Any thoughts there would be helpful. Christopher Kuehn: Chris, this is Chris. I'll go first, and then Dave may jump in. So very happy with the Americas margin performance in the third quarter. Operating income margins were nearly 22%, up 120 basis points on a year-over-year basis. And when you think about service, we've described service margins to be higher than the segment average. They're higher than equipment margins. And we continue to invest strongly in that space across front-end tools, service technicians, sales account managers. And I think we like the path that those margins should be ongoing forward. There's absolutely an opportunity for those margins to expand. David Regnery: Yes. And the only thing I would add, Chris, we're also investing heavily in our training organization. And we just opened a new training center here in North Carolina. And it's just we want to make sure our techs have the best tools in front of them in front of our customers. We want them to be the smartest as they can be. And all of our connected solutions, our training, it all adds up to technicians that are more productive. And by the way, our Service business is growing at a very nice rate as a result of that. Christopher Snyder: I appreciate that. And then maybe going over to orders, applied plus 100%, obviously, a pretty massive number and I know you can't continue to grow orders 100%, obviously. But is there anything in that, that feels onetiming, that's worth calling out? It does seem like the pipeline, I think you referred to it as rapidly growing. So it still feels like there's a lot of opportunity out there. But any kind of comment on that applied number? And anything at the end market level would be helpful. David Regnery: A good question. Obviously, we're very strong in all of our verticals. Data center certainly had a lot of growth. We did see several large orders in the third quarter. You could think of a large order as over $100 million. I guess my framework has changed there. But -- yes, so we have had several large orders. I'll just remind you that data center orders can be more uneven. So you may see them in one quarter, not another. But look, the pipeline of activity, it is what it's really encouraging. And it's -- I had the opportunity -- I was walking to a meeting yesterday on campus, and I ran into one of our chiller portfolio managers and this individual stopped me for what I thought was going to be 2 minutes and it ended up being 15 minutes about -- tell me about all the robust demand that they're seeing in the pipeline, the orders we're receiving, the innovation that's going to be coming out or is out now. So look, there's a lot of momentum out there right now. And I would tell you that Trane Technologies is doing a great job of capturing more than our fair share of that momentum. Operator: Your next question will come from Andy Kaplowitz with Citigroup. Andrew Kaplowitz: David and Chris, you grew revenue low teens in Americas Commercial HVAC equipment and in Q3. But is there any reason why your growth there wouldn't follow the reacceleration in Americas Commercial HVAC bookings that you've seen lately and set you up actually for as good or stronger Commercial HVAC organic revenue growth in '26 versus '25? And the reacceleration in bookings, I mean, you talked about large projects. How are other verticals doing besides data centers? Christopher Kuehn: Andy, I'll start. Look, the Commercial HVAC Americas business has had a great year, and it's going to continue to perform strongly in the future. When you think about our full year guide for that business, we're expecting revenues to be up low double digits this year. Q4 will be up around 10%. And when you think on a 3-year stack for that business, it's consistent every quarter this year, a 3-year stack of 50% revenues for our Commercial HVAC business. So certainly, the backlog and the order rates continue to give us more confidence on growth into the future. And as you know, services really underpins that business as well. It's about 1/3 of the enterprise revenues. It's roughly half of the Commercial HVAC and the Americas revenues and that will -- we see that being a tailwind for many years to come as well. So we'll dial in 2026 when we are on our next earnings call, but we're expecting this business to continue to have strong growth going forward. David Regnery: Yes. And the only thing I would add on the verticals, Andy, certainly very strong in data centers. Health care was also strong. Higher ed was strong, government was strong. We'll see how that goes with the government shutdown. But right now, government was strong. And we also saw some strength in office, which was good to see. So overall, pretty balanced strength that we're seeing out there in our core verticals as well as the high-growth vertical. Andrew Kaplowitz: Great. And then you didn't change your incremental revenue impact on Resi HVAC in Q4 that you told us about in September. But can you give us more color on what you're seeing in your channel? There's obviously a debate out there as to when inventories and Resi will be rightsized. I know you already talked about relatively weak one -- first half of '26, mainly due to tough comps. But do you think inventories could get in balance by the end of the year? How do you think about that? David Regnery: Yes. I mean, we're hopeful it gets rebalanced. I mean, 2025 was such an odd year for Residential really, you had -- it started with a prebuy. You could argue that maybe it was 2 prebuys with maybe a little bit pre-tariffs. But -- and then you had this refrigerant change that didn't go very well because of the canister issue that was well publicized. And then you had a really short summer across the U.S. So those 3 factors are kind of anomalies that we look at in the Resi space. Obviously, that caused a bit of inventory in the channel that needs to be burned down. And our plan is, hopefully, it's burned down by the end of the -- at least by the end of the year. If not, it will certainly be burned down by the first quarter. But we'll give you an update on that, Andy, when we present our fourth quarter earnings. Operator: Your next question will come from Julian Mitchell with Barclays. Julian Mitchell: Maybe I just wanted to understand a little bit the operating leverage guidance change. So you've moved to sort of 30% plus there on the organic front, it's a bit higher than before, and that's even with the revenue organic guide being lowered a touch [indiscernible] overall. So maybe help us understand sort of why is that operating leverage moving up? Does it reflect kind of exceptional cost control that may have to unwind a bit next year? Or is it more to do with something in the sort of shape of the business, particularly in Commercial HVAC, that's giving you that more structural entitlement to higher incrementals? Christopher Kuehn: Julian, it's Chris. Yes, look, I think it's -- first off, we manage all parts of the P&L. And when I step back and I see the volume growth in Commercial HVAC, we're getting strong leverage on that volume growth. You're right. There's headwinds in the business we've described in Residential and Transport, and in the fourth quarter, some revenue shifting out to next year in Commercial HVAC. But we're really offsetting nearly all of these headwinds on an EPS basis really because we're managing all parts of the P&L. Multiple areas there. I mentioned volumes. There is a strong cost management. Think of us as leveraging our scenario plans and our business operating system, where we beginning part of the third quarter, we saw the lower volumes in Residential. We made sure that we were managing all parts of our cost. It's a combination of discretionary cost control as well as some structural cost takeout, and you expect that from [indiscernible] operator. What we didn't do, we haven't cut investments. So we're preserving investments and there's a number of investments we had planned for the fourth quarter, and Dave was very clear, and I, we're not cutting those investments. We're moving forward with those because they set us up for future growth. So I'd look at the cost management, strong volumes in commercial as well as making sure that we're preserving investments. David Regnery: Yes. The only thing I would add is on the scenario planning, what we do really, really [indiscernible] well is it's not just what you -- it's what you will not cut and we spend a lot of time on that. And that's why, as Chris said, we're continuing to reinvest in all of our businesses. And we have projects out there that we know are so important for our future, that those are all ring-fenced. So we make sure that we -- those are things that we will not cut because they're about our future. So we do -- the teams do a great job there of identifying those and making sure that we're going to be not only ready for a particular quarter, but really well into the future. Julian Mitchell: That's great to hear. And then just my follow-up would be around pricing. Maybe just give us any color as to the price contribution to firm-wide revenues in the third quarter? And within those Resi Americas market, specifically, what's your comfort level that price discipline can hold up as this inventory destock plays out? Christopher Kuehn: Julian, price for the quarter was a bit above 3 percentage points. We've been tracking around 3 percentage points in the first half of the year. And from a full year guide perspective, think of the 6% organic revenue growth is roughly 3% price, 3% volume. I'd say we just continue to manage all the inflationary inputs well and ensuring that we've got a positive spread over price versus cost. In Residential, it's really about a volume story there. We're obviously shifting very much this year into 454B with a price/mix contribution. There'll be a little bit of carryover going into next year, but we're also just making sure we're staying ahead of a very dynamic environment in terms of cost inputs and remaining nimble. So we'll continue to do that. David Regnery: Yes. And on Resi, the industry has remained disciplined, Julian. Operator: Your next question will come from Amit Mehrotra with UBS. Amit Mehrotra: Chris I wanted to ask about organic growth between the applied equipment and light commercial. I know together, those grew low teens. Hoping you can give us a little bit more color on just the applied equipment side. And just given where the backlog and orders are for the equipment, obviously, the sustainable growth opportunity in service. Those 2 are kind of 50% of the business. Do you think growth can be maintained at the current levels, accelerate, decelerate because you have large numbers? Like what should be the right expectation prospectively for those growth rates for those 2 particular parts of the business? David Regnery: Yes. Look, applied was very strong, okay, very strong. Unitary was positive. I guess that's a good news, but it was -- it has not been a big contributor this year to our growth. We'll see how it plays out next year. As far as services goes, look, our Service business is very consistent. And we continue to put up nice growth rates there. We have -- if you go back to 2020, our compound annual growth rate, as I said in my prepared remarks, it's in the low teens, which is very, very strong. And by the way, that doesn't happen by accident, okay? We have a very detailed operating system around our Service business that allows us to do that. And if you think about all what's happening with our applied solutions and the installed base continuing to grow, look, the future is very, very bright for our Service business. Amit Mehrotra: Okay. And just as a follow-up, maybe for Chris, the company, you guys have this framework for top quartile revenue earnings growth kind of year in and year out. I interpret that to mean kind of high single-digit revenue growth, maybe low to mid-teens EPS growth. Obviously, you're achieving that this year, which is incredible in the context of what's happening in the Residential market. But just given kind of where the Commercial HVAC business order momentum is, hopefully, Resi is better next year than it is this year, obviously, it should be. Should we see an accelerating revenue and earnings algorithm next year? I would assume that would be the case just given the headwinds you're facing this year. Christopher Kuehn: Yes. I mean, look, I think the future is bright. We'll update investors in about 3 months at our next earnings call. But we do go into each and every year thinking about how we're going to plan for top quartile top line growth, EPS growth. And let's not forget about free cash flow conversion with a 4-year average well over 100%. I think we're one of the leaders in that space of converting that earnings to free cash flow. But with down markets in Residential and Transport, we know the first half of 2026 is going to have some tough comps -- or tough start to the year, okay, and off of tough comps. Let's see how the full year looks like. We'll update you in a few more months. Things are dynamic. But certainly, the growth of Commercial HVAC and over 90% of that backlog is for Commercial HVAC, of which the vast majority of that is applied systems, gives us a lot of confidence that we'll see strong growth in that business next year. Operator: Your next question will come from Scott Davis with Melius Research. Scott Davis: Those applied bookings were big numbers. Is that -- is there any of that, that's leaking into '27? Or is that -- I know the industry standard used to be kind of 1-year max lead time. Is it now leaking out a little longer than 1 year, just given how strong demand is? David Regnery: Not really. I mean, it was -- I think there might be just a little bit in '27. Most of it's going to ship in the next 15 months. So that's subject to change. That's kind of the lead time we're seeing. Christopher Kuehn: Yes. In the backlog, in terms of some of the large orders, customers give us insight on what they're going to place, but we won't put it into the backlog until there's a signed PO. So there are slots, let's say, that we're expecting to be filled for 2027, but that will convert to orders here starting in the fourth quarter into 2026. David Regnery: Yes. And the other thing I would add, the pipeline of activity, I know we had very strong, and I'm proud of what the team was able to do in the third quarter. Our pipeline of activity is extremely, extremely robust right now. Scott Davis: Yes, clearly. So guys, I just wanted to switch gears a little bit. You put out a press release 2 days ago on this thermal management system, the reference design for NVIDIA. What's new in that design? It looked like to me, it almost implied that you guys are making the CDU and kind of doing kind of the A to Z. Just kind of maybe talk about what's new in that design or the importance of it? David Regnery: If I told you, I wouldn't be able to talk to you anymore. We're working with NVIDIA. They're a leader, obviously, in the chip side of things, and we're helping -- basically as a leader in that vertical, and I've been saying for a long time, we're a leader in the data center vertical. We're working with all influencers, whether it be hyperscalers or whether it be great companies like NVIDIA that we're working with. And it's really about our very technical engineers working with their technical engineers and coming up with solutions that, in some cases, we didn't think were possible just a very short period of time ago. So more to come on that. We're excited about working with NVIDIA. We've been working with them for a while, and we think there's a lot of opportunities. And the innovation that we're seeing in the data center vertical is moving very, very fast, and we're there moving with it. I would also tell you that a lot of this innovation as we develop, we're pulling back into our core markets as well. So it's additive. We like being challenged. We like sitting at the table. We like them in our labs, showing them what we can do. And when smart people challenge each other, you usually have great outcomes. Operator: Your next question will come from Tommy Moll with Stephens. Thomas Moll: I wanted to ask about EMEA margins, which we haven't covered in enough detail yet, just given some of the comments you made there about recent investments that have pressured those margin percentages a bit. What's the time line look like there or when assuming continued top line progression, you can start to see some positive margin dynamics? Christopher Kuehn: Yes, Tommy, look, the third quarter for our Commercial HVAC business in EMEA came in really as expected. For our second half guide, we knew that the revenue growth would be stronger in the fourth quarter than the third quarter, really based on the timing of when customers want their products. We also expected sequential margin improvement throughout the year, and we saw that also in the third quarter versus the second quarter. Some of that for the segment is really around some recent M&A that we've completed, both in the Transport channel and in the Commercial HVAC channel that just on day-1 had lower margins on the segment average. So we'll work through that throughout the year. But those M&A transactions are very important to give us more opportunities for growth in the markets that they serve. So we're excited about that. The region has continued to invest on its front end and sales and service portfolio. I think that's largely anniversaried at this point as we go into the fourth quarter, but we would expect those margins to continue to grow and accelerate into 2026. Thomas Moll: And if we zoom out and look at consolidated margins, specifically next year, obviously, you're not going to guide today, but are there any variances to your typical planning cycle around the mid-20s conversion that are worth pointing out? And even if it's just a seasonal comment, obviously, there are a couple of factors that weigh on the first half and then flip to tailwinds in the second half. So perhaps you could give some context around that. Christopher Kuehn: Yes, nothing to call out specifically. I mean you called out our long-term framework of 25% or better incrementals. And we would go into any planning year thinking along that guidance. The pipelines Dave's talked about in terms of orders and bookings, the pipelines for our investments in the company remains very, very strong. So for us, it's always been about how to pull them ahead to drive growth even faster. So we'll manage the 2 of them as we think about 2026. I appreciate your comment on first half. I do think for our Transport market in the Americas and for Residential, those will be tougher first halves in 2026 with expected growth in the second half. And we'll put it all together and the goal would be, let's drive to top quartile financial performance again. But we'll update everyone in a few months. Operator: Your next question will come from Joe Ritchie with Goldman Sachs. Joseph Ritchie: I want to just focus my questions just on the data center opportunity and what you're seeing today. So if you think about kind of like the nature of the projects that you're winning, I'm curious whether that's like the nature of the projects have changed. So what I'm thinking about specifically is like are you starting to see like more modular type data centers getting built by the hyperscalers because the time to market it's really important. Just anything else you can tell us around the opportunities that you're booking would be helpful. David Regnery: Yes. I mean -- but we've seen that for a while, okay? I mean, the amount of stick build that you can reduce on a job site is obviously advantageous because it ensures a smoother build process. So that's been happening in the data center space for a while. And we're obviously -- you could see all of our chillers being installed there. So we're part of that process. So I wouldn't say it's a change. But obviously, I think it's a great question, though, because I know we're talking about data centers here. But if you think about other labor constraints and other verticals, that whole modular or less labor required on a job site is certainly something that will trend in the future. Joseph Ritchie: Yes. That makes sense. Sorry, -- that makes sense. And then I guess, Dave, just kind of thinking going back to Scott's question just around lead times, right? You have certain parts of the value chain that are out, like I think turbines are out like 3 to 4 years in terms of when they can get delivered. And given that your lead times right now are really kind of 12 to 18 months, I mean, it just seems like the opportunity for you, like you've just got a lot of -- like already based on what we're seeing in the value chain, the opportunity for you guys should be really strong really through the end of the decade. I don't want to put the cart before the horse here, but just how are you thinking about this data center opportunity for you guys? David Regnery: End of the decade, I like it. Look, I think 12 to 18 months -- first of all, that may not be our capacity. That may be what the -- when the data centers just given -- the hyperscalers is giving us visibility for planning purposes. We've actually expanded our capacity. I had the team do an analysis since 2023, we've expanded our chiller capacity by 4x. So we've invested a lot there, but we're ready for the growth. And by the way, in some cases, our lead times now have actually contracted to a point where we have quick ship programs again. And that's not for data centers, but that's for core verticals. But it's -- the momentum we're seeing is great to see. The innovation that we have is driving a lot of that momentum, and we are more than ready to make sure that we can meet the demand that's being placed upon us. Operator: Your next question will come from Jeff Sprague with Vertical Research. Jeffrey Sprague: My question maybe is a little bit related to sort of where Joe was at. But just thinking about all these large projects, right, things must be slipping back and forth all the time. I don't recall you calling out project slippage in the last couple of years like you are today with this $100 million. Just wondering, even though your lead times are improving, are we starting to bump up against just the ability for the supply chain, the construction community, whatever to put this stuff in the ground at the pace they would like? Or would you just kind of characterize what you pointed out today is just kind of normal noise in shipment patterns? David Regnery: I think it's normal noise, okay? We haven't seen anything that I would say is a trend. But we certainly had several customers ask us to wait until 2026 to ship product, which that happens in our industry. We're obviously never going to ship a product before it's -- a job site is ready for it. But I think it's just timing and timing, sometimes there's positives and sometimes there's negatives. It's just in the fourth quarter, it's probably more negative for us, and we called out the $100 million that's going to push into 2026. But I wouldn't read too much into that. The demand that we're seeing right now is extremely strong, and you see that by our order rates. So I'm not -- normal activity, not concerned about it. Christopher Kuehn: Yes, Jeff, I would add. I just wanted to be transparent, and we just kind of called it out because it was something we had our internal plans were stronger than that. And so with news from those customers, we just wanted to be transparent in terms of that delta. Jeffrey Sprague: Great. And then, Chris, a follow-up for you. Maybe this was partially addressed in an earlier question. But the improvement in corporate, the pickup in other, do those continue into 2026? Was there anything unusual there that normalizes? And also just a $0.20 kind of deal-related headwind, I think you still have a headwind next year, but a smaller headwind. So effectively, it's a tailwind in the P&L, right? Can you maybe just elaborate on that? Christopher Kuehn: Yes. Starting in reverse, I think it is a $0.20 -- the M&A this year is about a $0.20 headwind. Think of that as really the accounting requirements around amortization expense, and that's typically heavier in those first few years of an acquisition. There's also integration costs that we've got planned to really drive the synergies that we see in those businesses. So should be less of a headwind going into 2026. We'll dial that in, in a few months. You're right, corporate was favorable, items below the line were unfavorable. I'd call out other income, other expense unfavorable year-over-year. Tax was actually a bit unfavorable in the third quarter. Very confident we'll have tax at 20% for the full year. That means it will be a bit favorable in the fourth quarter versus, say, 20%, Jeff. But I think look, lots of investments still that make up our corporate structure. Some of the discretionary cost reductions, reduction of, say, open roles, some of that does impact the corporate line as well. So ultimately -- but we'll start on investments, we'll start generally with corporate and then move into the segments as we see benefits. But I wouldn't read too much into it this year, but we'll dial in, in a few months. Operator: Your next question will come from Andrew Obin with Bank of America. Andrew Obin: Yes. Just a question about institutional business. What's the visibility like into '26? It seems the unit bond market is getting better, and it seems that funding for schools and hospitals is getting better. So does this mean that this business could accelerate into next year? Or where is the base in '25 because we haven't spoken about this business for a while? David Regnery: Yes. I think if you look across our pipelines, like we have a lot of strength in all of our verticals. So I think it's a great question. And right now -- I mean, I've been in this industry a long time. And I would tell you that I've seen pipelines as strong as I see right now probably ever in my career. So we're very bullish on the momentum, especially in our Commercial HVAC team and really in EMEA as well that they have a lot of opportunities in front of them. Andrew Obin: But the question is specifically about institutional. So you haven't seen institutional slowdown this year, right, for you? David Regnery: Health care was very strong. Education remains strong, especially on the higher ed side of things. No, we have not. The only thing that we've seen, at least in the third quarter, maybe a bit slower, and it's always difficult to say a quarter makes a trend, but retail was slow, industrial is slow. Life sciences, I don't like to pick on life sciences, but that continues to be a little bit of a COVID hangover there, I think. And -- but that -- the rest of our markets were pretty strong. Andrew Obin: And just a follow-up question on data centers. Do you need to build extra sort of muscle to service because you do have Fan Wall offerings, you have [indiscernible], you have CDUs. What does it take to be able to service inside the data center gray space versus sort of serving your chillers that are sort of outside the building? Is there a discernible difference in what you need to do to your service workforce? David Regnery: Well, it really depends on the data center. And I guess the short answer is, look, we're skilled at servicing all of our products. But a really good question that you kind of reminded me of was this commissioning capability. And this is, again, one of our strengths with our technicians. We have a lot of resources to make sure that all of these data centers get commissioned on time. And think of commissioning is when the mechanical contractor says, okay, this particular chiller is ready to go, we go in then and make sure that it's going to operate the way it was designed, call that commissioning. And we have a lot of resources that we are able to rifle to any particular data center to make sure that it gets up and running on time. And I can tell you that, that is something that I'm getting asked a lot of questions on about our capacity there, and it's certainly one of our strengths. Operator: Your next question will come from Nicole DeBlase with Deutsche Bank. Nicole DeBlase: Could we maybe talk about the step-up that you guys saw in the EMEA bookings this quarter, pretty attractive, up 14%. Are you starting to see the data center orders really come through in a big way yet? Or do you think that's still to come in the pipeline? David Regnery: We certainly have data center orders in all of our regions, okay? EMEA, I'm trying to recall the third quarter, nothing comes to mind. But look, I would tell you that the data center orders in EMEA are a lot smaller from a -- the size of the data center is a lot smaller than what we're seeing in the U.S. So in the U.S., it could be as much as like 1/10 the size. So we have a lot of orders, they're just smaller, okay? Nicole DeBlase: Okay. Got it. That's really helpful color. And then if I could ask one on North America Resi. Could you guys comment on was the price mix versus volume split in line with what you laid out at the Laguna Conference in September? And then thoughts on annual price increase in 2026, if it will be kind of normal? And if you think that customers are willing to accept it since price is up so much over the past few years? Christopher Kuehn: Nicole, yes, the third quarter and our expectations for the fourth quarter are consistent with the September update. Revenue is down about 20%. That would imply volumes down roughly 30% and then the price/mix impact would be favorable around 10 points. And then of the price mix, think of that as roughly 50-50, roughly 5 points plus or minus for each one of those attributes. For 2026, we're prepared to go into the year. We haven't seen any structural changes within the industry. We'll look at all the cost inputs that we have. We'll look at where we're driving for share. And ultimately, what we look for each of our businesses is to drive strong leverage, 25% or better and price versus inflation is one of those levers we'll look at. So typically, our price increases don't come out until late, let's call it, December, January time frame for the year. So we'll update you in a few months on what that standing is for 2026. Operator: Your next question will come from Noah Kaye with Oppenheimer. Noah Kaye: So Services has consistently had an attractive margin profile. And I'm curious and perhaps goes a little bit to some of your earlier comments. As you layer in BrainBox and some of the other software offerings into the toolkit, how do you think about sort of a richer software mix impacting where service margins go? How are you implementing that in some of the project management now? David Regnery: Yes. Great question. Look, we're very -- I'll start with, we're very happy with the BrainBox AI acquisition. Together, think of our Trane Connected business now with BrainBox, we have over 65,000 connected buildings and we're adding about one building every hour, and the momentum is increasing. So yes, you're spot on with your question. This is becoming -- I'm very bullish on the future as far as the connected service opportunities and how you optimize a building using AI. With BrainBox, we're using Agentic AI, okay? So this is where the agent is actually making the decision on how to run the building looking at a vast amount of data. So -- and the margins are obviously very accretive when you're able to deploy this type of software. We had a fast food -- it was a convenience store. So think of thousands of locations, and they gave us a pilot. And we implemented, I think it was 50 of their stores, and we ran the pilot for 90 days and the results were just -- they were amazed by it. We were able to save the customer. It was north of 30% on their energy costs. That was a pilot of 50 stores, but obviously, they're going to now run that through their entire portfolio. So this is going to be a fast grower for us. It's still early innings, but we're excited about the opportunities there. And as you said, when you start doing subscriptions, the margins are accretive. Noah Kaye: It's great color. And on a similar theme, when you think about what you may want to add into the portfolio on an M&A basis next year, obviously, you're continuing to generate strong free cash flow. So there's dry powder there. Should we think about kind of continued sort of software-centric? Are there any parts on the product side that are of particular interest? David Regnery: Yes. I mean, I think we're going to be -- we'll keep our options open. We get a chance to look at everything, as I'm sure you know, being a major HVACR player on a global basis. So we'll be opportunistic, but we'll also be disciplined. So I don't know if you want to add anything, Chris? Christopher Kuehn: No, I think the capital deployment framework has served us well for many years, and we'll continue to balance without leaving any excess cash on the balance sheet, we'll make sure we toggle that between M&A that meets our internal goals and something that we can integrate well into the company as well as toggle between, if not M&A, then share repurchases when it trades below our calculated intrinsic value. And we'll continue, I think, that expectation for many years to come. Operator: Your next question will come from Deane Dray with RBC Capital Markets. Deane Dray: I want to follow up on your exchange with Nicole on the data center demands by geography. If you just look at where the big build-outs are happening now, like the Middle East, I would be surprised if they are smaller orders. But just maybe talk about the visibility by region and expectations from there. David Regnery: No, you're spot on in the Middle East, specifically Saudi Arabia, we're seeing larger data centers there. Specific to Europe, they tend to be smaller. But obviously, in the United States, there's some big data centers that are being built and I would tell you that there's even bigger data centers that are being planned right now. Deane Dray: And how about Asia? David Regnery: Yes. We see in Asia as well. We're seeing some activity for sure in China, but more outside of China, specifically Singapore, Australia had some nice orders there. So there's activity there. It's nothing as to the size of what we're seeing in the United States right now. But as you said, in the Middle East, specifically in Saudi Arabia, there's a lot of activity as well. Deane Dray: Yes. We've been hearing all about that. And then just last one. Can you give any comments or updates, insights into your investments in some of these liquid cooling start-ups? David Regnery: Yes. I mean, as you know, we made an investment in LiquidStack several years ago. It's going well. We continue to work with their team, and they continue to work with us. And we like having partners like that, right? They're innovative and we teach them, they teach us and 1 plus 1 often equals 3 or 4. So we'll continue to work with those types of innovative companies in the future. Operator: Your next question will come from Steve Tusa with JPMorgan. C. Stephen Tusa: Congrats on the execution through a lot of noise out there in these markets, for sure. The backlog for commercial HVAC, you guys gave kind of a bit of a like year-to-date increase. I think from year-end, just requires a little bit of math, but like what would that have been year-over-year for commercial HVAC backlog? Christopher Kuehn: Yes. Year-over-year, enterprise backlog was roughly flattish, but similar to the walk from beginning of this year. Thermo King and Residential backlog down about $300 million. Commercial HVAC Americas backlog up nearly $500 million from -- on a year-over-year basis. So the mix and -- the mix of that backlog continues to shift more towards commercial HVAC. C. Stephen Tusa: Okay. And so that's up like, what, 6%, 7%? Christopher Kuehn: From beginning of the year, it's up 7%. C. Stephen Tusa: No, from year-over-year. Year-over-year. Christopher Kuehn: On Commercial HVAC, yes, it's probably in that range, probably mid- to high single digits, yes. C. Stephen Tusa: Okay. And then just the amount of forward sales kind of in the backlog last year, I think you guys gave an enterprise number of like $4.1 billion or something like that. Where does that stand this year? Christopher Kuehn: Yes. I would just say it's stronger than last year, okay? And obviously, we'll continue to grow that frontlog for 2026 here into the fourth quarter. Lead times continue to -- as we talked earlier, lead times continue to be contracting from last year's time to this year. So Dave mentioned a little bit around quick ship programs as an example, where we have some opportunities. But the absolute dollars of backlog for next year, they're up, and we'll give you more of an update as we approach the Q4 earnings call. We would expect backlog to remain elevated going into 2026. C. Stephen Tusa: Yes. And then just one last one on Resi. Maybe just the difference between your captive distribution and the independent? Christopher Kuehn: For the quarter? C. Stephen Tusa: Yes. Yes. For the quarter. Christopher Kuehn: I mean we had sell-through that was down in the high single digits range. Obviously, our Resi growth was down about 20%. I would say, the sell-in was a little bit north of that than the 20%, a little bit higher than that. Operator: Your final question will come from Nigel Coe with Wolfe Research. Nigel Coe: I appreciate you going further in the game here. [indiscernible] a lot of ground. So you know we're scratching around when we talk about corporate. But maybe just talk about what we should done for 4Q corporate. And then I think the M&A impact went up by $0.05. I think we're now looking at a $0.05 slightly greater impact. I think $0.20 is the number for the year. I mean, how does that look into 2026? Does that $0.20 go to 0? Or are we still dealing with some dilution there? Christopher Kuehn: Yes. I'll answer the second question first. I don't think the $0.20 necessarily goes to 0. Our framework would be we want to make sure we're EPS positive by the end of year 3. And while we're very happy with the start of the BrainBox acquisition, there's an early-stage company, there's a lot of amortization associated with it. So let's see what it is next year. I would expect it to be better, but I wouldn't necessarily think it goes to 0. And then, Nigel, your question on Q4 corporate, the implied number for the quarter is about $80 million. We're making sure we have the dollars reserved for the investments that we want to make in the fourth quarter. So that's how that math works out. Nigel Coe: Okay. And then my follow-on. I know Services has got a fair amount of bad time on the call. The consistent double-digit growth in Services is pretty extraordinary. And I think investors would appreciate it. Maybe just talk about how the service model has changed, Dave? And what kind of confidence do you have that you can maintain, if not 10%, but high single growth going forward? David Regnery: We're very happy with our growth rates. I'll start there. Look, we continue to invest heavily in our Services business. We have a whole business operating system built around it. We track lots of different [indiscernible]. I'm not going to create a road map for our competitors. I would just tell you that it's a big part of our business, it's a competitive advantage that we have, and it doesn't happen by accident, okay? We're investing heavily in it, and you could see the outcomes that we're able to drive. So we're very happy with our Services business. Operator: There are no further questions at this time. I would now like to turn the call back over to Zac for any closing remarks. Zac Nagle: Thanks, operator. I'd like to thank everyone for joining today's call. As always, we'll be available for questions in the coming days and weeks, and we look forward to seeing many of you on the road in the fourth quarter. Have a great day. Thank you. Operator: Thank you for your participation. This does conclude today's conference. You may now disconnect.
Operator: Ladies and gentlemen, thank you for standing by, and welcome to the Third Quarter 2025 HII Earnings Conference Call. [Operator Instructions] After the speaker's presentation, there will be a question and answer session. [Operator Instructions] Please be advised that this -- that today's conference is being recorded. [Operator Instructions] I would now like to hand the call over to Christie Thomas, Vice President of Investor Relations. Mrs. Thomas, you may go ahead. Christie Thomas: Thank you, operator, and good morning, everyone. Welcome to the HII Third Quarter 2025 Conference Call. Matters discussed on today's call that constitute forward-looking statements, including our estimates regarding the company's outlook, involve risks and uncertainties that reflect the company's judgment based on information available at the time of this call. These risks and uncertainties may cause our actual results to differ materially. Additional information regarding these factors is contained in today's press release and the company's SEC filings. We will also refer to certain non-GAAP financial measures. For additional disclosures about these non-GAAP measures, including reconciliations to comparable GAAP measures, please see the slides that accompany this webcast, which are available on the Investor Relations page of our website at ir.hii.com. On the call today are Chris Kastner, President and Chief Executive Officer; and Tom Stiehle, Executive Vice President and Chief Financial Officer. Now I'll turn the call over to Chris. Christopher Kastner: Thanks, Christie. Good morning, everyone. The United States Navy recently celebrated its 250th birthday and the U.S. Marine Corps will do the same in the coming weeks. So I would like to start today by thanking both of them for their enduring service to our country and their commitment to our national defense. Thank you for all that you have done and all that you do to protect us and future generations. Moving on to the third quarter, I'll start by discussing our results and division highlights and provide an update on our operational initiatives, then Tom will provide some details on our financial performance and outlook. Before I begin, I'd like to reiterate our commitment to accelerate shipbuilding construction to meet our customers' requirements. We continue to support the identification of strategies to increase throughput across our shipbuilding programs and are working closely with our customer and partners to achieve this important mission. Now turning to our results. This morning, we reported record third quarter sales of $3.2 billion and diluted earnings per share of $3.68. Shipbuilding sales growth of 18% year-over-year was driven by our shipbuilding division's focus on increasing throughput in our shipyards and supported by broader efforts underway to rebuild the U.S. maritime industrial base. Likewise, 11% sales growth at Mission Technologies was driven by our team's continued focus on delivering innovative solutions, including growth in the critical areas of C5ISR; cyber; electronic warfare & space; and live, virtual, and constructive training as well as unmanned systems. Demand for our products and services remain strong. Third quarter contract awards were $2 billion, and our backlog is $56 billion, of which $33 billion is funded. At Newport News, we continue to make progress on submarines and aircraft carriers. The last 2 Virginia-Class Block IV submarines are in the water with SSN 798 Massachusetts having recently completed sea trials and preparing for delivery this year. As for our carrier program, CVN-79 Kennedy continues to make progress in its testing program, and we expect to conduct the ship's first sea trials around the end of the year. And shipbuilders are installing the large components that have now been received on CVN-80 Enterprise, which will allow erection progress to accelerate. Moving to Ingalls. In the third quarter, we successfully completed builders trials for DDG 128 Ted Stevens, bringing her a step closer to acceptance trials and delivery. Our amphibious warship construction continues to make progress with both LHA-8 Bougainville and LPD-30 Harrisburg through integration and testing in support of trials next year. At Mission Technologies, we had another strong quarter of sales at $787 million, along with a book-to-bill of 1.25x and announced key strategic partnerships around future opportunities. First, we joined forces with Babcock International to integrate HII's unmanned underwater vehicles with the Babcock submarine weapon handling and launch systems, while REMUS 620 was validated for torpedo tube deployment. This will position our torpedo tube launch and recovery solutions for international markets. We also announced a partnership with Shield AI to accelerate cross-domain and modular mission autonomy solutions and a partnership with Thales to develop advanced autonomous undersea mine countermeasure capabilities. Additionally, we unveiled the ROMULUS family of unmanned surface vessels powered by our Odyssey Autonomy software and have started building the flagship ROMULUS 190. ROMULUS is one example of numerous projects and contracts underway in Mission Technologies that combines internally developed technology with world-class partner technology to create best-of-breed technology solutions for the war fighter. Now shifting to an update on our operational initiatives. Both Ingalls and Newport News performance was stable to slightly improving in the quarter as we continue to work through ships that were contracted prior to COVID. As I previously indicated, during the contract mix transition from pre-COVID contracts to our newly awarded contracts, we continue to expect some choppiness in performance. The first operational initiative increasing throughput is showing improvement over 2024. Initial indications align with our expectation that the HII and Navy investments in workforce, infrastructure and supply chain will have a positive impact on throughput trajectory. Our updated expectation is to achieve approximately 15% throughput improvement for the full year 2025 as throughput improvements have accelerated throughout the year. From a labor perspective, we have hired over 4,600 shipbuilders year-to-date, and our retention rates have improved at both shipyards. At Newport News, we've seen an increase in experienced hires following the wage investment this summer and increased hiring from regional workforce development pipelines, which provides more proficient incoming shipbuilders. These are important steps to stabilize and level up the experience of our workforce. Also, we are seeing success and expansion of the industrial base with our distributed shipbuilding strategy resulting in significant outsourcing taking place at 23 partners and growing. With the Navy support, we are partnering with shipyards and fabricators in multiple states to grow throughput and improve schedule adherence for all of our shipbuilding programs. The second operational initiative is our $250 million annualized cost reduction effort, and we remain on track to achieve this target. And the final operational initiative is achieving our new contract awards. Having completed the negotiations for the significant award of 2 submarines earlier this year, our teams have pivoted to negotiations of Block VI and the next Columbia award and are working towards having agreements in place late this year. Shifting to activities in Washington. The new fiscal year began with a lapse in appropriations. And as a result, many activities of the federal government have halted. I will note, in the Department of Water shutdown guidance, shipbuilding is 1 of 6 departmental priorities that should be supported to the extent possible with available funds. To date, our programs in shipbuilding have been fully supported, and we've seen no impact to normal operations. We have had immaterial impact to Mission Technologies, but we are watching those programs closely as they are more likely to be impacted by budget timing. We continue to support completion of the FY '26 appropriations process as soon as possible to minimize the impact that a lapse in funding could have on our programs. Both House and Senate defense appropriations bills include critical funding to support the submarine and maritime industrial base. And both bills reflect continued investment in our shipbuilding programs with funding provided for the Columbia-Class and Virginia-Class Submarine programs for CVNs 80 and 81 construction and CVN 82 advanced procurement for the DDG-51 program and for the second of 3 years of funding for the refueling and overhaul of CVN 75. We also look forward to Congress completing work on the fiscal year 2026 National Defense Authorization Bill, qualifying the strong support for shipbuilding and other national security priorities reflected in the respective House and Senate bills. The 2 defense authorization committees continue to show strong support for our company's programs. In summary, we had a solid third quarter with record sales as we ramp production in support of delivering on our commitments. And now I'll turn the call over to Tom for some remarks on our financial performance. Tom? Thomas Stiehle: Thanks, Chris, and good morning. Let me start by briefly discussing our third quarter results, and then I'll address our outlook for the year. For more detail, please refer to the earnings release issued this morning and posted to our website. Beginning with our consolidated results on Slide 5 of the presentation, our third quarter revenues of approximately $3.2 billion were a record for HII and increased 16.1% compared to the same period last year. The higher revenue was attributable to strong year-over-year growth at all 3 divisions. Ingalls revenues were a record $828 million and increased by 24.7% compared to the third quarter of 2024, driven primarily by higher material volume in surface combatants. Newport News revenues of $1.6 billion increased by 14.5% compared to the third quarter of 2024, driven primarily by higher volumes across submarine and aircraft carrier programs. Together, shipbuilding revenue was $2.4 billion, well ahead of our guidance for the quarter as results benefited from higher-than-expected material receipt as well as the impacts of wage investments and our broader efforts to drive higher shipbuilding throughput, including increased outsourcing. Mission Technologies revenues of $787 million increased by 11% compared to the third quarter of 2024, driven by higher volume in C5ISR; cyber, electronic warfare & space; and live, virtual, and constructive training as well as our growth in unmanned systems. Moving on to Slide 6. Segment operating income of $179 million and segment operating margin of 5.6% in the third quarter of 2025 were both up from prior year results, primarily driven by the prior year period's negative adjustments as well as the positive impacts of the volume growth I discussed. At Ingalls, segment operating income was $65 million and operating margin of 7.9% compared to $49 million and 7.4% in the third quarter of last year. The increases were driven by the volume increases in surface combatants. The third quarter net cumulative adjustment at Ingalls was a positive $6 million and none of the adjustments were individually significant. At Newport News, segment operating income was $80 million and operating margin was 4.9% compared to $15 million and 1.1% in the third quarter of 2024. Prior year results were impacted by negative adjustments resulting from the performance challenges and the delay of new contract awards. For the third quarter of 2025, Newport News Shipbuilding net cumulative adjustment was negative $13 million. None of the adjustments in the quarter were individually significant. Mission Technologies operating income and margin were largely consistent year-over-year as changes in the contract mix offset the higher volumes I previously mentioned. Consolidated operating income for the quarter was $161 million, and operating margin was 5% compared to $82 million and 3% in the same period last year. The variance was primarily driven by the segment results I've just noted. Net earnings in the quarter were $145 million compared to $101 million in the third quarter of 2024. Diluted earnings per share in the quarter were $3.68 compared to $2.56 in the same period last year. The effective tax rate in the third quarter was 28.9%, higher than our initial expectations as results were impacted by a reduction in the estimated research and development tax credit for the prior year. Turning to Slide 7. Cash provided by operations was $118 million in the quarter. Net capital expenditures were $102 million or 3.2% of revenues. Free cash flow in the quarter was $16 million. Free cash flow results in the quarter were better than the guidance we had provided, largely due to stronger collections in the quarter as well as some disbursements moving out of the quarter. I'll discuss our updated 2025 free cash flow guidance in a moment. During the quarter, we did not repurchase any shares. We did pay a cash dividend of $1.35 per share or $53 million in the aggregate. Last week, we announced a modest increase in our quarterly dividend to $1.38 per share. Turning to liquidity and the balance sheet. We ended the quarter with a cash balance of $312 million and liquidity of approximately $2 billion. Our capital allocation priorities are unchanged. We value our investment-grade credit rating, and we will continue to prioritize prudent debt levels while strategically investing in our shipyards and thoughtfully growing our dividend while continuing to use excess free cash flow for share repurchases. Moving on to our outlook on Slide 8. We have narrowed the shipbuilding revenue range to be between $9 billion and $9.1 billion, which is an increase of $50 million at the midpoint from the prior guidance range. We are reiterating the shipbuilding margin range of between 5.5% and 6.5%. For Mission Technologies, we are now expecting revenue between $3 billion and $3.1 billion, an increase of $50 million from the prior guidance range at the midpoint. We expect Mission Technologies operating margins of approximately 4.5% and EBITDA margins between 8% and 8.5%. Our 2025 guidance is predicated on achieving the operational initiatives we have laid out. We are pleased with the throughput improvement we saw in the third quarter, though we have not been able to overcome the slower start to the year and therefore had to trim our throughput improvement expectation for the full year. As Chris noted, we are continuing to work towards the Virginia-Class Block VI and Columbia Build II submarine awards later this year. If the award were to push into 2026, it would be a headwind to our guidance that would likely have us end the year slightly below the midpoint of our shipbuilding margin guidance range. Conversely, an award this year would support us ending at or slightly above the midpoint of the range. For 2025 free cash flow, we are updating our guidance to be between $550 million and $650 million. At the midpoint, this is an increase of $50 million compared to our prior guidance range. We are establishing a cumulative free cash flow target for 2025 and 2026 of $1.2 billion. Using the 2025 free cash flow guidance midpoint, this does imply both years will generate about $600 million in free cash flow. As always, our cash flow in a particular quarter or year can be impacted by small changes in timing for large receipts and disbursements. We are also updating a number of discrete income statement guidance elements. We have made some minor revisions to our pension outlook, and you can find updated 2025 and 2026 expectations in the appendix of today's slide presentation. We are also updating the expected effective tax rate for the year to 22% given the elevated rate in the third quarter that I discussed previously. To close, it was a good quarter as we continue to make steady progress working our way through challenging shifts and executing our 2025 operational initiatives, securing new contracts aligned to the current environment, drive higher throughput and thoughtfully manage cost. With that, I'll turn the call back over to Christie to manage Q&A. Christie Thomas: Thanks, Tom. [Operator Instructions] Operator, I'll turn the call over to you to manage the Q&A. Operator: [Operator Instructions] Our first question comes from Scott Mikus with Melius Research. Scott Mikus: Chris and Tom, I wanted to ask on Virginia Block VI and Columbia Build II negotiations. So you kind of touched on the fact that shipbuilding is not really impacted by the shutdown. Is there anything that's potentially holding up that negotiation maybe due to government employees being furloughed? And then also from a high-level perspective, does it make sense for industry and the customer to commit to that many boats at once? Or should the negotiation maybe split up into 2 or more negotiations to just get a better understanding of the cost and schedule to build those? Christopher Kastner: Yes. Thanks, Scott. I think furlough is not impacting that negotiation. The team is working very hard to get that done. I won't comment directly on the negotiations because it's inappropriate. But the team is working very hard to get that done before the end of the year. I know -- I also know the Navy is working on how that works with the shutdown and potential CR to make sure that we can get the ships awarded. So more to come there, but I think we're making good progress. On the incremental award or potentially award less ships, really doesn't make sense and contrary to really what we think is the most important thing for the industrial base, which is a consistent demand signal. And as important as that is to us, the supply chain really needs it. So I think incrementally negotiating these, rewarding these does not make a lot of sense. We need to get all 10 of these awarded and be on our way. So thanks, Scott. Appreciate it. Scott Mikus: Okay. And then a quick one. It looks like you mentioned the retention rates have been improving. You had the wage increase go in at Newport News, I think, in June. When is the wage increase going in at Ingalls? Christopher Kastner: Yes. So we're in discussions with the union at Ingalls. That union agreement expires next year. So we're hoping to get that in place at the beginning of next year or maybe end of this year, but we're in discussions. It makes it a bit more complicated because we have to engage with the union to get that done. Operator: Our next question comes from Noah Poponak with Goldman Sachs. Noah Poponak: Tom, you highlighted the shipbuilding revenue in the quarter being almost $250 million ahead of your plan, but then only raising the full year by $50 million. And to be in the full year range, 4Q shipbuilding revenue would need to be flat, actually maybe even down a little. And I think the compare is pretty easy. Can you help me with that math? And I guess the bigger picture question is just seeing this very high growth rate in the quarter on shipbuilding revenue. The question is, have you achieved much better ability to get the throughput relative to demand? And can we extrapolate -- maybe it's not 16% every quarter for a while, but can we extrapolate much better growth in the medium term? Or was there something just with the outlay allocation or something kind of random to the quarter? Thomas Stiehle: I appreciate the question there, Noah. So a couple of things there. Newport News, they grew 15%. Ingalls grew 25%. From a Newport News perspective, what we saw there, increased throughput, wages and outsourcing. It was primarily driven by the material that we see on those contracts as well. And from an Ingalls perspective, it was the material volume that we saw on the surface commend, a mixture of FY '23, the destroyers, the DDG-1000 and some growth on some long lead contracts we have and some orders on that front. I do expect we held the guidance right now. We took the bottom range up. We held the top range still and what we gave you at the beginning of the year there. There is some tailwinds, I'll tell you. So we want to see how we continue to improve. As Chris mentioned in his remarks upfront, it was earned throughput. Charleston Operations is providing a lift in revenue. We've qualified over 23 new vendors on the outsourcing side. So all that's very favorable. We want to continue to see a positive trend as we go forward here. I would say a couple of the dollars are pull ahead from Q4 to Q3, but there's some foundation and some substance there of increased growth as we go forward here. Chris and I will evaluate how Q4 plays out, and then we'll provide some guidance of revenue projections for shipbuilding on the February call. Christopher Kastner: Yes. I think to add to that and Noah, obviously, I think 4% midterm growth is probably in the rearview mirror. But we want to make sure we roll up our plans and give you good guidance on the year-end call. Thomas Stiehle: Yes. I would comment too, if you pull back just -- even though Q3 was 18% growth that we had here, kind of year-over-year in shipbuilding. For the year itself, it's 6.1% between Q1, Q2 and Q3 here. So we do see some positive signs of the capacity and throughput. And I envision as we continue to execute on the backlog we have, we have the book of business, the investments mature, the wages take hold and the workforce becomes more senior, I would envision that that's going to ramp as we go forward here. Noah Poponak: Chris, 4% is in the rearview mirror. What do you mean by that? Christopher Kastner: Just long midterm guidance for shipbuilding. We have provided kind of midterm guidance for shipbuilding at 4%... Noah Poponak: What do you mean by it being in the rearview mirror? Christopher Kastner: That means it's not -- probably not valid anymore. It's probably in excess of that. We just need to roll up our plans. Noah Poponak: Okay. Understood. And then Tom or Chris, the $250 million cost initiative, it's a pretty big number just compared to your EBITDA base. Will that be a gross number? Do we need to net that number? And how much of that is already done and in your numbers versus is still ahead of you? Christopher Kastner: Yes, it's all in our guidance. We assume we're going to achieve that in our guidance. So it's all in. Noah Poponak: It's in your 2025 guidance? Christopher Kastner: Yes. Thomas Stiehle: Yes. Noah Poponak: And has that been benefiting the margin year-to-date? Christopher Kastner: Well, these are long-term contracts, and you make assumptions about what the cost profile is going to be. So it's all been -- it's all been in our guidance. Operator: Our next question comes from Ron Epstein with Bank of America. Ronald Epstein: Yes, just maybe a quick one here. Can you give us more color on your partnering strategy on unmanned vessels? You announced recently a partnership with Shield AI and the progress you're having on your own internal autonomy systems for these vehicles? Christopher Kastner: Sure. Thanks for that. As you know, it's an Odyssey software solution for autonomy. We've got -- the beauty of Odyssey, it's open source. So the implementation or incorporation of new software tools is pretty seamless. And so when we reviewed the space and opportunity we had to identify partners that could add capability into that software, Shield AI made a lot of sense. C3 AI makes a lot of sense. It just makes it more powerful for the mission. We've been working on that software for a long time. As you know, we have over 750 uncrewed vehicles that have been delivered both to international and domestic partners. So it's been very positive. And I don't know if you've seen the releases relative to our ROMULUS line of vehicles that we're building as well. So Odyssey is a critical part of that. It only makes sense. It's part of MT's strategy to use world-class commercial solutions to make sure that we provide the best solutions for our customer and the open architecture of that software makes that pretty seamless. So we're excited about it. We think it's going to be a great tool, and we tend to include it going forward in our unmanned products. Ronald Epstein: Got it. Got it. And I mean, ultimately, how big do you think the unmanned market can be for you? Christopher Kastner: Yes. So I don't want to give a specific size. It is ramping. It is becoming more material within Mission Technologies, and you see the budget environment, the allocation of additional unmanned opportunities in reconciliation is very positive. So it's ramping. I don't want to size it here, but it's definitely a place we're investing in. Ronald Epstein: Got it. Got it. And then maybe just one last one. You probably saw in the news yesterday. And if you can answer this, I mean it didn't happen that long ago. But the Trump administration suggested that Hanwha is going to be making nuclear submarines into the Philadelphia Navy Yard. How does that changed things or not? I mean, how do you think about that strategically? Christopher Kastner: Well, it's definitely been an exciting couple of days in shipbuilding. I don't want to comment specifically on that because that's pretty new information. But at the end of the day, we're going to build what the Navy wants us to build. We're going to partner with them. And if they need our help, we're going to help them. So we're not getting distracted by anything. We're keeping our heads down, and we're going to build what's in front of us. But that's pretty new information. I don't want to comment directly on it until we understand more details. Operator: Our next question comes from Seth Seifman with JPMorgan. Seth Seifman: So I wanted to ask, I think -- Tom, I think you mentioned with regard to the margin rate, if the contract didn't come in Q4, you'd be below the midpoint for the year, which I think would imply kind of a step down in the margin in Q4. And just kind of curious what drives that given where the underlying margins are in the -- in each shipyard after EACs, it would seem that the underlying margin here with kind of neutral EACs is something that is above 6% kind of in the maybe low towards mid-6 range. And so is that some conservatism that leads you to have that guidance? Or is there some kind of anticipation of potential further negative adjustments? Thomas Stiehle: Yes, I appreciate the question. Our shipbuilding margins for the first 3 quarters have been stable. We saw 6.4%, 5.8% and 5.9%. We're just tweaking the guidance on what will happen as we play out in Q4. The [indiscernible] award will have incentives in there, some performance incentives and some capital incentives. Just the math of that is the timing of when that happens and how we book that, has incremental changes as we adopt the capital projects, the CapEx incentives and how we book that. So we're probably being a little conservative on that front, and we're trying to guide the Street as where we could land depending on the timing of those awards. We don't see some stepbacks right now. Through Q3, we've booked our performance for cost and schedule. And we're just reiterating the guide that we gave you at the beginning of the year for [indiscernible]. But no issues or concerns, expect to kind of finish up around the midpoint as we go forward here. Operator: Our next question comes from Scott Deuschle with Deutsche Bank. Scott Deuschle: Chris, relative to that 15% throughput target, are you looking for a similar number from both Ingalls and Newport News? Or is that target materially different between the 2 yards? Christopher Kastner: No, they actually are ending up at about the same place. So that doesn't often happen. But yes, they're ending up in about the same place. And it's pretty equally distributed between increased outsourcing and performance of the labor force. So yes, it's been pretty equal. Scott Deuschle: Okay. And then relative to the reduction from the 20, was that also equal? Or did one of the yards see like slightly less improvement than was expected? It sounds like fairly equal as well, but just curious for that. Christopher Kastner: Yes. Yes, fairly equal. Scott Deuschle: Okay. And then, Chris, after you raised the wages for your workers in Newport News, did you see any other local area industries respond in kind by also raising wages? Just trying to get a sense as to whether you're maintaining a consistent spread above the market wage rate as a result of those increases or if the market is also already eating into that at all? Christopher Kastner: Yes. The market has not materially adjusted such that it's impacted our hiring in Newport News. It's been pretty positive at Newport News and the effect of those wages has been positive and reduced attrition. But we're probably most excited about repositioning the experience level of the workforce where we have more experience, but we're also hiring about 50% out of what we call the pipeline, which are the regional workforce development centers, the apprentice schools and the high school programs, which is very positive. So Newport News labor is doing well, kind of cautiously optimistic, and we hope to keep it going. Operator: Our next question comes from Myles Walton with Wolfe Research. Myles Walton: Tom, on cash flow -- on the cash flow flatness implied in 2026, maybe just give us a little bit of a color there. Obviously, an assumption that earnings will grow, CapEx, I would have thought maybe steps down a tad. Is there an offset to that to kind of keep in the flat range? And then a couple of years back, there was a bigger target for cash flow in the $700 million to $800 million range. Is that something that can only arrive with something like the [indiscernible]? Thomas Stiehle: I appreciate the question on that. Yes. So we brought back more than a guide, an annual guide here for 2-year guide. A piece of that is just with 5 quarters, this quarter this year. And next year, as the awards come through, we watch performance for Q4 and then we set the trajectory for next year, we wanted to kind of settle the Street on where we think we're going to be. We've talked about the book of business we have, the performance where we stand. I think it's consistent that we'll have a run rate here about $600 million between the 2 years. We'll just see what hits this year versus kind of next year between receipts and the awards. So I'm comfortable with that right now. Relative to your math, the revenue does grow here. There is a lot of moving parts in there between the working capital that I have, the CapEx -- and again, the timing of receipts and the performance for the next 5 quarters, that plays into all of that here. But generally speaking, there's -- I'm comfortable with where we're at. It's a conservative guide, I would tell you, for 2026 as we go forward here, I really want to close out the year, lock on our plan, get the awards from the customer, which has both opportunity R&Os around that. And then we'll give you more color on that in the February time frame. Relative to your comment on the $700 million to $800 million, as we get back, obviously, the top line is growing, that's good. We've kind of hinted here that the 4% has some good tailwinds. And you see for the first 3 quarters of this year, it's over 6%. So we'll give you increased kind of guidance on that in the February time frame. But the top line will grow kind of meaningfully. And the major piece that will change that cash flow inflection in the medium to long term will be the return of the profitability. We expect incremental profitability from year-to-year. And as we continue to retire the pre-COVID contract work, the new contracts are aligned with the efficiencies and the schedules and the materials that we see. And as we get into those contracts, we start kind of booking more conservatively. But as we get into those contracts 3 to 5 years out, we will see us getting back to more traditional expectations of profitability in shipbuilding. Obviously, higher top line, higher bottom line, and that's where we get back to the cash flows that you've kind of hinted here on the tail end of the decade here, so okay. Myles Walton: Okay. Got it. And then, Chris, maybe one for you, and I don't know if you can answer this one either, but the President has recently quoted saying he's going to have an executive order moving aircraft carrier designs back to steam from emails. I'm just curious, what carrier could that cut over into if that was actually a change that was going to take place? Christopher Kastner: Yes. So again, I probably don't need to comment on that directly. What I will say is, we're going to build whatever the Navy asks us to build. So if they ask us to code over e-malls or weapons elevators, we'll work with them to do it the most intelligent way and cut it over in the right way. But again, we're going to build what they ask us to build. Operator: Our next question comes from Gautam Khanna, TD Cowen. [Operator Instructions] Gautam Khanna: Guys, I was wondering if you could update us on a couple of things. One, did you receive the modules for CVN-80 that were delayed in the quarter? Christopher Kastner: We did. We did. We're -- we will install those in Q4 and to get back on the erection schedule for that both. So yes, we did receive the modules. Gautam Khanna: Terrific. And could you give us the net EACs by segment? Thomas Stiehle: Yes. So the net EACs that we had here were gross favorable was 37%, unfavorable was 40%, net of minus 3%. And that was made up Ingalls at positive 6%, as I said in my remarks, Newport News at minus 13%, those in the remarks as well as NTA at positive 4%. Gautam Khanna: Okay. Sorry, I missed that. And then I was just curious, Tom, on the Q4 implied shipbuilding EBIT, pretty wide range, but you did mention that it's going to be somewhere around the midpoint with or without the submarine contracts signed. Is there the high end, is that like what would get you to the high end of the implied range? And is there any reason to think that the extremes are actually in play? Thomas Stiehle: Yes. I appreciate the question. We gave you that guide at the beginning of the year in February. We have reiterated in May and July now here. We just have not changed that. I mean the math of the extremes would take a lot of things break in one way or another way. I would stick to the comments I had earlier here. We've been very consistent from quarter-to-quarter. I don't really expect this to inflect significantly up or down from here for the end of the year. As I said earlier, I do expect as we go from year-to-year an incremental improvement here. But we understand how we're operating. The performance has been really steady right now, and we're razor-focused on what we have to do for the end of the year to close out within our guidance ranges that we gave. Gautam Khanna: Perfect. And one last one, Tom, just I know you talked about the pre-COVID and post-COVID contract mix. Can you remind us what it is this year? And what do you expect it to be in 2026? Thomas Stiehle: Yes. We haven't given specific percentages on that, but we've said that when we get to 2027, there'll be more work post-COVID than pre-COVID, it will be over 50%. So you can do the math of that of where we stand. But we're ramping from being in the 80s and 70s down to that by 2027. And it's fairly significant to retire those boats and ships. Every time we sell one off, obviously, there's less pre-COVID work and then the opportunity set is in front of us there with the new contracts aligned to performance and schedule and cost that we see here. Operator: Our next question comes from Noah Poponak with Goldman Sachs. Noah Poponak: Just one follow-up on kind of everything happening here. Can you talk about why philosophically or mechanically and whether that's mechanically in the actual work or the nature of your contracting, why would throughput and top line growth improve before faster than the margins? Christopher Kastner: Yes. That's an interesting question. The throughput assumptions we have in our schedule support the EACs, and we have risk and opportunity around them. So if we can execute on those throughput targets, then it mitigates a significant amount of risk and there's potential upside, but you have to evaluate each every quarter. It's not a perfectly aligned metric tied to margin performance. Noah Poponak: Okay. Yes. Just sort of trying to better understand the much better top line and your confidence in that continuing with the shipbuilding margin being kind of just flat through the year. And I guess I would -- improve the labor, I guess, would maybe immediately drive higher throughput, but then you need the labor to refine and get better before it impacts the margin was maybe a thought or I didn't know if it's just the nature of percentage of completion accounting. It's just sort of an interesting dynamic in the financials. Christopher Kastner: Yes. So, I think it's an interesting question. Tom can chime in here as well. But 1 quarter doesn't win the day, right, in an EAC. And you're running risk and opportunity throughout the entire program. So while, yes, you're retiring risk. And if you're achieving your throughput targets and achieving your sales targets, you are retiring risk, but you aren't necessarily going to convert that into profitability in your EACs. Noah Poponak: So perhaps 1 quarter is evidence of a start of everything you're doing, but you need more than that to put it in the actual booking rates. Christopher Kastner: That's why I consider this a stable quarter. It's stable, but we need to continue to keep our head down and work. Thomas Stiehle: I'd comment on the back of that, too. I'm with Chris, Noah, it's 13 weeks. Some of these contracts have 2 to 6 years to go. It's good -- it's actuals plus estimate to complete and you put a quarter in the books that's a solid quarter, which is good. Expect that trend to continue if not improve, but that wouldn't necessarily mean that immediately we change the EACs. Incrementally, we'll continue with good performance to retire down the risk. And as the cost risk kind of goes away, that's the catalyst to really take the booking rates up. So I like the trends that I'm seeing right now. And quarter-over-quarter, as we continue to see that, that's what's going to drive the incremental improvement of the bottom line. Thanks for the follow-up. Noah Poponak: Yes, yes. It's interesting. The appreciate the detail. Operator: I'm not showing any further questions at this time. I would now like to hand the call back over to Mr. Kastner for any closing remarks. Christopher Kastner: Thank you for taking the time to join us today and for your interest in HII. At HII, we're committed to delivering on our strategic priorities and aim to drive growth, improve efficiency and create value for all our stakeholders. Please have a safe and happy Halloween weekend ahead. Operator: Thank you very much. That concludes today's call. You may now disconnect your lines.
Operator: Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to the Sun Communities Third Quarter 2025 Earnings Conference Call. At this time, management would like me to inform you that certain statements made during the call, which are not historical facts, may be deemed forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Although the company believes the expectations reflected in any forward-looking statements are based on reasonable assumptions, the company can provide no assurance that its expectations will be achieved. Factors and risks that could cause actual results to differ materially from expectations are detailed in today's press release and from time to time in the company's periodic filings with the SEC. The company undertakes no obligations to advise or update any forward-looking statements to reflect events or circumstances after the date of this release. Having said that, I would like to introduce management with us today: Charles Young, Chief Executive Officer; John McLaren, President; Fernando Castro-Caratini, Chief Financial Officer; and Aaron Weiss, Executive Vice President of Corporate Strategy and Business Development. [Operator Instructions] As a reminder, this call is being recorded. I'll now turn the call over to Charles Young, Chief Executive Officer. Mr. Young, you may now begin. Charles Young: Good afternoon, and thank you for joining us on today's third quarter earnings call. This is my first earnings call as Chief Executive Officer of Sun, and I want to start by saying how excited I am to be a part of this exceptional team. Since stepping into the role on October 1, I spent my first month listening, learning and engaging across the company. I have already visited a large number of our communities, and I look forward to continuing my tours. My first few weeks reaffirmed what drove me to Sun, the strength of our teams, the scale of the platform, the quality of our communities and the opportunity in front of us. It is clear that Sun's success has been built on a strong foundation, underpinned by a deep commitment and dedication to our residents and guests. I'm thrilled to be joining at this pivotal moment in the company's journey, and I look forward to building on Sun's strong legacy. My near-term focus includes 3 key areas: one, deepening my understanding of the MH and RV business, ensuring I'm grounded in every aspect of our company's operations and culture; two, supporting our team as we deliver on our strategy and commitments; and three, assessing opportunities for disciplined long-term growth. I am grateful for the warm welcome I have received from the Sun team. I look forward to working together to continue to drive excellence in all that we do for the benefit of our team members, residents, guests and our stakeholders. With that, I'll turn the call over to John and Fernando to review our third quarter results and outlook in more detail. John? John McLaren: Thank you, Charles. On behalf of the entire team, we are thrilled to welcome you to Sun Communities. Your deep understanding of and experience in the real estate industry and fresh perspectives have already been additive, which will help guide Sun through this next exciting chapter of growth and value creation. Turning to our performance. I'm very pleased with our third quarter results. Sun reported core FFO per share of $2.28, exceeding the high end of our guidance range, driven by strong same-property performance in North America and the U.K. For the third quarter, within our North American same-property portfolio, NOI increased 5.4%, led by manufactured housing, which delivered 10.1% NOI growth and maintained a solid 98% occupancy. Through the end of September, 50% of our MH residents have received their 2026 rent increase notices, averaging approximately 5%, reflecting the continued strength and stability of our portfolio. In our RV business, same-property annual RV revenue was up 8.1%. Transient RV revenue performed in line with expectations, declining by 7.8%, with roughly half of this decline due to our strategy of reducing transient sites as we continue to successfully convert transient guests into RV annuals. As I've shared before, the volume of RV transient annual conversions has returned to a more normalized growth pace following several record conversion years. RV same-property NOI declined 1.1%, and we remain focused on cost controls with same-property RV expenses down year-over-year. For 2026, annual RV rental rates are being set with an estimated average annual increases of approximately 4%. In the U.K., same-property NOI grew 5.4%, supported by 4.8% revenue growth and 4% expense growth. While home sale volumes are lighter given broader macro challenges and when compared against recent record volumes, our team continues to maintain elevated market share by providing differentiated services and amenities at Park Holidays' high-quality communities. Our Park Holidays homeowners have received 2026 rent increase notices averaging approximately 4.1%. Our U.K. team continues to execute exceptionally well as they strategically shift the earnings mix toward recurring real property income while driving operational excellence. I want to take a moment to thank our entire team for the discipline and dedication towards achieving our goals and continuing to position us for a strong future. Their commitment to operational excellence, including expense discipline and top line growth, resident and guest relations and accountability is what enabled us to deliver these great results. With that, I will turn the call over to Fernando to review our financial results and updated 2025 guidance in more detail. Fernando? Fernando Castro-Caratini: Thank you, John. I will start with an update on capital deployment and our balance sheet. Following the initial safe harbor closing on April 30, we completed the disposition of the remaining 9 delayed consent properties for total proceeds of approximately $118 million, with the final closing taking place on August 29. In addition, during the third quarter, we sold a land parcel for $18 million. In October, we acquired 14 communities for approximately $457 million using 1031 exchange proceeds. These properties include 11 manufactured housing and 3 annual RV communities, all located in existing Sun markets, allowing us to leverage our teams, scale and infrastructure. In the U.K., during and subsequent to the quarter, we purchased the titles to 7 properties previously held under long-term ground leases for approximately $124 million. Year-to-date, we have purchased 28 ground leases for approximately $324 million and agreed to purchase 5 additional ground leases for approximately $63 million with closing expected by the end of the first quarter of 2026. These transactions create meaningful financial and strategic flexibility and eliminate significant lease complexity. As of September 30, total debt stood at $4.3 billion with a weighted average interest rate of 3.4% and a weighted average maturity of 7.4 years. Pro forma for the closed transactions and our common distribution in October, our net debt is approximately $3.7 billion, and our net debt to recurring EBITDA on a trailing 12-month basis is approximately 3.6x. Under our $1 billion authorized share repurchase program, we have repurchased approximately 4 million shares for $500 million year-to-date at an average price of $125.74 per share. We continue to view buybacks as a way to enhance long-term shareholder value while maintaining balance sheet flexibility. Turning to our full year 2025 guidance. Based on our strong third quarter results and recent capital actions, we are raising our core FFO per share expectations by $0.04 at the midpoint to a range of $6.59 to $6.67, reflecting continued operational strength and disciplined execution of our strategic priorities. North American same-property NOI growth guidance has been increased to 5.1% at the midpoint, up 40 basis points from the prior quarter, driven by solid performance across both manufactured housing and RV segments. Manufactured housing same-property NOI is now expected to grow by 7.8% at the midpoint, reflecting continued outperformance through the third quarter and steady demand across the portfolio. RV same-property NOI guidance has been raised to a 1% decline at the midpoint, supported by stable third quarter results and improving transient trends relative to prior expectations. U.K. same-property NOI guidance has been increased to approximately 4% at the midpoint, reflecting better-than-expected third quarter performance and continued real property strength in the Park Holidays platform. For additional details regarding our full year guidance, please see our supplemental disclosures. Our guidance reflects all completed acquisitions, dispositions and capital markets activity through October 30. It does not include the impact of potential future transactions or capital markets activity, which may be reflected in research analyst estimates. I will now turn the call back over to Charles for concluding thoughts. Charles? Charles Young: Thank you, Fernando. The team delivered a strong performance in the third quarter, and we are encouraged by the positive momentum. I am incredibly excited to be at Sun, and I look forward to providing updates as we work together to drive consistent growth for years to come. We have concluded our prepared remarks, and we will now open the call for questions. Operator? Operator: [Operator Instructions] Our first question is from Steve Sakwa with Evercore ISI. Steve Sakwa: Charles, I realize you've only been on the job 30 days, but I'm just curious kind of your initial observations and some of the positives and maybe challenges that you've seen? And are there some kind of low-hanging fruit items that maybe you've uncovered given your background at Invitation that you think you can implement at Sun over the next 6 to 12 months? Charles Young: Great. Steve, thanks for the question. Hello to everyone. Let me start with how excited I am to join Sun's outstanding team. And Steve, I appreciate the question as I'm sure many have been thinking it or wanted to ask it. So congrats on getting it out there. As you mentioned, I've been here for all of a month. So please allow me to level set and give you a few of my early thoughts, clarify what I've done and where I want to focus in the near term. Let me start with the quarter. As you can see from this quarter's performance, the team is executing at a high level. So well done to the leaders on the call with me here today and to the entire Sun team. It's great to join such a high-performing team. So my first priority really has been around how do I support the team to finish our commitments and finish the strong -- the year strong 2025. As I mentioned in my earlier remarks, my first 30 days have been on focusing and on engaging with the team and getting up to speed on all aspects of Sun's businesses. Over the past several weeks, I've been on the road visiting our properties. I met with apartment leaders, spending time in the field with our team members. It's incredibly valuable for me to know our business up close and from the ground up. And I've been impressed by the strength of the team at all levels as you ask about what I'm seeing. The scale of the platform feels familiar, which is great to see and the quality and location of our communities really stands out to me, and I plan to build on all of these strengths. So it's been exciting to validate what originally drew me to Sun. Looking forward, so as we look beyond my first 30 days and next 30 and beyond that, my long-term focus is on driving consistent and profitable growth that creates long-term value. And Steve, as you know me and others know me, my background is in residential housing. So operational excellence and resident and guest satisfaction will remain at the heart of everything we do. Internally, I'm a big believer in the value of culture, one that continues to reflect Sun's values while empowering our teams to deliver their best for our residents and guests. And from a financial perspective, I plan to stay disciplined in how we allocate capital. Any future enhancements will be thoughtful, data-driven and focused on creating long-term value for our stakeholders. But as I think about it all, and let me end with this because I know it's kind of early in my time, what really stands out from my experience is that in today's world, affordable living and attainable experiences that Sun provides is needed now more than ever. The value proposition offered by our high-quality communities and team members is unparalleled. And what this quarter performance shows you with our 98% occupancy is that the demand for affordable housing has never been greater. So I'll end here. I'm generally excited to join Sun at such a pivotal time in the company's history and truly believe in the exceptional opportunity ahead of us. Operator: Our next question is from Jamie Feldman with Wells Fargo. James Feldman: Great. I appreciate the thoughtful response there, and congratulations on the new role. I guess as you're thinking about the strategy of the company, what are your thoughts on the U.K. or maybe for the broader group there, what are the latest thoughts on the U.K.? I know you've been buying up some of the ground leases. But is this still a long-term hold for the company? And I know the growth looks pretty good actually, but maybe just share your latest thoughts. Charles Young: This is Charles. Why don't I jump in and just give you my initial kind of what I've done to date on that, and then I'll turn it over to Aaron to get into the ground leases. In my first 30 days, I've had a chance to engage with the Park Holidays team. And as I mentioned, I'm evaluating all aspects of our business, including the U.K. And I'm encouraged from what I've seen. The team's discipline, execution and focus stands out. Performance has been solid, and the team has executed on our strategy to grow recurring real property-based revenue. Again, I'm going to stay high level. I'll spend more time digging in. Aaron, you can fill in a little bit on the ground lease approach. Aaron Weiss: Yes. Thanks, Charles. Year-to-date through October, we've now acquired 28 ground lease properties and have another 5 under contract, which will bring the total purchases to 33. All these transactions are accretive to our earnings, were completed at attractive yields. And as Charles, I think, alluded to, meaningful flexibility to manage the portfolio strategically over time. Most importantly, from a strategic and flexibility perspective, following all of these closings, 49 of our 53 U.K. communities will be owned on a freehold basis. To comment in a way that John and I have commented previously, consistent with what we have said in the past and in light of our continuing strong performance despite those headwinds, we have the best team in the business in the U.K. They are managing the best assets in the market and are focused on executing an operational plan to ensure as with our entire portfolio that we are optimizing our properties and maximizing value for our stakeholders. Operator: Our next question is from Jana Galan with Bank of America. Jana Galan: Congrats and welcome, Charles. A question on the transaction market, given you've been very active this year in both the dispositions and acquisitions. If you can maybe talk to kind of pricing, what's out there and any kind of additional opportunities? Charles Young: Appreciate the question. Thank you. We just want to highlight that the most important part of what we've announced from a transactional perspective is that we've been very disciplined and selective in deploying the capital. These are all high-quality assets. They definitely fit our long-term strategy. Leveraging the long-term industry relationships that we've had. We are seeing an increase in the transactional activity in the market, but the overall opportunity set of properties that meet that acquisition criteria is consistent with what we have seen historically. The transactions we've announced and the transactions we are seeing that meet our criteria are much more likely to be in the single asset or small portfolio opportunities. We are looking thoughtfully and prudently at adding communities in our portfolio to the extent they meet those criteria. What we did see from the transactions we executed on was cap rates in the low 4% area. We would expect that to continue to be the area in which we would continue to transact. And as we noted in our release, we do have another $50 million of potential 1031 transactions in the pipeline. But beyond that, I would suggest that the overall environment is very consistent with what we've been seeing, though we are able to acquire these single assets or small portfolios, we will remain selective, and we aren't seeing significant large portfolios of assets that meet our underwriting criteria, but we'll continue to underwrite and look thoughtfully at these opportunities. Operator: Our next question is from John Kim with BMO Capital Markets. John Kim: I wanted to ask about your transient RV performance, which was better than expected. Have you had an impact from the Canadian customer base this quarter? What is your engagement like with your customers there? And what are you seeing? And can you remind us about the seasonality of the Canadian transient RV customers? Do you have more in the summer or winter months? John McLaren: Yes. Thanks, John. This is John. I'll respond to that. First, I appreciate what you said. I'd like to say again how pleased I am with -- when we talk about RV -- annual RV revenue being up 8% in the quarter. Our RV NOI overall is performing towards the higher end of the guidance range we provided. As you know, I think most people know that our Canadian guests represent less than 5% of total transient and 4% of our RV annual business. And as I've shared, we have experienced softness with Canadian customers coming down to Florida. So back to your question about sort of seasonality. We addressed some of that back last winter as well as some of that slowness in the Northeast this summer. But I will tell you, we are -- we've been sort of hyper focused on the annual RV side on retention in 2025. I think you all have heard me talk about that before. And that has led to overall good net conversion results with converting a net almost 700, okay, so far this year as well as we've been focused on with some of the short-term Canadian softness that we've dealt with just more -- getting more domestic RVs to help fill that Canadian guest gap. And then what we're seeing going out forward is a little bit stronger booking trends on the transient RV side, okay, over recent weeks as well as some really encouraging activity in terms of renewals of RV annuals coming into the next season. So it feels like the work that we're doing where we focused our attention over the course of 2025, and I can't emphasize enough, you can't just flip the switch and do well retention. It takes a year to build that up, okay, which is what we've done. So we've put in that work, which is why we're seeing the trends that we're seeing now. And so I'd like to say that we're a little more positive than we were at this point last year. John Kim: Given your exposure in Michigan and some of the Northeast states, do you have a pretty even seasonality pattern with your Canadian RV customers? John McLaren: I mean it's going to be mostly like -- it's going to be mostly in the first quarter, and it's going to be -- and then some in the third quarter up in the Northeast, but it's not really Michigan. It's more like Maine and places like that. Operator: Our next question is from Eric Wolfe with Citigroup. Eric Wolfe: I was just wondering if you could talk about how you came up with 4% annual RV increase for next year. If there's any reason why it's down from, say, 5.1% the previous year, if you're trying to prioritize occupancy or -- just trying to understand the strategy around that increase. And then also, at what point you have good sort of data on the acceptance of that? So meaning like by the time we get to the end of the fourth quarter or first quarter, do you generally know sort of what your annual RV revenue will be for the year? John McLaren: Yes. Great question, Eric. Thanks for -- this is John again. Specific to RV, our rent increases are intentionally set to continue reinforcing what I was mentioning earlier on retention, okay? Excellent operational execution remains key in retention, ultimately net RV annual conversion, which means the experience that our guests have at the properties, frankly, is far more valuable than anything we can do from an external marketing perspective. This is why I'm so focused on retention. You have heard me say before that the best revenue-producing site that we can gain is the one we never lose, okay? And as I shared, we believe the strategy is paying off, and we are, in fact, running ahead of last year's renewal pace for RV annuals. And this all kind of culminates, which is why we've been prudently tempered, as I would say it, with a 4% RV annual increase for 2026. I mean it is retention really remains one of the most valuable drivers for consistent long-term growth for us, particularly in the RV space. Operator: Our next question is from Adam Kramer with Morgan Stanley. Adam Kramer: Congrats, Charles, on the new role and looking forward to working together. I wanted to ask about just the drivers of the guidance raise for the U.K. business. And I recognize there's some moving parts there with the ground leases, but just maybe fundamentally, like what's happening with that business currently and sort of what's embedded in the new outlook versus the prior? Charles Young: Sure, Adam. The increase in same-property growth for the U.K. portfolio on the real property side is really a reflection of outperformance coming in the third quarter, and that's leading to the almost 180 basis point increase at the midpoint for NOI growth for the year. We saw stronger transient growth in the quarter as well as success from an expense containment perspective across utilities and supplies and repair. Adam Kramer: Great. And maybe if I could just sneak in a quick follow-up here. Just wondering about tax implications. I think you guys have bought about $580 million or so, and I think the gains from the safe harbor sale were to be in the $1.4 billion range. So just wondering maybe high level, is there a tax asset that can offset some of the liability here that you have from those gains? Aaron Weiss: [indiscernible] Thanks for the question. I think that was referring to the safe harbor potential tax liability. To follow on what we've talked about in the past when we announced the transaction and even prior to that, we started implementing a broad tax mitigation strategy. Some of those efforts were the 1031 exchange programs we've talked about. There was the May special distribution. And then throughout the year, beginning in early 2025 as well as through to now, we have been selling nonstrategic assets that have generated losses. We also have the ability to use NOLs. We're continuing to use those strategies. We're continuing to follow through. And as we've talked about before, the tax implications are generally in the year for the year. So we will continue to work through those as we move towards year-end and provide an update as appropriate. We would suggest we are very happy with how we've proceeded over the course of the year, particularly since the initial closing at the end of April this year. Operator: Our next question is from Michael Goldsmith with UBS. Michael Goldsmith: Welcome, Charles. Sticking with the U.K., can we just talk a little bit about the U.K. home sales environment? I noticed NOI from U.K. home sales were down pretty materially in the third quarter, so year-over-year. So is there -- is that a reflection of the environment overall? Or is there some kind of individual events that are weighing on that? John McLaren: Michael, it's John. Appreciate the question. Yes, I mean, as I've said in my prepared remarks, home sales in the U.K. are a little lighter than they were last year. But I have to emphasize, we are really pleased with the overall performance of the U.K. business. U.K. same-property NOI grew by 5.4% in the quarter. We raised our U.K. same-property NOI guidance for the balance of the year. Our team in the U.K. continues to execute exceptionally well. They've done a great job of strategically shifting the earnings mix towards stable recurring real property income while maintaining strong market share and pricing power despite what you're talking about is the challenging macro backdrop. But I do think this is really a tribute to the high quality of the portfolio, the exceptional service that happens on the ground by the team and the skill, performance, mindset inherent in that group of people that are led by Jeff, Richard and Chris. I mean, as you know, 2024 was the highest volume year of home sales for Park Holidays. And while 2025 volumes will be lighter, okay, than they were, I think they remain solid in line with our overall operational strategy in the U.K. One of the things kind of looking forward, we did have, as I think Fernando kind of alluded to, a strong 2025 vacation season in the U.K., and that may ultimately contribute to the pipeline for future home sales going out. Operator: Our next question is from Jason Wayne with Barclays. Jason Wayne: Just you reported $630 million in 1031 escrow at the end of the third quarter, netting this month's deals against that would suggest around $175 million of remaining funds. So just wondering if you turned down any deals this month or what's causing the delta between that and the $50 million remaining today? Aaron Weiss: Yes. So originally, thanks for the question. When we announced it, we originally put $1 billion into 1031 exchange accounts. And then we ultimately, as part of second quarter earnings, reallocated approximately $430 million into unrestricted cash, which left about $565 million earmarked for acquisitions. As part of this closing, it was about $457 million, and we do have some residual capital allocated to 1031s. As naturally part of these transactions, you do tend to over allocate 1031 funds for maximum flexibility. So we did expect a slightly less amount of actual transactions, but we ultimately executed on about 80% of those proceeds. In terms of our approach, I just want to reiterate, we're being incredibly disciplined and selective. The funnel we looked at over the course of 2025 was much larger than what we ultimately executed on, and we did not feel any pressure to move forward with any transactions that did not meet our long-term objectives. We have a lot of long-standing deep relationships across the industry throughout the organization, and we're able to leverage those, and we'll continue to leverage those to find these attractive communities on a one-off or small portfolio basis. So we're very happy with what we've landed on. And you can assume that for every deal we do announce and close, there were many transactions and communities we passed on because they did not meet our quality and underwriting criteria. Operator: Our next question is from Wes Golladay with Baird. Wesley Golladay: I just have a quick question on your land parcel sales. I know in the past, you were looking to be more of a developer and you may have some more inventory. Just wonder if you can quantify how much land you have left to sell -- for potential sale. Aaron Weiss: Thank you for the question. I think overall, we will continue to look to maximize value of unproductive assets. We've been very aggressive in exiting nonstrategic assets over the past 18 months in excess of $600 million of operating assets as well as land parcels. We wanted to highlight that we will continue to do that even as we look to grow the portfolio with high-quality communities and assets that we may acquire in due course. There may be smaller transactions like the one Fernando alluded to in his opening remarks, about $18 million, but we do not have substantial land assets you should be looking for, for sale. To the extent we do have some additional land, it will likely be adjacent to existing assets and may provide some incremental growth through expansion in the future. Operator: Our next question is from Brad Heffern with RBC Capital Markets. Brad Heffern: Welcome, Charles. On the regulatory side, there's clearly been an increased emphasis from this administration on housing affordability. Obviously, that's the main selling point of manufactured housing. I know the main impediment historically to supply has been at the local level, but I'm wondering if there's anything you're tracking at the national level or that could potentially be helpful that might come out of this. John McLaren: Brad, it's John. I appreciate the question. I mean to answer your question directly, the answer is no. I mean there isn't a lot that's really changed. I mean I think you know that we've been an active participant in anything related to affordable housing as it relates to government support. We'll continue to be an active part of that. But in the meantime, we are obviously very skilled, experienced in being able to work at the local level, and we have shared a lot at the local level through some of the things that we've done in the past that we can be -- well, I would just say we're always ready, okay, because we possess the skills, the experience and the know-how if something does get turned up, if you will, to help boost that and accelerate that process. But for right now, we'll just be prepared. Operator: Our next question is from David Segall with Green Street. David Segall: You still have room to run on the buyback authorization, but it seems like you paused the buybacks in October. So I'm just curious how you're weighing -- utilizing the remaining runway on the authorization versus additional acquisitions. Fernando Castro-Caratini: Thank you, David. You can expect us to continue being prudent with -- from a capital allocation perspective. I'd love to remind everyone that since the Safe Harbor sale, we have paid down over $3 billion of debt, meaningfully reducing leverage and removing our floating rate debt exposure, returned over $1 billion of capital to shareholders via special distribution and share buybacks and an over 10% increase to Sun's common distribution, acquired over $450 million of high-quality assets, acquired ground leases in the U.K., significantly improving financial and strategic flexibility for that portfolio. So we'll continue weighing right, all options in front of us from a capital allocation perspective and be thoughtful as it relates to how that next dollar is allocated. David Segall: Great. And just with regard to expenses, can you talk about what's driving the cost savings? You talked about it for the U.K. business in particular, but I'm curious for more broadly. John McLaren: Yes. Thanks, David. This is John. I think more broadly, speaking specifically to like COM expenses within the operations side, we have expanded what we said we're going to do. We're sort of towards the top end of that range and much of that has lie in payroll-related line items, various supply and repair categories, tech-related costs. But one of the bigger pieces is meaningful standardization, expansion and adoption of our procurement platform, which encompasses many different expense-related items centered on property operations. And additionally, I would share that we continue to harness transparency and the power of our technology to drive additional operational efficiencies. So I'm really pleased with how it's going. We will continue to focus on additional expense savings, but we're also very focused on additional revenue growth opportunities, okay? And the results of which are reflected in what you're seeing today in terms of our results, not just for the quarter, but for the whole year and the performance we've had in 2025. And some of that on the top line has come in the form of retention, occupancy gains, rate gains, revenue growth as well as the great job the team has been doing from a collections perspective, which has turned into overall savings within bad debt. So I mean, to really sum it up for you, David, it's fundamentals and execution. They are the focus and what you're seeing happen in real time. You're seeing this happen in real time to our overall bottom line results. Operator: Our next question is from Tayo Okusanya with Deutsche Bank. Omotayo Okusanya: Charles, welcome aboard. The transient RV business, could you just talk a little bit about what trends you're seeing at this point, again, whether you're kind of at the point where we're kind of getting towards the demand normalization everyone is looking for or whether for whatever reason that hasn't come back and kind of what may be delaying the eventual demand normalization of that business? John McLaren: Yes. This is John. I'll start. Great question. It's actually a question we've been asked pretty much all year long. And I think that the best way that I would answer that is, again, we're really happy with our RV same-property NOI performance being at the top end of that range, okay? We've done really well coming off of 3 record years of transient RV conversions and still growing them. On top of that, we've got 23,000 transient sites we can convert in the coming years if we want to, okay? And so when we think about -- I would tell you, what is normalization, what is stabilization, I would just say, well, what is it, okay? Because it's a balance between what we do from both an annual side and the transient RV side. And the goal is to maximize what we can do from an overall RV NOI. And I think what you're seeing happen and what I've shared earlier in the call has been, we are seeing improved trends, not just on the annual RV renewal side, but as well as our current pacing that we're seeing on the transient side. So it's a difficult question to answer. But I think what we're seeing right now is actually pretty positive. Fernando Castro-Caratini: And Tayo, if I could add, we are actually seeing an improvement from a forecast perspective for the full year for just transient RV revenue performance. When we last spoke in July, we were forecasting about a 9.25% decline in revenue. That has improved over the last 3, 4 months by about 30 basis points for full year performance. So we're actually seeing slight improving trends from that standpoint. Operator: Our next question is from Steve Sakwa with Evercore ISI. Steve Sakwa: Just -- and I'm sorry to ask this on kind of the RV business. So I believe the RV business is down 2.8% year-to-date, but the forecast for the full year calls for down 1%, which was a 50 basis point improvement. So that implies a pretty big, I think, acceleration or improvement 4Q to 4Q. Can you just maybe speak to what's driving that, number one? And then secondly, I know you guys have a lot of cash sitting on the balance sheet that's not restricted. How do we just think about that use of cash kind of moving into '26? Fernando Castro-Caratini: So Steve, you're right as it relates to expectations for fourth quarter NOI growth for our same-property RV portfolio. The main driver of that will be -- or one of the drivers for that will be transient growth where we're expecting a smaller decline than what we have seen on a year-to-date basis. That would be the largest driver. Charles Young: And Steve, on the second question on the capital allocation. Again, I'm going to stay high level because of the time that I've been here, but I've been digging in with the teams and my perspective has always been to take a disciplined approach that balances growth, operational needs and shareholder value. And what I've seen so far is the team has executed very effectively across all of those areas. It's been very disciplined. And I expect that balanced and disciplined approach to continue as I dig in and get a deeper understanding with the teams. And we'll continue to review that framework, work closely with the Board and evaluate all options for long-term shareholder value. Operator: Our next question is from John Kim with BMO Capital Markets. John Kim: It's a followup. Charles, I wanted to know what you thought of the rental home business within the MH communities. Is that's something that could be built up within Sun? Charles Young: Yes. Again, this is part of my deep dive into the business. I've obviously, with my background, I have been spending a lot of time with John and Bruce understanding that business and how it works. Obviously, I have history and perspective. It seems to be executing really well, and I'm asking some questions as to kind of where we go from there. I don't have much more to add at this point, but it is something that I am particularly interested in given my background. John, do you want to add anything or? John McLaren: Yes. I would just -- I think you know this, John. I mean, I've been around that program since its inception here at Sun. And one of the things I think is super important, one of the biggest benefits that it brings to the company is a key traffic driver to our communities, okay? Because we have lots of prospects that come to the property, thinking they might want to rent it, ultimately end up purchasing a home and become a homeowner. So that in itself is an important part of that program. And like I said, it drives a lot of traffic to us. So it's something that we will continue to have as one of the tools that's going to drive growth across the portfolio. John Kim: And if I could just follow up on the U.K. ground lease acquisitions. It provides you with some earnings accretion and flexibility. Can you just comment on what that flexibility means? Is that on the financing of the asset? Is it flexibility in how you may spend capital to develop on the asset? Or just does it give you just more value when -- if and when you decide to sell some of these communities? Aaron Weiss: Thanks for the question. It's Aaron again. Yes, to all of those questions. I think fundamentally, we acquired the business with these in place. They were part of our original underwriting. And due to our capital position and the opportunity presented by the current landlords, we're able to acquire them, incredibly helpful for the team on the ground in terms of managing the portfolio and owning them on a freehold basis. And certainly, to the extent we continue to assess the portfolio, just as we've done in the U.S., we've considered certain single asset, noncore asset sales and things like that. We will continue to do that. It provides that flexibility and ultimately, just increases it strategically and certainly remove some incremental lease payments we were making overall. So it does check a lot of boxes, both for the team here as well as for the team in the U.K., simplifying and improving flexibility and strategic optionality. Operator: Our next question is from Brad Heffern with RBC Capital Markets. Brad Heffern: I may have missed this, but did you give the cap rate on the recent acquisitions? And also, can you give a rough yield, I guess, on the ground lease purchases? Aaron Weiss: Aaron, again, thanks for the question. We did comment and said we were acquiring in the low 4% cap rate area, which is consistent with what we've shared with the market over the last few months from an expectations perspective. And in terms of the ground leases in aggregate, roughly in the same range, slightly higher from a yield perspective, low to mid-4%. Operator: Thank you. There are no further questions at this time. I'd like to hand the floor back over to Charles Young for any closing comments. Charles Young: Thank you for joining our call today, and I appreciate the welcome messages from each of you. I look forward to seeing many of you in person at the upcoming conferences over the next few weeks. Thank you. Operator: This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.
Operator: Thank you for standing by, and welcome to Enterprise Products Partners L.P.'s Third Quarter 2025 Earnings Conference Call. [Operator Instructions] I would now like to hand the call over to Libby Strait, Vice President of Investor Relations. Please go ahead. Libby Strait: Good morning, and welcome to the Enterprise Products Partners conference call to discuss third quarter 2025 earnings. Our speakers today will be Co-Chief Executive Officers of Enterprise's General Partner, Jim Teague and Randy Fowler. Other members of our senior management team are also in attendance for the call today. During this call, we will make forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934 based on the beliefs of the company, as well as assumptions made by and information currently available to Enterprise's management team. Although management believes that the expectations reflected in such forward-looking statements are reasonable, it can give no assurance that such expectations will prove to be correct. Please refer to our latest filings with the SEC for a list of factors that may cause actual results to differ materially from those in the forward-looking statements made during this call. And with that, I'll turn it over to Jim. A. Teague: Thank you, Libby. Good morning. Before we dive into our third quarter results, I want to take a moment to recognize the upcoming retirement of Tony Chovanec. Tony has been more than a colleague. He's been a dear friend and a guiding force at Enterprise for nearly 2 decades. His leadership in building our Fundamentals and Supply Appraisal team helped steer Enterprise through the shale revolution and set the standard across the industry. We wish him all the best in the next chapter and thank him for his invaluable contributions. Tony will be with us through the start of next year, but we wanted to make sure we had an opportunity to congratulate him on an incredible career on this call. Tony Chovanec: Jim, I really appreciate those kind words and all you all here around the table. I really appreciate you all. People on the call, the analyst community, our producers, our customers around the world. I'm forever grateful for the interest and respect that you've always shown for in our fundamentals and our supply appraisal work sincerely. Jim, I want to thank you for years ago when we sat down at your table, recognizing early on that we had something that we now know is the shale revolution. And as you put it, you had a bunch of reports on the table in front of you, and you told me something is different this time and given me the chance to establish a Fundamentals team that I've been so honored and frankly, humbled to be part of, and I really mean that. I guess last but not least, Corey Johnson, the Data Science team that what you all have taught me over the last 4 years, I'll take with me the rest of my life. So thanks to everyone. Thank you, sir. A. Teague: Yes, I'm about to crack, Tony. Now the results. Today, we reported adjusted EBITDA of $2.4 billion for the third quarter, generating $1.8 billion of distributable cash flow, providing 1.5x coverage. Additionally, we retained $635 million of DCF. When I look at the third quarter results, I'm reminded of the long anticipated projects we're commissioning in the fourth quarter. Third quarter results were lighter than expected, but far from discouraging as we look ahead to year-end and into 2026. After a 3-month delay, Frac 14 is now in service and will contribute to our results going forward. The Bahia pipeline and Seminole pipeline conversion will come online in tandem, adding capacity to our NGL pipeline system and returning capacity and flexibility to our crude oil pipelines. We originally planned for these projects to be completed around midyear, but we look forward to completing them in the remaining months of 2025 and what they'll deliver. Our PDH plants are looking up with PDH 1 averaging 95% of nameplate, and PDH 2 showing similar promise as it resumes operations following a third quarter turnaround to address coking in the fourth reactor, an issue the technology licensor order has committed at the highest levels to resolve. If you add all that up, I see a lot of upside that was pushed out of the third quarter. As you know, our petrochemical facilities at Mont Belvieu have faced their share of opportunities and challenges. Enterprise is built on engineering and operational excellence, and Randy and I couldn't be more proud of the incredible work our petrochemicals teams have done to bring these assets up to our standard. We've never been more confident in the team we have in place today. With the Neches River terminal set to be completed next year, we're nearing the end of a multiyear, multibillion-dollar capital deployment cycle that began in 2022. These strategic investments, including pipelines, marine terminals and key acquisitions puts us in a great position to capitalize on long-term growth from the Haynesville and Permian Basins. Finally, I'm sure Randy is going to hit this, but I kind of enjoy stealing his thunder from time to time, to say this morning, we announced a $3 billion increase to our buyback program, taking it from $2 billion to $5 billion. While we see plenty of opportunities to efficiently expand our footprint in the future, we are also well positioned to continue our strong track record of returning capital to our unitholders. Growing distributions will continue to be our primary focus, but this expanded program enhances our flexibility to grow buybacks alongside rising free cash flow. We're excited about the next chapter, not just in the years ahead, but in the decades to come. And with that, I'll turn it over to Randy. W. Fowler: Thank you, Jim, and good morning, everyone. Starting off with the income statement. Net income attributable to common unitholders was $1.3 billion or $0.61 per common unit on a fully diluted basis for the third quarter of 2025. Adjusted cash flow from operations, which is cash flow from operating activities before changes in working capital was $2.1 billion for the third quarter of 2025. We declared a distribution of $0.545 per common unit for the third quarter of 2025, which is a 3.8% increase over the distribution declared for the third quarter of 2024. The distribution will be paid November 14 to common unitholders of record as of the close of business, October 31. In the third quarter, the partnership purchased approximately 2.5 million common units under its buyback program for $80 million. Total repurchases for the first 9 months of 2025 were $250 million or approximately 8 million enterprise common units, bringing total purchases under our buyback program to approximately $1.4 billion. In addition to buybacks, our distribution reinvestment plan and employee unit purchase plan purchased a combined 3.5 million common units on the open market for $114 million during the first 9 months of 2025, including 1.2 million common units on the open market for $37 million in the third quarter. For the 12 months ending September 30, 2025, Enterprise paid out approximately $4.7 billion in distributions to limited partners. Combined with the $313 million of common unit repurchases over the same period, Enterprise return total capital was $5 billion, resulting in a payout ratio of adjusted cash flow from operations of 58%. As Jim mentioned earlier, we expect an inflection point in discretionary free cash flow in 2026 as we have completed a 4-year period of large investments, both organic and acquisitions that enhanced our -- have enhanced and expanded our integrated footprint in the Permian and Haynesville basins and our premium -- premier wellhead to market businesses serving domestic as well as international markets via our marine terminals. With the completion of the major projects such as Bahia NGL pipeline, and Neches River Terminal, we continue to believe our organic growth capital expenditures in the near term will return to our mid-cycle range of approximately $2 billion to $2.5 billion per year and largely consist of pipeline expansions and smaller projects, both on the supply and demand side and natural gas storage, treating and processing facilities. As Jim noted earlier, we announced our Board has approved an increase in our common unit program of -- to $5 billion. The program now has $3.6 billion in capacity, allowing us to increase the amount of our annual buybacks as our free cash flow increases. In terms of allocation of capital, we see cash distributions to partners growing commensurate with distributable cash flow per unit in the near term with discretionary free cash flow being evenly split between buybacks and retiring debt. Growth in cash distributions to partners can be further enhanced by the percent of common units we retire through buybacks. Total capital investments were $2 billion in the third quarter of 2025, which included $1.2 billion for growth capital projects, $583 million for the acquisition of natural gas gathering systems from Occidental in the Midland Basin, and $198 million of sustaining capital expenditures. Our expected range of growth capital expenditures for 2025 and 2026 remains unchanged at approximately $4.5 billion for 2025, and $2.2 billion to $2.5 billion for 2026. We continue to expect 2025 sustaining capital expenditures to be approximately $525 million. Our total debt principal outstanding was approximately $33.9 billion as of September 30, 2025, assuming the final maturity date of our hybrids, the weighted average life of our debt portfolio is approximately 17 years. Our weighted average cost of debt was 4.7% and approximately 96% of our debt was fixed rate. At September 30, we had consolidated liquidity of $3.6 billion, which includes availability under our credit facility and unrestricted cash on hand. Our EBITDA -- our adjusted EBITDA was $2.4 billion for the third quarter and $9.9 billion for the last 12 months. As of September 30, our consolidated leverage ratio is 3.3x on a net basis after adjusting debt for the partial equity treatment of the hybrid debt and reduced by the partnership's unrestricted cash on hand. This is above our leverage target of 3.3x, plus or minus 0.25 or a range of 2.75 to 3.25x. This is due to the capital expenditures on our large projects such as NGL fractionator 14, Bahia NGL pipeline, Neches River Terminal and the acquisition of Oxy's Midland gathering system being included in our debt balance without EBITDA included in our trailing 12 months of EBITDA. We believe our leverage will return to our target range by year-end 2026 when we have a full year of EBITDA from these projects. With that, Libby, we can open it up for questions. Libby Strait: Thank you, Randy. Operator, we are ready to open the line for questions. Operator: [Operator Instructions] Our first question comes from the line of Jean Ann Salisbury of BofA. Jean Ann Salisbury: So there are lots of Permian gas pipelines coming on next year in the basin. Do you think that that's going to drive producers to produce more gas at the margin? And do you consider that to be a constraint? Tony Chovanec: The Permian Basin, Jean Ann, is an oil basin, first and foremost, and it will be forever more. I think the thing that more gas pipelines does do is just -- and NGLs, transportation takeaway for both NGLs and natural gas at the end of the day, I'll say, is healthy for the producers, meaning it is healthy for the basin. That's kind of the bottom line. That's how we see it, Jean Ann. Jean Ann Salisbury: That makes sense. And then I think I have one more for you, Tony. I think I know what you're going to say, but as LPG exports ramp, I've gotten this question a lot from people, but do you see Asia rezcom and petchem demand as sort of an unlimited sync for all that LPG? Or is there going to potentially require extreme price pressure on global propane to make it flow? A. Teague: Jean Ann, I'm going to punt that one to Tug because he travels the world, he and his team. If that's okay, Tug, can I do that? Tug Hanley: Yes, this is Tug. Yes, in short, I would say both rezcom demand is growing internationally and petrochemical due to lightening of the petrochemical feed slate. But the growth is really tied to supply. The U.S. will export, what's needed to balance the market and price will ultimately adjust upon that global demand. So we're not necessarily worried about demand. A. Teague: Jean Ann, this is Jim. I've got a fundamental that I always believed in. Price creates supply and price creates demand. We're not going to have an issue with demand. Tony Chovanec: Jean Ann, while you're still on the line, I guess I sort of have one for you. You and I have always been in the industry sort of obsessed with this molecule called ethane, as you know. And we haven't always been on the same side of the ledger relative to this molecule, which now, again, just looking back, has become very important and will become more important. I remember in 2018 at our Analyst meeting, I was on crutches and just after we were at the Museum of Natural Science and sitting on the sidelines, and you came and sat down next to me and you said, "I want to sit next to the only ethane there besides myself in the industry." Do you remember that? Jean Ann Salisbury: I do. I remember that Tony. Tony Chovanec: So what I'd like to say is we're approaching 1 million barrels a day of exports for ethane. That's a line of sight that the industry can see. And we still have -- just like we talked that day, we still have 600,000 to 800,000 barrels a day that's being reject. Jean Ann Salisbury: Yes, it's unbelievable. Tony, thank you for all of your help over the years. I'm really going to miss working with you. Tony Chovanec: Thank you, so much. Operator: Our next question comes from the line of Theresa Chen of Barclays. Theresa Chen: I'd also like to congratulate Tony on his retirement and thank him for his insights and help over the many years. We wish you the best, Tony. Going to the capital allocation side of things. On the upsized buyback authorization, would you all talk about or just provide more details on the capital allocation outlook for the next couple of years. What do you see at this point as a steady-state run rate for CapEx? And do you expect to buy back stock on a more ratable basis given the visibility in free cash flow growth? Or will it be more opportunistic and dependent on market dynamics? W. Fowler: Okay. Theresa, this is Randy. Yes, I think when we come in and think about sort of as you put over the near term, the next 2 or 3 years on organic growth CapEx, we do see it in the $2 billion, $2.5 billion range. With the projects that we currently have announced, and with a few that we've got pretty good visibility on that we think will come forward that's included in expectations. Next year, we see really $2.2 billion to $2.5 billion. Could next year get to $2.6 billion, $2.7 billion? It could. But we don't see it going to $3 billion. And so I think that's sort of where we are on the CapEx side. And so as a result, we will have -- given those numbers, we'll have some free cash flow to deploy. And again, at this point, looking to split it between buybacks and debt paydown. And I think because we're leaning in a little bit more on buybacks than what we've done over the last 2 or 3 years, there could be an element of programmatic buybacks in there as well as, I think, with the component of debt paydown that we have in there as well, that gives us a little bit more flexibility to be opportunistic. So really, I see the buybacks having a component of both programmatic and opportunistic. Theresa Chen: Understood. And with DINO's announced plans yesterday to potentially move up to 150,000 barrels per day of refined products, primarily from its own refineries from PADD 4 to PADD 5, could this lead to better utilization and/or marketing opportunities on your Texas Western product system that recently went into service and ramped? How do you see this evolving? Justin Kleiderer: Yes, Theresa, this is Justin. So clearly, a lot of headlines out there with respect to people reacting to kind of the ongoing closures and potential future closures in California. Two points to make. There's a lot to unpack with respect to the projects out there, whether or not they go or not, and then also what the future closures or potential closures in California will be. But we'll hang our hat on two things with respect to the system. One is we run a unique corridor pretty much direct to Salt Lake. And to the extent that Salt Lake gets net shorter as a result of these projects, then we're going to stand to be the beneficiary. And then if you zoom out to our overall product system, both our TW system and our legacy TE system benefit from Mid-Continent pricing being at a premium to the Gulf. And really, all three of these projects that have been announced do some degree of that. So our overall product system will benefit by -- if any of them go. Again, early days, we just have to see how it plays out. Operator: Our next question comes from the line of Michael Blum of Wells Fargo. Michael Blum: I also wanted to wish congratulations to Tony. We've really enjoyed working with you. So congrats. I wanted to ask kind of a macro question, I guess. So you're signaling here an inflection point. You've completed a big capital build-out phase and now you're kind of pivoting to some more cash return to shareholders. How much of this is just your view that the macro is less constructive with oil prices lower, drilling slowing, et cetera? Or is it just a function that you think like your system is built out, you're still expecting that growth, but you just have ample capacity? W. Fowler: Yes. Michael, I think it's just a function of large projects. I've come back in, and if you look at -- if you just look at our history, we have had some large capital-intensive projects that we've put into service. And again, our CapEx has flexed up. And then it's come back into a sort of a normal mid-cycle range. And I think that's where we are. Probably the most recent cycle of that was in 2015, '16, where we built the Morgan's Point ethane export facility. We built the Aegis ethane pipeline running over to South Louisiana, and then we built the Midland-to-ECCO I system. That was a period of elevated CapEx. And then we came back down into sort of a $2.5 billion range until we saw the next large capital project. So I think it's more of a function of that as opposed to a change in our macro view of the economy. Michael Blum: Okay. That makes sense. And then on the buyback, I wanted to ask how you're going to basically balance the potential increase in buybacks with any tax ramifications for your unitholders? And does that create any kind of limit to the amount of buybacks you can do in any given year because of taxes? W. Fowler: Really, the tax ramifications are really for those selling unitholders, not for the unitholders that remain. Did I answer your question, Michael? Michael Blum: You did. Operator: Our next question comes from the line of John Mackay of Goldman Sachs. John Mackay: Tony, I'm going to make sure we get a few last ones out of you while we still have you. So thank you again. We haven't really talked about the kind of broader macro that much, the last question kind of touched on it. I'd love just to hear you guys were a little ahead of the curve on being a little cautious earlier this year. I'd love just to hear a little kind of mark-to-market on what you're thinking now and what you're hearing from your Permian producer customers. A. Teague: Is Natalie in here? Tony Chovanec: Yes. I think Natalie tell us what you're seeing on our systems would be the best way to start. Natalie Gayden: Mike, well, this is Natalie Gayden. I would say in Midland, volumes are outperforming our expectations. I think the last time I sat on this call, I gave some well connects just for color. The well connects in '26 are up 25% from what I told you last time. We're now expecting almost over 600 wells to be connected to the system next year. A lot of that fourth quarter surge from the original 500. In the Delaware, same growth trajectory. We've got a record number of wells being connected to the low-pressure system we've built up in the Northern Delaware. That growth curve is steepening for Delaware and the trajectory remains intact and increasingly constructive. And then lastly, I'll just -- I'll say this, and I may say it more than once, but we don't talk about base volume durability and PDP and how it holds in on gas. I think that's sometimes what people miss, and I'll just give you an example. We have a producer in Midland that finished their development program a year ago. Today, in Midland, those volumes are flat with where they were then. So in some part of the PDP and the base volume and durability of that volume, I think that's just upside. A. Teague: Jay, you got anything on crude oil or Justin on NGLs? James Bany: Yes. This is Jay on crude. My story is similar to Natalie. Again, we don't have the same large footprint. We're probably more heavily weighted to Midland Basin. But from '24 averages to '25, we saw a well above a double-digit gain in gathering. And we're seeing -- at least based on producer curves for '26, something very similar. A. Teague: How are you contracted on Seminole? James Bany: Yes. I mean, so we've mentioned it, Seminole comes up at the beginning of next year. We do have some space as that pipeline ramps up. But over the course of '26, we become very well contracted over the year. Tony Chovanec: I'll say, again, it will be the last time I'll say that the PDP wedge is the most underappreciated thing in the industry, particularly when you're a midstream company. That's the reality, and we see it time and time again. John Mackay: Absolutely clear. I appreciate all that color. Second one for me is you talked a little bit about some of these projects coming on maybe a little later than hoped. Could you just give us a general target, $6 billion of projects coming on between now and next couple of quarters. When would you expect those all generally all else equal to be fully ramped? A. Teague: What was the question? I think you asked when these projects, when would we expect them to be fully ramped that I referred to in my -- yes. I think what I said was Bahia will be on at the end of November, 1st of December, Justin. Frac 14 is up and running. PDH 2 was in the process of running. What else was the Neches River Terminal -- Tug, you want to take a shot? Tug Hanley: Yes. This is Tug. Yes, NRT will be -- it's ramping right now. It will be full, call it, by middle of next year, the first train. And then the second train comes online shortly after that, and that will be our LPG ethane flex train, and we'll have long-term LPG contracts commence once that train starts as well. A. Teague: Okay. Are you fully contracted on ethane and LPG? Tug Hanley: We're around 90% contracted on LPG, and we are fully contracted on ethane... Operator: Our next question comes from the line of Jeremy Tonet of JPMorgan. Vrathan Reddy: This is Vrathan Reddy on for Jeremy. I just had one question. I think previous remarks have touched upon the potential for not a major step-up in '26 organic growth CapEx, but maybe point to the high end, if anything. In that case, curious where in the value chain you see the most attractive opportunities for organic growth? And if you could just expand upon that a little bit. A. Teague: I'll take the first shot at it and then let Natalie and maybe Tug. I mean I don't think we're through rebuilding gas processing plants. And the appetite we have for exports is stunning. And I think you could see us moving in both directions. Natalie, processing? Natalie Gayden: Yes. This is Natalie. On processing, if you think about it, there's 5 Bcf a day under construction, let's just call it, in the Permian of gas processing capacity in a basin that's been growing almost 2 Bcf -- 2.2 Bcf a day a year. So in the near term, probably call it, 1- to 2-year window, we've got clear line of sight to 2 more plants, 2 more 300 a day plants, one beyond what we've announced, one in each basin, and we've got further expansion opportunities beyond that. And then as we expand our gathering system, our ability to scale with capital efficiency is really rooted in the reach that we already have. So I'll just leave it there. W. Fowler: Natalie, do you want to add on what we're seeing on natural gas power generation in Louisiana and Texas? Natalie Gayden: Yes. So we're capturing indirect upside from some of those data -- that data center demand really through incremental power gen across Texas and Louisiana. We have an advantaged interconnect footprint in really San Antonio and Dallas area. So we're well positioned to benefit from that trend without really much incremental CapEx. On the behind-the-meter side, we've got several high-margin kind of low-touch opportunities that require minimal investment there, but they offer outsized value uplift. Tug Hanley: Yes. And this is Tug. Just with respect to ethane specifically on the export side, we're continuing to see strong international interest for ethane. There's a lot of demand. So there could be some opportunities there as well. Operator: Our next question comes from the line of Keith Stanley of Wolfe Research. Keith Stanley: First, I thought you sounded more optimistic than previously on the PDH issues now being behind you. So am I hearing that right? And can you talk a little more to what gives you confidence after this turnaround that you're more or less in the clear going forward? Graham Bacon: This is Graham. On PDH 2, we've had some issues with coking on the fourth reactor. As Jim mentioned in his remarks, we've developed new operating procedures and made some modifications during the outage to address some of those, and we continue to work with a high-level team from our licensor to improve the process. And if you look at -- on PDH 1, if you look at our run rate for the quarter, we had a very high run rate, a few minor issues, but the team out there has really done a great job of being able to reduce some of the impacts, and we know some of the -- we've got line of sight on fixing a few of the issues that we have. So we're very optimistic going forward that the PDH run rates are going to continue to increase from where they've been, and we'll see a great improvement in 2026. Keith Stanley: That's great to hear. Second one, on your Permian NGL pipelines, can you remind us the business model that you guys pursue here? So is it -- you're primarily transporting NGLs produced at your own plants on your Permian NGL pipelines? Or is there any meaningful amount of third-party NGL volume that you move on your Permian pipes today? Justin Kleiderer: Keith, it's Justin. So it's a portfolio of all of the above, but it's primarily rooted in the volumes that our gathering and processing plants bring to us. I'll give you a data point. In 2020, the volumes out of the Permian that our pipelines moved were -- 45% of those volumes were from our own gathering and processing facilities. In 2025, that number is now 2/3 of the volume, and we expect that trajectory to continue. We continue to see a growing allocation of our NGL portfolio to be behind our own gas plants. And while we'll continue to look for other third-party opportunities, we don't expect that to be our baseline assumption as high -- as large as it has been historically. Operator: Our next question comes from the line of AJ O'Donnell of TPH. Andrew John O'Donnell: Congrats on your retirement, Tony. I wanted to go back to just some of the NGL and LPG stuff, especially on the terminal volumes. It seems like for the third consecutive quarter, we saw lower implied volumes on the LPG side. I was just wondering if you guys could provide maybe a little bit more detail on kind of what's going on there, if there's anything to unpack. Tug Hanley: Yes, this is Tug. In the third quarter, we had some minor maintenance, which resulted in some lower volumes, and we had some cargoes roll from month-to-month. So nothing other than that. Demand is still strong. It's robust. Andrew John O'Donnell: Okay. And then just one other -- just continuing on this theme of LPGs. We're starting to see propane inventories notch new records here. Curious what your view is on the latest for the domestic propane market and maybe if there are any read-throughs on tailwinds for your storage business and/or marketing opportunities you're looking out over the short to medium term? Tug Hanley: Contango presents opportunities, we have the storage assets to monetize that, and we will. With respect to lower LPG price that could provide potentially some arbitrage opportunity across the water, those will be the opportunity sets. A. Teague: How do you see our storage? Justin Kleiderer: I mean I think Tug is right. We got a lot of storage. We got the biggest storage position in the world. So propane goes contango, it will be beneficial for Enterprise. Operator: Our next question comes from the line of Manav Gupta of UBS. Manav Gupta: My first one is on August 6, you announced acquisition of some assets from Oxy. What -- how is the integration of those assets going? And the best acquisitions are one which always come with some organic growth opportunity. So if you could highlight the organic growth opportunities on these assets, maybe Athena? What else can be done to further get more revenue and EBITDA out of these assets? Natalie Gayden: This is Natalie Gayden. That asset acquisition was strategic, and I'll just -- let me just lay it out for everybody that doesn't remember. It's a 75,000-acre acreage dedication. It's got over 1,000 drillable locations. So an opportunity of that scale is quite rare. They bolt -- the assets bolt on pretty seamlessly to our existing footprint and extends the reach. We -- it will unlock for us an incremental 200 million a day almost immediately, let's just call those revenues coming to us in really 2027. We love assets that are already producing gas, but then the development for that asset is going to be quite constructive and strong. Like any other asset or footprint that we've purchased, again, being in an area and having the reach is the way we get incremental packages of gas onto our system. So we've already seen synergies, yes, with the acquisition of that asset. Zach Strait: Sorry. This is Zach Strait. I'll also chime in that there's going to be a pull-through on the NGL side to both Justin's pipe and our fractionators. Manav Gupta: My quick follow-up here is you guys did a very smart deal and got in the Permian sour gas opportunity with Pinon. The price was great. How is that opportunity developing along? And are you seeing more producers willing to go in that part of Eddy and Lea County because the gas, oil ratios are favorable, drill for more gas, but then -- sorry, more oil and then get this nasty gas. So how is this Permian sour gas opportunity evolving for you after that announcement of that deal? Natalie Gayden: Yes. We still think Pinon is the most attractive position out there. So we're so proud of that. There has been a bit of a pacing gap really with producers working through some of the development hurdles they've had with commodities this high of H2S. But it's temporary. The trajectory remains intact. Train 4 is coming online next summer for us. It will add another 180 million a day of treating. We see train 5 and 6 right behind it. So the setup for that system is extremely bullish. Operator: Our next question comes from the line of Brandon Bingham of Scotiabank. Brandon Bingham: I was just curious, looking at the Permian more broadly, there's a lot of announced egress capacity slated to come online over the next, call it, few years. Just wondering what you make of it considering your currently outlined growth expectations for the basin. Is there a chance that some of these projects get sidelined? Or maybe conversely, do you think there is a chance that Permian growth actually accelerates to meet the announced build-out? A. Teague: It's Natalie show... Natalie Gayden: This is Natalie again. So next year, let's just call it, 4.5 Bcf a day coming online. That will be really nice. I don't think we'll see, let's just call it, late 2026. But as a reminder, Tony kind of pointed out to it a little earlier, this is an oil basin. These gassier benches aren't being drilled. It's because of the multi-bench development that these producers are going after some of these gassy zones. So yes, takeaways there is even better for them. Tony Chovanec: And I'll say again, it's very healthy for the basin. Negative gas prices are not healthy for producers. Brandon Bingham: Okay. Fair enough. And then just one more -- just a quick clarifying one. Natalie, I think you were talking about two incremental plants beyond Athena or line of sight to them. Was that something contemplated for 2026 CapEx budget? Or were you just saying there's just line of sight to those over the next year or 2? Just trying to figure out like what's currently contemplated in the 2026 CapEx budget, if it's just Athena or if there's an incremental one because you guys kind of have that 1- to 2-year cadence -- 1 to 2 a year cadence. W. Fowler: Yes. This is Randy. And our CapEx expectations for '26, that includes the expectation that we'll be building a couple of more plants, in addition to what was already announced. Operator: I would now like to turn the conference back to Libby Strait for closing remarks. Madam? Libby Strait: That concludes our remarks for today. Thank you to everyone for your participation, and have a good day. Operator: This concludes today's conference call. Thank you for participating. You may now disconnect.
Operator: Good afternoon, ladies and gentlemen, and welcome to AvalonBay Communities Third Quarter 2025 Earnings Conference Call. [Operator Instructions] Your host for today's conference call is Matthew Grover, Senior Director of Investor Relations. Mr. Grover, you may begin your conference call. Matthew Grover: Thank you, Bahn, and welcome to AvalonBay Communities Third Quarter 2025 Earnings Conference Call. Before we begin, please note that forward-looking statements may be made during this discussion. There are a variety of risks and uncertainties associated with forward-looking statements, and actual results may differ materially. There is a discussion of these risks and uncertainties in yesterday afternoon's press release as well as in the company's Form 10-K and Form 10-Q filed with the SEC. As usual, the press release does include an attachment with definitions and reconciliations of non-GAAP financial measures and other terms, which may be used in today's discussion. The attachment is also available on our website at investors.avalonbay.com, and we encourage you to refer to this information during the review of our operating results and financial performance. And with that, I will turn the call over to Ben Schall, CEO and President of AvalonBay Communities, for his remarks. Ben? Benjamin Schall: Thank you, Matt. I'm joined today by Kevin O'Shea, our Chief Financial Officer; Sean Breslin, our Chief Operating Officer; and Matt Birenbaum, our Chief Investment Officer. Before discussing our Q3 results, which were below our prior expectations and our updated outlook for 2025, I want to start by emphasizing a series of AvalonBay tailwinds and strengths that keep us confident in our ability to drive superior earnings and value for shareholders. First, our portfolio with its heavy concentration of communities in suburban coastal markets continues to be well positioned. With a more uncertain demand backdrop, we believe that those markets and submarkets with lower levels of new supply will continue to be the relative winners. Our established regions are particularly well situated with deliveries as a percentage of stock projected at only 80 basis points next year. And given how challenging it is to get new development approvals and the amount of time it takes to get those approvals, we expect our markets to continue to benefit from below-average levels of supply for a number of years. A second differentiator for us is the $3 billion of projects we currently have under construction, which will generate a meaningful uplift in earnings and value creation in 2026 and 2027. These projects are tracking ahead of our initial underwriting and importantly, are benefiting from reduced construction costs, which translates into a lower long-term basis for shareholders. These projects are 95% match funded with capital that we previously raised through a mix of equity and unsecured debt with an initial cost of capital of below 5% providing an attractive spread to our development yields on these projects. Third, our balance sheet is in terrific shape with low leverage and over $3 billion of available liquidity. As we look ahead, this balance sheet strength provides us with the flexibility to continue to redeploy free cash flow, disposition proceeds and low-cost debt into our next set of accretive development projects as well as to buy back our stock when appropriate, as we did in Q3, having repurchased $150 million of our stock at an average price of $193 per share. Finally, we continue to advance on our set of strategic focus areas, which are generating incremental earnings and cash flow from our existing portfolio as well as on new developments and acquisitions. This year, we've made strong progress in advancing toward our longer-term portfolio allocation targets with a continual eye towards enhancing the cash flow growth of our portfolio. And we remain very excited about our progress on our operating model initiatives, including the expanded set of uses for technology, AI and centralized services. By year-end 2025, we expect to be roughly 60% of our way toward our target of generating $80 million of annual incremental NOI from these operating initiatives. Turning to the third quarter. Slide 5 in our earnings presentation summarizes our Q3 and year-to-date results. We are on track to start $1.7 billion of development projects this year with a projected yield in the low 6s on an untrended basis. We've also completed our planned capital sourcing activity for the year, having raised $2 billion of capital at an average initial cost of 5%, generating a spread north of 100 basis points relative to development yields. Slide 6 provides the breakdown of third quarter core FFO relative to our prior expectations. Of the $0.05 underperformance relative to our outlook, $0.03 was attributable to same-store portfolio results, of which $0.01 related to lower revenue and $0.02 related to higher operating expenses, including in repairs and maintenance, utilities, insurance and benefits. Turning to Slide 7. Apartment demand has been softer than anticipated this year, which we attribute mainly to the reduced job growth backdrop with related factors, including higher macroeconomic uncertainty, lower consumer confidence and a reduction in government hiring and funding. As shown on the left side of Slide 6, the National Association of Business Economics, or NABE, is now projecting growth of 725,000 jobs in 2025, down from the over 1 million jobs in their prior forecast. And for Q4, NABE is projecting growth of just 29,000 jobs per month. We revised our revenue expectations as part of our midyear forecast with results for July and August generally tracking to those expectations, as shown on the right-hand side of Slide 7. As Sean will discuss further, softness on rental rates in August continued in September, along with a slight occupancy dip. With further softness continuing into October, trends that are now incorporated into our updated outlook for the remainder of the year. As shown on Slide 8, we've also updated our expense outlook for the year to 3.8%. After benefiting from meaningful operating expense savings in the first half of 2025, we've had trends run against us across a set of expense categories without any offsetting savings. For example, in repairs and maintenance, we knew that certain savings from the first half of the year would be incurred in the second half, but have incurred more and higher cost repairs and non-repeat projects than anticipated. Other unfavorable variances include insurance, utilities and associate benefit costs. Given our Q3 results and these revenue and operating expense trends, we've updated our outlook for the full year, which Kevin will now discuss in more detail. Kevin O'Shea: Thanks, Ben. Turning to Slide 9. We present our updated operating and financial outlook for full year 2025 as compared to our prior outlook on our second quarter call and on our initial outlook for the year that we provided in February. We are lowering our full year core FFO per share guidance by $0.14 to $11.25 per share, which reflects an updated expectation for year-over-year earnings growth of 2.2%. Our updated full year outlook reflects same-store residential revenue growth of 2.5%, same-store residential operating expense growth of 3.8% and same-store residential NOI growth of 2%. Turning to Slide 10. We highlight the components of our updated outlook for full year core FFO per share in the second half of the year for key parts of our business as compared to our prior outlook on our second quarter earnings call. Specifically, as Ben previously mentioned and as detailed on this slide, our third quarter core FFO per share results were $0.05 below our prior outlook. And for our fourth quarter core FFO per share, we provide a comparison between our prior outlook and our current outlook. The expected $0.09 decrease is primarily driven by $0.06 of lower NOI from the same-store portfolio, consisting of a $0.04 decrease in same-store residential revenue and a $0.02 increase in same-store residential operating expenses. The remaining $0.03 reflect lower expected earnings contributions from lease-up NOI, commercial NOI, joint ventures and other stabilized NOI. Taken together, our 3Q results and revised fourth quarter outlook resulted in an updated outlook for the full year core FFO of $11.25 per share. And with that overview of our updated outlook, I'll turn it over to Sean to discuss operations. Sean Breslin: All right. Thanks, Kevin. Moving to Slide 11. As Ben noted, we started to experience some softening in key revenue drivers during the quarter. In Chart 1, economic occupancy was generally consistent with our expectations in July and August, but fell below our previous outlook in September and has continued to be below our previous expectation for October. Similarly, rent change started to trend below our midyear outlook in August, driven primarily by weaker move-in rents, which are depicted in Chart 3. While move-in rents softened across most regions, the deceleration was most pronounced in the Mid-Atlantic, Southern California, which was driven by L.A. and Denver. In terms of underlying bad debt, while we ended the quarter close to our original estimate, we experienced an uptick in August, which contributed to the unfavorable revenue variance for the quarter. Turning to Slide 12. We now expect same-store revenue growth of 2.5% for the full year 2025, down 30 basis points from our midyear outlook. The primary drivers of the reduction are average lease rate, which is estimated to account for 20 basis points, along with economic occupancy and underlying bad debt, which are projected to be about 5 basis points each. Our established regions are projected to produce 2.7% revenue growth, while the expansion regions are forecast to be modestly positive. As I mentioned on the previous slide, while the softness we've experienced has been somewhat broad-based, it has been most pronounced in the Mid-Atlantic and L.A. The Mid-Atlantic has been choppy since the second quarter, and it softened further during Q3 as the probability of a government shutdown increased. Given the shutdown has become a reality and is heading into a second month in a couple of days, we expect continued weakness in the region through year-end. And in L.A., job growth in the film and television industry has continued to be weak. It's been estimated that the number of film and television jobs in L.A. has declined by roughly 35% as compared to just 3 years ago. And stage occupancy, which reflects the percentage of time sound stages are being used by production companies in the region, has been trending in the mid-60% range recently, down from 90%-plus levels just a few years ago. While new tax incentives were passed in July this year to support film and television production in California, any employment benefit from them won't likely be realized until sometime in 2026 or beyond. Moving to Slide 13. As we start thinking ahead to 2026, while job growth has been below expectations recently, our portfolio is positioned to perform relatively well given 2 important factors: First, the very low level of new supply expected in our regions; and second, a lack of affordable for-sale alternatives. New supply in our established regions is expected to decline to roughly 80 basis points of existing stock in 2026, which is not only less than half the trailing 10-year average, but also a level we haven't experienced since 2012. It's also roughly consistent with what occurred during the '90s decade, which was a terrific time period for us. On the right side of Slide 13, although mortgage rates have been trending down recently and home values have flattened out or declined in many regions, for-sale housing remains very unaffordable in our established regions. It still costs almost $2,500 per month more to own the median-priced home relative to the median apartment rent in these markets. Overall, while we don't have a crystal ball regarding job and wage growth for 2026, again, our portfolio is relatively well positioned for any demand environment given the supply picture and the lack of affordable alternatives. And as it relates to our portfolio and the setup for 2026 revenue growth, we're currently projecting our earn-in to be roughly 70 basis points. Additionally, we continue to expect improvement in underlying bad debt as we work through the backlog of cases in several established regions and our various screening tools further constrain new entrants to the bad debt pool. Forecasted benefit for the calendar year 2025 is approximately 15 basis points. For 2026, I would expect at least 15 basis points and likely more given some of the underlying activity we're seeing across the portfolio. And third, while it won't likely be as strong as the last couple of years as we begin to stabilize our AvalonConnect offering for residents, we still expect another well above average year of growth in other rental revenue in 2026. Now I'll turn it to Matt to address our development activity. Matthew Birenbaum: Thanks, Sean. Turning to our development activity. As shown on Slide 14, our current lease-ups continue to perform better than our initial expectations, reflecting the conservative underwriting approach we take, where we do not trend rents and analyze every new start primarily on its current economics. Our development underway reached $3.2 billion by the end of the third quarter, was 95% match funded and underwritten to an untrended yield on cost of 6.2%. We opened several new lease-ups over the summer and now have 6 communities where there is enough leasing activity for us to update the rents and yields to current market. This $950 million in development activity is running 10 basis points above the initial projections, thanks to $10 million in cost savings and rents that are $50 per month higher than pro forma, generating a further lift to the value creation and earnings accretion these communities will deliver once they are complete and stabilized. We have another 3 communities, all in New Jersey that are just starting their lease-ups and rents at those assets are currently set at 2% above pro forma. So the trend of development outperformance is likely to continue as all 9 of these communities look to complete their lease-ups next year. And the 13 communities that won't start lease-up until 2026 or '27 should open at a time when there will be much less competitive new supply, as Sean detailed earlier. Turning to Slide 15. We are strategically increasing our development underway when the industry as a whole is retrenching, taking advantage of the benefits of our integrated platform to build at a time when costs are lower and competition is more subdued. As we look to 2026, many of these favorable tailwinds should persist, although we are also mindful of the softening revenue environment and the associated impact on our cost of capital to fund new starts going forward. And with that, I'll turn it back to the operator for Q&A. Operator: [Operator Instructions] Our first question comes from Jana Galan with Bank of America. Jana Galan: Maybe following up on Matt's development comments. Just curious kind of how you're looking at the next crop of projects and properties, kind of how you're thinking about those? And maybe also comparing that with you guys were active on share repurchases in the quarter. If you could kind of talk to those capital allocation decisions. Benjamin Schall: Sure, Jana. Thanks for the question. Let me start by just reemphasizing the strength of our balance sheet. It's in a terrific shape today and really does provide us with a ton of flexibility as we think about our capital allocation choices going forward. I do think about a fairly rich menu of opportunities today. I'll start with reinvestment opportunities back into the existing portfolio. We're active this year on revenue-enhancing investments, see a similar set of opportunities as we look to next year. On the development side, as a baseline, we're thinking right now in terms of 2026 development starts in the range of $1 billion of starts. And that's based on looking out on our pipeline and the set of opportunities. They tend to be -- that $1 billion tend to be in our established regions where operating fundamentals are a little bit more stable today. We are seeing strong construction buyout savings in those markets as well. And based on today's rents and today's costs -- those projects aren't starting today, but based on today's rents and those costs, yields on that $1 billion are in the 6.5% to high 6% range. So a meaningful spread to where we can raise incremental capital. And then as we always do, we will flex and adjust as we need to. As folks know, we approve every development project, project by project. We have, for sure, raised the target returns that we're looking from our developers next year, but expected, and we're hopeful that we'll be able to have another year of fulsome development activity. And then given our balance sheet strength, we also have the opportunity to buy back our stock as we did in the third quarter and the extent that, that continues to present an opportunity for us to invest accretively into our existing portfolio. So that's the general setup where we sit today as we think about capital allocation choices. Operator: Our next question comes from Steve Sakwa from Evercore ISI. Steve Sakwa: I appreciate all the comments on the markets. Maybe for Ben. Just as you talked about SoCal and then obviously, the government shutdown won't go forever, but I mean, do you kind of look at those markets maybe differently just on a long-term basis? And would your, I guess, preference to have lower exposure in both of those markets kind of on a go-forward basis? Benjamin Schall: Yes. I'll start at a high level and then turn it to Sean to talk about what we're seeing on the ground, Steve. On a high level, we continue to advance on our portfolio allocation targets, which do have us -- this goes back to a couple of years ago, looking to reduce our exposure in the overall Mid-Atlantic as well as in California. The other emphasis point that I would give to you is we've not only set targets at a market level, but we've also set targets within our regions. And I'll use the Mid-Atlantic as an example here, on the heels of our D.C. disposition, our recent DC sales, we've been looking to increase our exposure in the Mid-Atlantic heavier to Northern Virginia based on a number of factors. And so on the heels of that transaction, we now have close to 50% of our portfolio in Northern Virginia. So that's how we kind of continue to -- it's a combination of looking longer term, but then also making shorter-term transaction activities. And then, Sean, if you want to speak to what you're seeing on the ground more in both of those markets? Sean Breslin: Yes, Steve. I think probably the right way to think about this, obviously, the government shutdown was looming in Q3. It's become a reality. We've seen this story play through before. It's not a long-term sort of secular shift for the most part, tends to be cyclical in nature. As Ben noted, we're happy that we have kind of half our portfolio currently in Northern Virginia and also, as he noted, tilting it more towards Northern Virginia, which is holding up better than the district or some of the markets in Maryland. The big thing with the Mid-Atlantic that I think we have to all look at also is, we delivered about -- projected to deliver about 15,000 units of new supply in 2025. That's projected to decline to just 5,000 units across the entire DMV for 2026. So to the extent we get to the other side of this and we get into a more stable and even modestly growing job environment, that's a pretty good setup for revenue growth when we get there. And then Southern California, obviously, has gone through cycles in the past, broadly diversified economy. Certainly, the entertainment sector has taken a hit. Some of the tax incentives and other activities will likely bring it back at some point in the future. And that is a market that, again, broadly diversified economically, which is generally good in terms of that diversification benefit, but tends to run at one of the lowest levels of new supply relative to stock of any of our regions in the country. And that is likely going to be the case as we look forward over the next couple of years for such a massive market to see a pretty meaningful reduction in supply. So I do think we're thinking about these both the short-term decisions, but not thinking too differently in terms of the long term other than the rotation within the region as opposed to outside the region is the way I'd probably think about it. Operator: Our next question comes from Eric Wolfe from Citi. Nicholas Joseph: It's Nick Joseph on for Eric. Maybe just going back to the capital allocation answer earlier. You mentioned development starts maybe in the mid-6s to high 6s. I think buybacks would be somewhere around the mid-6s now. How does that compare to what you're seeing kind of real time in the transaction market? Have kind of going-in yields changed at all given some of the weaker rent growth assumptions? And as you think about that, is there also a difference within some of the different markets that you're looking at today? Matthew Birenbaum: It's Matt. I guess I'll take that one. The short answer is we haven't really seen any change in where the market is pricing stabilized asset sales. It's still kind of anywhere from the mid- to high 4% cap rate range to low to mid-5% cap rate range depending on the geography. And even our own activity is kind of a good example of that. I put D.C., the district on the higher end of that range. But suburban Seattle might be on the lower end of that range where we just sold an asset this quarter at a 4.6% cap on our numbers. So it has not -- it's been pretty sticky. And if anything, as kind of long rates have come down a little bit, that's given buyers more confidence. So I think transaction velocity, multifamily trades in Q3 were up pretty materially over Q3 of '24. It is still selective in terms of the assets that are getting that bid are assets where there is reasonably good momentum in the rent roll or at least they're not backsliding. But so far, cap rates are holding firm and values. Operator: Our next question comes from John Pawlowski with Green Street. John Pawlowski: Matt, just a quick follow-up and if I could fit 2 in. Did I interpret your comments on the D.C. cap rates accurate that those sold before dispositions were right around a low-5 cap? And then Kevin or -- Kevin, can you provide more details on the -- really what drove the repair and maintenance surprise? Are we running into labor availability issues? Or what else went wrong in the R&M functions? Matthew Birenbaum: Yes. John, it's Matt. The cap rate on the DC sales was probably mid-5s. There was a little bit of retail in the portfolio. So the residential cap rate was probably kind of low to mid-5s, but I'd say the overall transaction was right around 5.5%, and then... Sean Breslin: John, it's Sean. On the R&M side specifically, it's kind of a smattering of different things. What I'd say at a high level is we had a pretty good experience going through Q2, as Ben mentioned in his opening remarks in terms of the benefit, we expect a little bit of that to come back. But unfortunately, just kind of hit a bad streak in Q3 in terms of various accounts that came through on the repairs and maintenance side, slightly higher cost per turn in terms of the way the units came to us. Some of them are skips and a VIX, the higher cost. So I wouldn't say there's one particular pattern there other than we just probably underestimated a little bit kind of where we land in Q3 relative to what happened in Q2. Operator: Our next question comes from Adam Kramer with Morgan Stanley. Adam Kramer: I think last quarter, there was a discussion around lease-up at an asset or 2 in Denver development assets. Just wondering if there was any update there for those assets. And then I guess just more broadly, if you sort of think about the performance of development assets and lease-up, how are they doing? And as sort of some of them maybe from a year ago or 9 months ago, as you get closer to sort of that annualizing the initial leases, what is sort of the performance in terms of people at renewal given sort of the pace of lease-up? Matthew Birenbaum: Adam, it's Matt. I'll start on that one, and then I think Sean can also provide some other detail specifically around our Denver lease-ups. But in general, as I mentioned at the opening, our lease-ups continue to perform well, and we're getting a little bit of outperformance on rent. And importantly, we are also seeing pretty significant cost savings. And the good part about that is that stays with you forever. That reduced basis, the NOI will move around over time, obviously grow over time, but it will have its ups and downs. But the basis is forever. And just between the deal that we completed in the first half of this year and Annapolis, which we completed this quarter, and we have another completion coming next quarter in Maryland, just those 3 deals alone, there's probably $12 million worth of cost savings on 1,000 units, that's $12,000 a unit in lower basis. So that's pretty compelling. And that -- so I would expect more of our yield outperformance on what we're leasing up now and into next year to come from the denominator and the numerator, but we're still getting a little juice on the numerator in general. And in generally, we lease at a pace so that we can have the assets full within 12 months. So essentially, we don't wind up competing against ourselves on renewals. We are very mindful of that. And in general, we've been able to achieve that. There are a couple of exceptions and the one in Denver is a good example of that, where that submarket in Governor's Park there south of downtown is just littered with supply. So Sean, I don't know if you want to share a little more on that and contrast that to some of the others. Sean Breslin: Yes. Just to give you some insights on Denver, we really had 2 lease-ups. One just finished and stabilized at the end of the third quarter, which is in Westminster. And then the other one is Governor's Park, which Matt has referenced. So on average, they did about 20 leases a month during the third quarter, which is a little bit below where we typically would like. But again, Westminster was heading right to stabilized mode. So a little bit softer pace there. And then concessions on the Westminster deal averaged about 150% of a month's rent, and it was more than 2 months rent at the Governor's Park deal. So certainly a soft environment in Denver. I think that's pretty apparent to pretty much everybody nowadays. But fortunately, we have one that's stabilized and the Governor's Park deal is approaching 90% leased at this point. So we're getting pretty close. Matthew Birenbaum: The other piece of good news I'd add, and I think I mentioned this last quarter, too, it just so happens a lot of our lease-up activity now and as you look to next year is in the suburban Northeast, which is still pretty strong. I think we -- as I mentioned, we have 3 lease-ups that are opening -- that are leasing now in New Jersey and a fourth one that's just finishing its lease-up, and that market has been very solid. Operator: Our next question is from Austin Wurschmidt with KeyBanc Capital Markets. Austin Wurschmidt: Just thinking through potential share repurchase activity from here, I guess, do you have capital lined up to fund that today? Or would you need to source additional capital to fund future purchases? And just wondering if dispositions are the best -- still the best avenue for that today? Kevin O'Shea: Sure. Austin, this is Kevin. So a few points for you to consider here. I guess, first of all, from a balance sheet point of view, as Ben outlined, we're in terrific shape right now. As you can see from our earnings release, our leverage is 4.5x net debt to EBITDA. If you give us credit for the forward equity of nearly $900 million we have in place, that's essentially another half turn lower. So we're kind of at around 4 turns. We have nearly full availability on our line of credit. It's only $200-plus million in commercial paper. So we have plenty of access to liquidity, and we have leverage capacity to the extent we wish to use it. From a share repurchase authorization standpoint, as you probably noticed in our earnings release, we essentially reloaded or reauthorized our share repurchase program. So we now have $500 million of additional authority to be able to tap into here going forward. So we have that set up as well. And I think as kind of outlined by Ben, we're prepared to be nimble. We do currently plan on having, call it, roughly $1 billion in starts next year, but it's -- the decision of whether to engage in a buyback or development is not necessarily a binary one, as you even saw from us in the third quarter, where we continue to be constructive on development and also bought back $150 million in shares. So not in a position to tell you today what we're going to do tomorrow, but we are in a position to act on a buyback if it makes sense. And we recognize that our shares are attractive. But we also recognize that development is attractive and a point of indifference also gives us fresh assets with a low CapEx profile and a strong growth profile. So there are certainly strong merits to continuing to do development, significant amount of what's in our development book, but we have the capacity to engage in a buyback if appropriate. From a standpoint of how much -- how we think about funding it longer term, certainly, we would likely tap available liquidity in the form of commercial paper to do so, which prices in the low 4% range today. But ultimately, as we think about framing how much we would do, we are limited by our gains capacity, which is in the normal year, about $500 million of asset sales and an intention to essentially term out whatever we buy in terms of the buyback on a leverage-neutral basis with its proportionate share of recycled asset sales, if that's the case and incremental longer-term debt. So we feel like we have plenty of room to be constructive in, there, but -- so -- but it's not necessarily a binary choice, and we're prepared to be nimble and react to the appropriate market singles. Operator: Our next question comes from Jamie Feldman with Wells Fargo. James Feldman: As we've been listening to the calls throughout the day, the #1 incoming question is just how do these residential companies have visibility on where the market is going, first for guidance through year-end, but also just to kind of get through the spring leasing next year. So I know there's only 2 months left in the year, so that's probably an easier part of the question. But just as you think about your crystal ball setting guidance and even thinking about where this cycle could go before it gets better, can you point to some of the things that are giving you confidence or that people should be thinking about or that you're thinking about and watching because every company is certainly taking numbers down or their outlook is down given September and October. Benjamin Schall: Jamie, I can start. The -- emphasize a couple of different elements. One, sort of our portfolio positioning, for sure, emphasizing the level of low levels of supply that we're seeing now and particularly as we get into next year, and Sean mentioned it, but just to reiterate, we don't need a ton of incremental demand given that supply backdrop to see some strong results as we get into next year. As you think about the overall job environment, the hope is that we're headed towards a period where there's increased certainty on the macroeconomic side, increased certainty around where tariffs are going to land, the end of the government shutdown. So increased certainty, increased confidence. The rate dynamic potentially also leads to further investment, but we can kind of shift out of our current environment to there and you lead to businesses further investing and also investing in their workforces, that's sort of the other side of this dynamic for us as we think about the job picture. Operator: Our next question comes from John Kim with BMO Capital Markets. John Kim: I wanted to talk about bad debt, which came in a little bit higher than you were expecting. And I wonder -- I just wanted to know what the potential source of that was and if you have a disproportionate amount of bad debt that came from recent development lease-ups. Sean Breslin: Yes, John, it's Sean. Yes, the miss in bad debt we referenced is in the same-store pool. So the development assets wouldn't be in that book. And it's really a relatively modest number. It's about 5 basis points different in terms of what accounted for the variance. And in a book like that, when you're dealing with court times and dockets and when the share is going to show up and all that kind of good stuff, 5 basis points is a pretty tight margin of error. But obviously, it was a negative variance. So overall, we feel good about where we're headed with bad debt. I can tell you that as you look at where we are now in terms of the number of accounts that we need to work our way through compared to the end of 2024, we're down 20%, 25%. So it's moving in the right direction. It's just a matter of kind of processing people through. So I would expect, as I mentioned in my prepared remarks, as we look forward to 2026, if we're getting about a 15 basis point benefit this year, I would expect at least, if not likely, more than that benefit in 2026 just based on what we're seeing as different cases work their way through the system and our screening tools get more and more sophisticated in terms of limiting the number of new entrants to the pool. John Kim: But in general, I know it's not part of the figure with the same store. Do you tend to get higher bad debt on lease up communities? Sean Breslin: Not necessarily. No. If it is, it can be an outlier community here or there. It's really kind of market specific in terms of the type of customers you're dealing with and tools you use. But in general, it's not necessarily an outlier across the development book as compared to the same-store pool. Operator: [Operator Instructions] Our next question comes from Rich Hightower with Barclays. Richard Hightower: But just to follow up on the jobs discussion. I guess, as you're having conversations with tenants in the D.C. market specifically, I guess, what are the chances that there's another shoe to drop with respect to sort of delayed impacts from DOGE. And if someone's laid off, there's usually sort of a lag before they think about vacating the unit or stop paying rent or things like that. And then secondarily, there's been a lot of headlines around weakness in the entry-level job market specifically. And that's not a D.C. comment, that's broad-based. But how does that affect your portfolio more broadly? So I guess kind of a 2-parter. Sean Breslin: Yes, Rich, it's Sean. I'll start and others can add as needed. As it relates to the districts or the D.C. region specifically, what I'd say is likely any impact that came through related to DOGE specifically and some of the activities that happened earlier this year, we probably would be feeling that about now just given normal sort of severance periods, notice periods, things like that. So there's probably an element of that embedded in the current environment. Of course, some of those people may have left 3, 4, 5 months ago. But I think the question now is as we turn to 2026, as I mentioned earlier, the supply picture looks drastically better in terms of the reduction in supply, getting down to like 5,000 units is not a number we've seen in D.C. in a very, very long time. So on the demand side then, if we can clear through the shutdown and get back to kind of normal business, I think we'll be in much better shape. I think the question really is what happens with some of the furloughs? Do they turn into permanent reductions, et cetera. We have not heard that, but certainly, that's a possibility. So I think we just need better visibility coming out of the shutdown in terms of the potential impact. And then if there is one, then we would lag that for whatever time period is appropriate 6, 7, 9 months. As it relates to your second question on the AI side, we feel pretty good about our overall position. I mean we're not necessarily -- I mean, the average age of our residents is in the kind of mid-30 range. It's not fresh out of college or even in the young 20s or mid-20s, which is where a lot of the focus is lately in terms of kind of new entrants into the employment base and the types of jobs that they perform being likely more automated. The other thing I would say is, particularly in some of the markets that we're in, in the coastal regions, they're pretty high value-add jobs. So when you think of the people that are coming into San Francisco or Seattle, as an example, more and more of the demand for that activity is people with the skills to help propel AI forward. I'll give you an example, I mean, I was in San Francisco not too long ago in Seattle. And when you talk to our teams on the ground, people coming in looking for new apartments propelling the momentum you see in that market, is people coming in heavily in the AI sector and other sectors, highly educated coming potentially from somewhere else or within the region. So we feel good about the high value-add nature of the jobs in those regions still likely being the winning formula as opposed to maybe the lower value-add jobs that might go away in some of the service industries, back-office operations, customer service operations, things of that sort. Operator: Our next question comes from Alexander Goldfarb with Piper Sandler. Alexander Goldfarb: Two questions. The first is on the asset sales, the $585 million in the quarter, I think all of those were developments and it was a slight economic loss. Just curious, you guys speak about the value creation. So the economic loss definitely jumps out. So is there anything specific, was it 1 or 2 of these projects that drove that? Or in aggregate, just want to better understand why there was a loss on the sale? Matthew Birenbaum: Yes. Alex, it's Matt. So those particular sales actually 2 of the 6 were acquisitions were Archstone assets, and 4 of the 6 were assets we developed. So it was a mix. And those particular communities, it was really driven by 2 where there was a material loss relative to our economic basis. One was an asset we developed was Brooklyn Bay, which was kind of an unusual submarket pocket in South Brooklyn, not a very large asset, less than $100 million investment, but that one was one that wasn't one of our better investment decisions. And the other one was one of the assets in NoMa that we got from Archstone. And NoMa has just been one of the uniquely difficult submarkets in the district and really anywhere in our footprint, really ever since we bought it. And we bought 60-plus assets from Archstone, and most of them have been pretty good investments. And obviously, that whole platform investment was very favorable for us. But once in a while, in a portfolio of that size, you're going to get 1 or 2 that don't do so well. So that was kind of what happened there. But I'll tell you, even -- I was looking at it today, even on the $800 million in dispos that we have for the entire year this year, which includes this $600 million, the unlevered IRR on that whole basket of 2025 dispos is in the mid-8s. So it's still pretty good investment returns given that. There are years when certainly, I think on average, we're probably in the low double digits, but that's still a pretty good investment return. And I think, as you know, our long-term track record has really been second to none, I think, in the REIT space, at least in the multifamily space for an awful lot of years. Alexander Goldfarb: Okay. And then -- yes. Benjamin Schall: Yes. Alex, the other element I'd just add on to Matt's commentary is these are a set of assets that have been on our target list for a while now. And we're waiting for asset values to recover to a certain degree to be able to execute. And so in any portfolio, you're going to have some low performers, but we really think about this as pruning those assets out, redeploying that capital into higher growth opportunities. Alexander Goldfarb: Okay. And then the second question is, it definitely seems like in REIT land, people are discovering nuancing the markets more, right? Like you want very Westside L.A. or east side in Seattle or different -- more Northern Virginia. So as you look at your development pipeline and your land options, have you like done -- has there been a big culling where you're like, hey, some of those sites that we originally picked they're not in submarkets we want anymore. Just trying to understand better how the -- as you start the next round of projects, how that has evolved versus what your land bank or land options were a few years ago? Matthew Birenbaum: Yes. Alex, I would say we've been pretty mindful of that really for the last several years. So if you look at our dev rights book today, it's almost all -- I mean, it's both bottom up and top down, right? We're looking for the best risk-adjusted returns, and we are looking to generate value creation on every deal we do, but we are also looking to develop assets that we think are going to be good long-term performers in our portfolio. And so we do actually incentivize that. We will demand a higher target yield if it's in a submarket we think is a little bit weaker. But we've been kind of tacking that way for a while now. And just to give you another example, Ben mentioned kind of within the Mid-Atlantic, more focused on Northern Virginia. Within Southern California, we've been really focused on San Diego, which is almost an expansion region for us. And this quarter, we just started a very big project in San Diego. We have 2 deals under construction in San Diego now, 2 more development rights. And we haven't started a development in L.A. County for 5 or 6 years. So our focus is completely on San Diego, Orange County and then Ventura in SoCal as an example. And again, in Seattle, same thing. Our portfolio is heavily east side. Our development focus has been entirely on the East side really for the last 7 or 8 years. Benjamin Schall: Alex, I'd flip your question, which is in an environment where others are pulling back and don't have our capabilities, these are the windows we actually can move on our best real estate, structure them the best way. Think about the amount of land that we actually have investment in today, very, very low. And these also -- and this is the environment also this cohort of projects tend to be some of our most profitable, both for the sort of the upfront deal striking that we do as well as for those projects opening a couple of years from now, facing less new supply. Operator: Our next question comes from Haendel St. Juste from Mizuho Securities. Michael Stefany: This is Mike on with Haendel at Mizuho. My question is, does the D.C. DOGE job cuts multiplier effect on the D&B region give you less confidence in market rent growth going into 2026? And how does that potentially impact the acquisition property and your portfolio in that region? Sean Breslin: Mike, this is Sean. Two things. One is in terms of the ripple effect, as I mentioned earlier, the DOGE impact, if anything, is probably being felt around now given the lag effect between the time people were noticed and when they actually departed. If there was a ripple effect, we probably would be seeing more of that now. I think it's a little uncertain at this point that we've actually seen that. And then on your second question, we have not acquired anything in this region in quite a long time in terms of assets. Is there another question there, Mike? Operator: Our next question comes from Michael Goldsmith with UBS. Ami Probandt: This is Ami. Are the remaining deliveries and lease-ups from the supply cycle more concentrated in urban or suburban areas? And then if we do see interest rates continue to tick lower and development activity pick back up, do you think [indiscernible] will be more likely to be concentrated in urban or suburban locations? Matthew Birenbaum: Ami, it's Matt. So as you look out over the next year or so, there's still more deliveries coming next year as a percentage of stock across our footprint in urban submarkets than suburban submarkets. There are a couple of regions where that's not true, I think specifically Northern Cal and maybe New York. But in general, in almost all of our other regions, we're still seeing -- we still expect a bit more supply, urban and suburban. The gap between the 2 is narrowing. It was wider 2 years ago. It was a little bit wider this year. But actually, I'm a little surprised there's still urban supply coming. As you look out beyond that, where the next slug of starts might be, the economics on development certainly work better in suburban submarkets today. That's what we're finding. I think that's what the market is finding. However, entitlements are more difficult, at least in our established region in the suburbs. And so you have to have been at it for a while if you're going to have a deal ready to go. And the other thing that we have half an eye on, I'd say, is in many of the urban cores, the cities are now trying to encourage conversion, adaptive reuse of outdated office to multifamily, and they're actually providing incentives to do that. So it is possible that if that starts to make sense, that supply could materialize fairly quickly because those are existing buildings that would be converted with a shorter build cycle time. Operator: Our next question comes from Alex Kim with Zelman & Associates. Alex Kim: Just a quick one for me. We saw the spread between renewals and new move-ins widen again this quarter, and part of that's due to the seasonal trend this time of year. But curious if you have any thoughts on that dynamic and what that means for rent growth for both front-end pricing and renewals moving into '26? Sean Breslin: Yes, Alex, it's Sean. Yes, fair point. I mean, typically, you would start to see a seasonal shift between the rent change for renewals versus move-ins at this time of the year. And nothing new on that front. Other than on the move-in side, as I indicated in my prepared remarks, it has been weaker on the move-in side in terms of rent change than we would have anticipated, reflecting some of the deceleration that we've talked about in some of the markets that I identified earlier like the Mid-Atlantic and L.A. and Denver. So certainly a little more meaningful than seasonal in those particular markets, but you would expect that to continue likely through year-end. And you don't start to see any kind of shift in that in a material way until you get to the spring leasing season and asking rents really start to move up through that period of time typically. So that's what would normally occur. At this point, we haven't provided a forecast for 2026, but that would follow the historical norm. Operator: This now concludes our question-and-answer session. I would like to turn the floor back over to Ben Schall for closing comments. Benjamin Schall: Thank you, everyone, for joining us today, and we look forward to connecting with you soon and at NAREIT in early December. Operator: Ladies and gentlemen, thank you for your participation. This concludes today's teleconference. Please disconnect your lines, and have a wonderful day.
Operator: Ladies and gentlemen, welcome to the Wacker Chemie AG Conference Call Q3 2025. I am Mathilda, the Chorus Call operator. [Operator Instructions] The conference is being recorded. The conference must not be recorded for publication or broadcast. At this time, it's my pleasure to hand over to Joerg Hoffmann, Head of Investor Relations. Please go ahead. Jörg Hoffmann: Thank you, operator. Welcome to the Wacker Chemie AG conference call on the third quarter 2025 results. Dr. Christian Hartel, our CEO; and Dr. Tobias Ohler, our CFO, will walk you through the presentation. The press release, our IR presentation and detailed financial tables are available on our web page under the Investor Relations section. Please note that management comments during this call include forward-looking statements involving risks and uncertainties. We encourage you to review the safe harbor statement in today's presentation and our 2024 annual report for information on risk factors. All documents mentioned are available on our website. Chris? Christian Hartel: Hello, everyone, and thank you for joining us on our third quarter 2025 results call. Chemical industry is under pressure worldwide, but especially in Europe. The economic situation is tense and demand is weak. At the same time, the market environment is challenging and competitive pressure is high, especially from China. In addition, the stronger euro creates headwinds. Like many other chemical companies, we had to revise our full year forecast downward in the middle of the year. All our divisions are affected. Despite these challenges, Wacker remains focused on executing its strategy and safeguarding profitability. Our third quarter performance and our refined full year outlook on the next page reflect the ongoing headwinds. Sales in the third quarter came in at EUR 1.34 billion with an EBITDA of EUR 112 million. The sum of the 4 operating segments EBITDA amounted to EUR 159 million. This is 18% lower than a year ago and 13% lower sequentially. Despite the lower EBITDA, net cash flow at plus EUR 19 million was markedly better than a year ago. The result was supported by targeted actions to reduce working capital. Utilization rates remain unsatisfactory, and our operations continue to be held back by ongoing macroeconomic and geopolitical headwinds. Our chemicals segments, Silicones and Polymers saw low demand in all major markets. Polysilicon was held back by weak demand and lower prices for solar products due to still ongoing regulatory investigations. On the other hand, semi continued to see strong demand year-over-year and our new etching line proceeds on schedule. Before we move on to the next page, let me say that the Chem-X initiative under sustainability marks an important step towards standardizing data for product carbon footprint calculations. Robust PCF data enables us to reliably speak about the sustainability of our products and strengthen our competitiveness. Now to our refined guidance. Considering the ongoing headwinds and soft order intake, we have updated our guidance. We now see full year sales at the lower end of the EUR 5.5 billion to EUR 5.9 billion range. We expect EBITDA in the lower half of the EUR 500 million to EUR 700 million range. These changes also affect our expectations about net cash flow. Net cash flow will be negative but significantly higher than the prior year. Our priorities are clear: sharpen focus on specialty chemicals, align polysilicon with semiconductor growth, accelerate efficiency and speed across the entire organization. Immediate measures addressing cash and costs are already underway. In the next step, we have launched a comprehensive project with the aim of significant cost savings. It will primarily target fixed production costs. We expect to achieve significant cost cuts in production and production-related areas as well as administration. We're also taking a close look at asset optimization across all regions. Measures are currently being developed. We intend to start implementation in the first quarter of 2026. Our goal is clear: restore competitiveness, protect profitability and position Wacker for sustainable value creation. Let me now hand over to Tobias for a look at the group financials and segments. Tobias Ohler: Thank you, Chris. Welcome, everybody. Let's now take a closer look at the financials for the third quarter of 2025. Sales in the third quarter were EUR 1.34 billion, down 6% year-over-year, and EBITDA declined to EUR 112 million from EUR 145 million a year ago. This development was primarily driven by lower pricing, foreign exchange and volume mix. Excluding others, which held back the reported EBITDA by EUR 47 million, the cumulative EBITDA of the 4 operating segments came in at EUR 159 million. This is down from EUR 195 million in the third quarter of 2024. As previously discussed, the main component of the others EBITDA is the CO2 compensation offset. In the third quarter, this was approximately EUR 40 million. As explained before, we expect a refund of these offsets in the fourth quarter of this year. The lower EBITDA and higher depreciation drove EBIT to minus EUR 20 million versus the plus EUR 30 million a year ago. Depreciation has increased in line with investments made over the past couple of years. Many of our major growth projects are by now completed, and our focus is on growth and filling the new capacities. As already flagged in the H1 report, the German government will gradually lower the corporate income tax from 15% to 10% during the period of 2028 through 2032. This is a welcome development, but it triggers a remeasurement of our deferred tax assets. The lower tax rates led to a deferred tax expense of EUR 30 million in the third quarter of 2025. After this expense, net income was a negative EUR 82 million, equating to a loss of EUR 1.73 per share. Our balance sheet shows EUR 4.42 billion in shareholder equity and strong liquidity of about EUR 781 million. Since the start of the year, inventories are EUR 173 million lower with efforts to reduce stock levels gaining traction. Looking at our financial liabilities, they are largely unchanged since the start of the year at EUR 1.94 billion. The shareholder equity ratio is 52% and remains at a high level. After the end of the reporting period, we successfully closed the order book for a new Schuldschein issue with 3-, 5- and 7-year tranches. Settlement is set for November 6. This is part of our established strategy of having well-balanced debt maturities. At Silicones, sales in the third quarter were EUR 673 million, down 7% year-over-year and 6% below the previous quarter. Following a weak order intake, volumes were largely flat year-over-year. A combination of price, foreign exchange and a weaker mix held back both sales and earnings. EBITDA was EUR 86 million, down 19% versus the prior year. For the full year 2025, we have updated the Silicones outlook. We now expect sales and EBITDA to be a low single-digit percent below the prior year level. In the fourth quarter, we typically see a year-end slowdown. This is nothing unusual, but this time around, we expect a pronounced year-end seasonality due to the ongoing weak order intake. At Polymers, third quarter performance was defined by ongoing slow markets. Sales came in at EUR 344 million, 6% below last year and 5% below the previous quarter. Sales were held back by a combination of foreign exchange and price as well as lower volumes in consumer-related binders. Volumes in construction-related binders, on the other hand, showed some improvement year-over-year, but remained at a low level. EBITDA came in at EUR 47 million at the same level as last year and ahead of the preceding quarter. As a reminder, our second quarter performance was held back by a turnaround. For the full year 2025, we have updated our Polymers outlook. We now expect sales to decline by a mid-single-digit percent with a margin below the prior year level. Overall, end market dynamics have not changed and remain challenging. For the fourth quarter, we expect to see the typical year-end slowdown. At Biosolutions, our performance was marked by a soft demand environment. Sales during the third quarter were EUR 93 million, down 7% year-over-year and 6% higher than in the previous quarter. EBITDA came in at EUR 8 million, down year-over-year and a bit ahead of the previous 2 quarters. The sales and EBITDA performance was primarily driven by the timing of customer project recognition. For the full year 2025, we have updated our Biosolutions outlook. We now expect sales to be similar with the prior year level with an EBITDA of around EUR 25 million. Our focus is on filling our capacities, but we see some customers delaying projects due to market uncertainty. At Polysilicon, sales in the third quarter totaled EUR 197 million, 6% lower year-over-year and 10% lower than the preceding quarter. EBITDA came in at EUR 18 million. Our performance over the past 5 quarters primarily reflected the low volumes of solar-grade polysilicon sold. Headwinds in solar over this period masked our successes in semi. Here, we continue to show strong growth with volumes being significantly higher year-over-year. For the full year 2025, we have updated our outlook for Polysilicon. Sales are now expected to be a high single-digit percent lower than the prior year with an EBITDA of approximately EUR 100 million. In Polysilicon, our semi volumes continue to grow strongly and the new etching line is on schedule. Semi is our primary focus and the new facility Burghausen will support strong semi growth. This supports the segment's overall performance, but we still have significant exposure to solar. As we highlighted on the last call, there might be opportunities ahead due to ongoing regulatory changes in the U.S. solar market. We need to wait for the outcome of these investigations only then we will be able to get a reliable view on how our solar demand may develop going forward. Now let's look at our net financial position. During the first 9 months of 2025, we generated a gross cash flow of EUR 128 million. After cash flow from investing activities before securities of EUR 411 million, the dividend payment of EUR 124 million and some other effects, we ended the third quarter with a net debt of EUR 1.16 billion. Before we get to the Q&A part of this call, let me make this clear. We are acting decisively. We will reduce CapEx meaningfully going forward. I expect 2026 CapEx to come in well below EUR 400 million. We implement targeted measures to improve our capital efficiency. While we have seen some progress already, we see further room to free up cash tied up in working capital. And we have initiated an ambitious holistic cost project aimed at all our production sites to structurally reduce production costs and administrative expenses. As Chris already mentioned, we will keep you informed as our plans become more developed. We face a demanding environment, but our actions are clear and focused. By improving cash flow and reducing costs, we will free resources to invest in innovation and specialty growth, strengthening Wacker's resilience and profitability. Thank you for your attention, and we are now ready for your questions. Operator: [Operator Instructions] The first question comes from the line of Christian Faitz from Kepler Cheuvreux. Christian Faitz: Yes. Two questions, please. First of all, can you remind us where at this point, which of your product groups are impacted by tariffs, even only via precursor products? I'm aware that now also Silicones are hit and what else? And is there any estimated financial impact you could provide us for the remainder of the year from tariffs? And the second question is in Polysilicon. What is the current split roughly between semi grade and solar grade? Christian Hartel: Okay, Christian. This is also Christian answering your questions. Now first question on the tariffs. In essence said, not much more development on the tariff side. And I mean, we communicated already that we expect an impact -- a direct impact of EUR 20 million to EUR 30 million for the full year. And which is, I think, more important, we also expect that we can pass this on to our customers, most of it. And I think it's also fair to say that probably the bigger financial impact goes from the indirect effect, meaning that there is less demand because of uncertainty of these tariffs. But of course, that is much harder to get a grip on. Yes. And so nothing really kind of new. On the mix between semi and solar, I mean, we don't disclose these numbers. But as Tobias also mentioned, we see quite good growth this year. And although we don't speak about next year, I can assure you we will also see growth in the semi side next year. And of course, solar depends on the regulatory decisions. Operator: The next question comes from the line of Chetan Udeshi from JPMorgan. Chetan Udeshi: I was just looking at your Q3 numbers, and I was surprised at the comment of solar polysilicon ASP down Q-on-Q. Why is it down? Because you're really not selling to the Chinese customers. So why is the ASP falling in that business? The second question I had was, you're talking about pronounced seasonality in Silicones in Q4. I mean you've not really seen any seasonal pickup through this year. So why would you see a pronounced seasonality in terms of decline? I mean, I'm just curious, are the orders getting worse in October so far compared to what you would normally expect for this time of the year? And is that mainly a function of weaker volumes? Or is it more that you see incremental pressure on pricing in Q4, which is driving that pressure? Tobias Ohler: Chetan, Tobias here, trying to answer your 2 questions. The first is on the ASP trend for solar, as we have referenced a sequentially lower price. I think you can find that also in the international price index, if you look at that, there's a little bit of a downtick. And as we have that also in mind when setting the price with our customers, we are also impacted by that. The second question is a bit broader, Chetan, on the overall seasonality, I would say all regions and industries see volumes that are lower than last year and the market dynamics haven't changed. So overall, in all industries and regions, customers are very cautious. And I think that sluggish macroeconomic behavior leads to a sluggish macroeconomic environment. And with respect to the current trading that we see, we had the weakest orders in August. So September and October were above that, but they were flat. And if I compare that to the order pattern of last year, we had an uptick in October. And then we had an uptick in November, and we haven't seen that in 2025 so far. And that's the reason why we are cautious to assume a year-end slowdown. So it wouldn't be surprising to see customers working on their inventories. And I mentioned we are working on our inventories. So don't be surprised if that is the broad picture that we feel in the market. So that's why assuming a slowdown and inventory management is our key assumption for the fourth quarter. Chetan Udeshi: Maybe can I ask one more on your Polysilicon business. Again, what I'm seeing as a dynamic is some of the Western polysilicon companies, Hemlock, OCI, they seem to be going down the chain, doing their own wafers, using their own polysilicon and trying to sell the wafers in the U.S. and maybe other Western world. Is this something you will consider as part of your strategy to use your solar polysilicon? Or you would rather just shut it down if there's not enough demand for solar polysilicon, especially one of your plants in Germany, which is focused solely on the solar part? Christian Hartel: Well, Chetan, we have a clear strategy focusing on semiconductor polysilicon. And I think that has been proven to be quite successful with the market share of about 50% globally. And now with the very successful ramp of our new etching line, leading into further volume growth also next year and quite some long-term agreements we have with our global customers. So from that perspective, that is the clear focus we have, the clear strategy we have on Polysilicon. The solar side, we see as an opportunistic opportunity and the Section 232 investigations, once there is a final ruling, this might be an attractive opportunity to continue. But I think it very much depends on the 232 ruling. And before that, I think it doesn't make sense to talk about further downstream integration. But even if it would come, if it would be attractive, then we would follow this opportunity. And then I would say there's also no need for an additional downstream investment. So from that perspective, we stick with semi. That's our strategy. We follow up on the opportunity which might arise from 232 solar in the U.S., but no downstream investments into the solar chain. Operator: We now have a question from the line of David Symonds from BNP Paribas. David Symonds: Yes, a couple for me, please. So just following up slightly on Chetan's question. Struggling to follow the development of the Polysilicon division a little bit. EBITDA virtually halved quarter-on-quarter despite the semi line running quite well. Could you maybe say whether -- I mean I think some of these contracts in the solar business are probably starting to roll off. So was there a material step down in the solar volumes that you did quarter-on-quarter? That's question one. And then question two, bear with me because it's a little bit of a long one, so apologies. But if I look at Silicones, EBITDA was down 20% year-on-year in the third quarter. It set to be down 40% year-on-year in the fourth quarter based on your updated divisional guidance. And coming into the first half of 2026, the comp from this year is very tough. So EBITDA was up 40% in Silicones in Q1. Q2 in Silicones, there was a EUR 20 million one-off. So if I sort of follow that math through, I think you have a EUR 50 million to EUR 60 million headwind in Silicones alone just from sort of mechanical comps next year, which is around sort of a 10% EBITDA drag at group level. And I'm just thinking, is there a chance that EBITDA could actually be down in 2026 overall for the group? Maybe you could comment on that and on any sort of mitigating factors that might benefit you next year. Christian Hartel: Okay. David, on the -- on your first question on the solar side. So we do have solar LTAs for this year, and we also have solar LTAs for next year to come. And that's the good part of it. And I think as we said before, the 232 decision, hopefully soon, will give us some more clearance and guidance on this segment. Yes. Tobias Ohler: David, Tobias here for the Silicones question. I mean you are trying to move towards '26. I think that's far too early. As you know, we typically give guidance in March next year. But nevertheless, your observations for Silicones, I'm happy to comment on these. I mean, you see a significant slowdown in the second half. Why is that? Because we have a drag on, as we described on the top line. I talked about adverse effects from volume mix and exchange rate and some -- also some price, I mean, all 3 together. But on the other hand, also in the second half, we see the impact of our efforts to reduce working capital. And if you run at lower utilization, just to get that under control, you get a lower absorption on fixed costs. And that definitely makes it not a good way to think about the run rate for next year. So it's far too early. We have many moving parts. As Chris mentioned at the introduction, I mean, we have embarked on a comprehensive cost program, exactly focusing also on the fixed manufacturing costs. So I would be not in the position now today to talk about any '26 hint on how the profitability might move. David Symonds: Understood. And then maybe just on that working capital point, I mean I noticed that payables as a percentage of sales is actually down quite a lot last year -- versus last year. Is there anything that's changed there? Or what's meaning that payables seems to be running at a much lower level this year? Tobias Ohler: Payables are running lower also from our reduced investment levels. I mean that is a huge swing factor. As I mentioned, going forward, we are targeting '26. And that type of guidance I can't give because we are just right in the midst of the planning discussions. We will be far below EUR 400 million in next year. And I mean that -- I mean decline in investment also plays a major role why payables are running lower. Operator: The next question comes from the line of Sebastian Bray from Berenberg. Sebastian Bray: I have 2, please. The first is on the pricing in specialty silicones more broadly. I've played with this data in different ways, but it looks as if at the margins, the specialties pricing may have started to slip a little. Is this fair? And what can be inferred about behavior moving into 2026? My second question is on the cost savings measures that have been announced and in particular, as they relate to Biosolutions because we're focused on Polysilicon and if Wacker can maybe shut a production line or what goes on there? But if I take the amount of capital invested in Biosolutions over the last decade, the company could have bought back as a rough guess, 1/4 of its stock at the current stock price with it. What is going on in that segment? And what are your thinking in terms of what is on and off the table when it comes to making potential savings? Could you shut a Polysilicon line? Could it involve divesting parts of Biosolutions? What are your preliminary thoughts? Tobias Ohler: Sebastian, Tobias here to start with your first question on Silicones and pricing in specialties. I think there is not big movement in pricing. I think if you look at the overall development throughout the year, we had a very strong start in the year with a strong mix. But if you look at the overall margin progression in specialties, I think it's rather flat. So from that perspective, it is flat and unsatisfying today because of the low utilization. And that is the topic also of that comprehensive cost program that we are trying to address our fixed cost base. And for that reason, no view into '26 again, as I said before, guidance will be disclosed in March, as always. Christian Hartel: Sebastian, let me answer your second question and maybe for clarification. So this ambitious and holistic cost project, which both I and Tobias talked about is for all the divisions. So it's not specific only for Polysilicon or only for Biosolutions. It's also for -- it's for the whole group. Therefore, it's kind of really comprehensive and ambitious. And it is on the -- especially on the cost -- sorry, on the production cost side. Now your question was more specific on what could we do on Biosolutions and on Poly. And I think that's a totally different topic because on the solar side, I think on the Poly side, it is very clear, as we mentioned before, strategy on semi. If there would be a very clear decision that there is no attractive solar market left for the Western players like us, then yes, you are right. We would have probably one plant too many for our semi strategy. And hopefully, we get an answer from a 232 decision. On the Biosolutions, I think we have a totally different situation. Although the utilization is also not satisfactory at the moment, we do see potential for growing this business. And I think at the moment, it is more by a very soft market environment, which we and others face. But we work very diligently on acquiring new projects in the pharma space, sometimes it takes more time. We have a pipeline working on it. And so that's what makes me confident about this and optimistic about this segment, but it might take more time than we have originally anticipated. Sebastian Bray: That's helpful. Just as a quick follow-up. Can you give any guidance on energy cost relief year-on-year expected for '26 for at current hedging, prevailing spot rates and so on? Tobias Ohler: Again, Sebastian, it's rather early. But I mean for energy, we do have our hedges. We see market prices trending down a bit. So there should be some relief on that. On the other hand, energy costs will be higher next year due to the lower CO2 compensation because that is always coming with a time lag from lower production as a reference. But on the other, there might be some positive changes from regulation. So again, as I said before, it's too early to give you a precise guidance for this cost next year. And the same goes for raw materials, slightly trending lower, but too early for guidance. Operator: [Operator Instructions] We now have a question from the line of Tristan Lamotte from Deutsche Bank. Tristan Lamotte: I was just wondering if we could see material upside to EBITDA from demand for Polysilicon for semis in 2026? Or is it more kind of the case that most of these capacities are already filled and therefore, it's not really going to move the dial and the pricing is fairly stable and on multiyear contracts? So I'm just kind of wondering about the materiality of potential upside. Christian Hartel: Okay, Christian (sic) [ Tristan ]. Again, Christian, I'm happy to answer Christan's (sic) [ Tristan's ] questions. And the answer is yes. We do -- although we don't want to talk about guidance for 2026, I think this is the exception we can really make. We do see an upside to EBITDA from the semi side because of increasing volumes to be sold next year, coming also from our hedging line. Tristan Lamotte: And maybe second, I was wondering if you could just talk a little bit more about where you're seeing pressure from China? And is there any reason that you're seeing why that additional pressure should go away at some point? Or is this kind of the new normal? Christian Hartel: Yes, it's a very, very good question, especially the second part of the question. For the first part, where do we see pressure from China? Yes, it's in some chemical segments. And I would say more also on construction-related and standard product-related stuff. And the main reason is an underutilization of assets in China and a weaker-than-expected market development in China. So we see volumes from China pressing into Europe. Obviously, not so much into the U.S. because of the tariffs. The question is, will it go away? I'm cautious on that. At least we prepare with our cost program to be -- to stay competitive and not to hope for that everything will come back. I think that's the right and cautious approach you should take in such a situation. And of course, we fight on the market for the volumes. And I think here also our very clear strategy on more specialties, on more elaborated products working together with customers is the answer in reducing the share of -- which can be taken by the Chinese or other competitors. Operator: [Operator Instructions] Ladies and gentlemen, there are no more questions at this time. I would now like to turn the conference back over to Joerg Hoffmann, Head of Investor Relations, for any closing remarks. Jörg Hoffmann: Thank you, operator. Thank you all for joining us today and for your interest in Wacker Chemie. Our next conference call on the full year 2025 results will take place on March 11, 2026. As usual, we intend to publish our preliminary numbers at the end of January or the beginning of February. As always, please don't hesitate to contact the IR department if you have further questions. Thank you for your interest. 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, ladies and gentlemen, and welcome to Ivanhoe Mines Third Quarter Earnings Conference Call. [Operator Instructions] Also note that this call is being recorded on Thursday, October 30, 2025. I would now like to turn the conference over to Matthew Keevil, Director, Investor Relations and Corporate Communications. Please go ahead. Matthew Keevil: Thanks very much, operator, and hello, everyone. I'd just like to, first and foremost, thank you all for joining us today. It's my pleasure to welcome you to Ivanhoe Mines' Third Quarter 2025 Financial Results Conference Call. As the operator mentioned, this is Matthew Keevil. I'm the Director of Investor Relations and Corporate Communications. On the line today from Ivanhoe Mines, we have Founder and Executive Co-Chairman, Robert Friedland; President and Chief Executive Officer, Martie Cloete; Chief Financial Officer, David van Heerden; Chief Operating Officer, Mark Farren; Executive Vice President, Corporate Development and Investor Relations and Mr. Alex Pickard; and Executive Vice President, Projects, Steve Amos. We will finish today's event with a question-and-answer session. You can submit a question using the Q&A box on the webcast as well as through the conference operator via your phone line. Please contact our Investor Relations team directly for follow-up questions that are not answered during the call. Before we begin, I'd like to remind everyone that today's event will contain forward-looking statements that involve risks and uncertainties that could cause actual results to differ materially from those in the forward-looking statements. Details of the forward-looking statements are contained in our October 29 news release as well as on SEDAR+ and at www.ivanhoemines.com. It is now my pleasure to introduce Ivanhoe Mines' Founder and Executive Co-Chair, Robert Friedland, for some opening remarks. Robert, please go ahead. Robert Martin Friedland: Well, thank you to everyone, all of our stakeholders all over the world. I'm addressing you from Riyadh, Saudi Arabia, where we've just concluded the future investment initiative that occurs here annually in Saudi Arabia, and it has become the premier investment destination in the world for people that are interested in the materials that comprise our supply chain and country's national security as it pertains to critical raw materials. And so it's particularly appropriate that we welcome the Qatar Investment Authority with their $500 million equity investment in Ivanhoe Mines. As a leading institutional shareholder in this country with superb relations throughout the Islamic world, which I believe is the least explored part of this planet's mineral endowment. We welcome our Qatar Investment Authority as a long-term shareholder, and we'll be talking more about our excellent relations and future together in the near future. It's also a very good day today to tell you that yesterday, we fed the first ore to the concentrator at what will become the largest precious metals development in our industry. It was in the 1980s that we began working in Limpopo province in the northern part of South Africa to find a giant deposit on the northern limb of the Bushveld, which is quite different than the rest of the Bushveld. We have discovered a super monster, very long-lived, ultra-important Tier 1 polymetallic mine. And the ore was fed to the Phase 1 concentrator yesterday, opening up at least a 100-year era of a very important developer of gold, platinum, palladium, rhodium, nickel and copper. And rhodium is one of the most strategic of all metals, but platinum and palladium are also used in data centers and are critical to every server in almost every data center in the world. So with that, I welcome all of you. It's -- I want to thank all of our people that have been working on our recovery program from the seismic event we experienced in May. We're delighted with our progress and the efforts of our people. And with that, I'll turn this over to Marna to start telling you the story. Thank you very much. Martie Cloete: Thank you, Robert, for your introductory comments, and good morning, good evening, everyone, and thanks for joining us on our quarterly call. It's indeed quite exciting times here in South Africa. We're preparing for the G20 Summit later this month. And I think we couldn't have timed the start-up of Platreef better to coincide with this important event in South Africa. You are seeing a picture of our management team there in front of a discharge and settling pond. That's part of our Stage 2 dewatering. And I'll quickly talk you through our quarter 3 turnaround strategy and some highlights at Kipushi. We're really on the brink of a new horizon. We had new horizons as a tagline associated with us before. And I'm bringing it back again today because we're quite excited about our plans coming together at Kamoa-Kakula. So if we can turn over to the next slide. The third quarter was always expected to be a slightly softer quarter, but we were reflecting on what we've achieved physically on site. And if we take the team and the massive effort that went into our dewatering. It's going exceptionally well. The pumps that we flew in from China made a difference. We're seeing a record speed of building projects, and Mark will take you through that in the presentation a bit later today. The team has really pulled off a significant effort to get the mine dewater as quick as possible. And we've got a team of technical experts. We brought them together. We're busy with our new life of mine plan that we plan to release sort of in the first quarter of next year. And we currently anticipate to bring Kamoa-Kakula back to copper production of over 550,000 tonnes in the future. We were anticipating to be in a position to publish our guidance for 2026 and 2027 a bit sooner, but we did find that there's a lot of moving parts. We are dewatering real time. We have these technical experts that all need to reach consensus. We are quite excited about what's coming through these numbers. And we would rather take the time and get everything accurate and then publish it out to the market. So by the latest, we will put these numbers out probably early January, but maybe before then. So that's what we anticipate to do over the next couple of months. Just quickly speaking about Kamoa-Kakula and focusing a bit away from our turnaround strategy, but it's been a very exciting time on the smelter. We're going to start with the heat up soon. We're going to feed first concentrate into the smelter early December. And the technical people on the call will talk you through what that looks like and how we will go about feeding the smelter in early December. We've also completed turbine 5 at Inga [indiscernible] , another major project that the team completed very successfully, and we're starting to transmit power through the grid, and we expect to receive another 50 megawatts through the grid in November. And then as Robert mentioned, exciting times at Platreef. And then Kipushi is sort of a rising star that we shouldn't lose track of. We've completed the debottlenecking program, and we are on track to meet our production and cash cost guidance at Kipushi. And then the same for Kamoa-Kakula. We're also on track to meet our revised production guidance and cash cost guidance at Kamoa-Kakula. Just one number I want to sort of address head on is the cash cost that you see at the bottom of your screen. That is the quarterly cash cost at Kamoa-Kakula. It does read higher than the numbers that you usually see. That's just because of the base used to calculate this cash cost for the quarter. We had lower production. We carried some G&A in that number. And then obviously, we were feeding a bit lower grade feed into our plant. So that's the reason why you see a differential there. So if we move over to the next slide, talking about health and safety, it remains our #1 priority. And I think these statistics speak for themselves, especially for a company that's currently executing projects and running large turnaround strategies. We haven't had any LTIs recently at -- on site at Kamoa-Kakula. And the construction of the smelter, which is a significant achievement, was completed without a single lost time injury recorded. I think that is really a great testimony to our project team and our construction teams. And then similarly, the construction of the Kipushi concentrator plant that started in September of 2022 as well as the recently completed debottlenecking program. They were all achieved without a single lost time injury. So I think a big shout out to our operational teams on the ground. They are doing an exceptional job. So with that as an introduction, we will now delve into the details, and I will ask David to take you through our financials for the quarter. David Van Heerden: Thank you, Marna, and good morning and good day to everybody joining the call today. We can move straight into the next slide. Kamoa-Kakula sold almost 62,000 tonnes of payable copper in the third quarter. Production for the quarter was in excess of tonnes sold, and that led to an increase of contained copper and concentrate inventory on hand that increased to 59,000 tonnes at the end of the quarter. That was up from almost 54,000 tonnes on hand at the end of Q2. The inventory at the nearby Lualaba copper smelter in Kolwezi was approximately 7,000 tonnes at the end of Q3, and that's down from the almost 19,000 tonnes that was there at the end of Q2. So the majority of the inventory is really sitting ready to be smelted by the Kamoa-Kakula copper smelter. It is really a supersized piggy bank at the current copper price, which is just waiting to be broken. We expect unsold inventory to gradually decrease, and we've said this previously, but we sort of maintain that, that should decrease to around 17,000 tonnes as the smelter is ramped up. Kamoa recorded revenue of $566 million in the third quarter, and that was at a realized copper price of $4.42 per pound of payable copper. Moving to the next slide. Kamoa-Kakula recorded EBITDA of $196 million for Q3, and this was impacted by the lower tonnes sold and the lower grade of ore processed as the recovery plan progresses. Considering that this is what at least we believe to be Kamoa-Kakula's loWest point of the turnaround, the margin of 35% looks pretty good. And cash cost for the third quarter of 2025 was $2.62 per pound of payable copper. Cash cost for the year-to-date sits at $1.97 per pound, and it's still well within our guidance for the year of $1.90 to $2.20 per pound of payable copper. Grade mined at Kakula was roughly 5% in Q1, 4% in Q2 and decreased to 2.5% in the third quarter, which was sort of in line with the overall grade processed from Phase 1, 2 and 3 as well as from the surface stockpiles in the third quarter. We do expect that mining of the higher-grade areas on the Western side of the Kakula mine will ever commence in November. As Marna mentioned, Q3 was really an anomalous quarter when it comes to cash costs, not only because of the impact of lower grade, but also because of other factors that will be addressed as the turnaround progresses. At the moment, the mining teams are doing mainly mining development tonnes as part of the reestablishment, which does come at a higher cost than stoping. The crews are also getting used to the smaller heading sizes and efficiencies are expected to improve in the future. And as we have explained previously, we will get noteworthy cash cost reduction benefits and from the smelter from early next year as the smelter ramps up. If we move to the next slide, and this illustrates the usual Kamoa-Kakula EBITDA waterfall. The EBITDA waterfall highlights the drivers of the quarter-on-quarter EBITDA change for Kamoa-Kakula. So while we recognized $90 million of abnormal cost in Q2 relating to the seismic event in May 2025, this was down to $9 million in the third quarter, resulting in a delta of $81 million illustrated as the green bar to the left. In Q3, only cost relating directly to the dewatering effort was classified as abnormal. So for Q3, this was mainly the cost of diesel to run the generators powering the dewatering pumps as the mining crews were no longer idle. The other big driver of our lower EBITDA was then the impact of the lower tonnes sold, which was almost $300 million. The higher quarter-on-quarter copper price resulted in a $25 million benefit. Logistics cost was a little bit lower quarter-on-quarter and other costs also came down from the elevated levels in Q2. We turn to Kipushi on the next slide. Following Kipushi's record production in Q3, Kipushi sold almost 50,000 tonnes of payable zinc, recognizing a record quarterly revenue of $129 million. Kipushi's contribution to Ivanhoe's EBITDA was $27 million for the quarter. I think a pretty good result. Considering that Kipushi had a number of days downtime while the times for the second phase of the debottlenecking was completed in August. Mark will talk you through the success of the debottlenecking later on in the presentation, and we expect Q4 results to be further improved as the production benefits are realized. Cash cost remains nice and stable and right in the midpoint of our guidance. We expect to see the benefits from the increased production from the fourth quarter onwards. Turning to Ivanhoe Mines' consolidated profit and EBITDA on the next slide. Ivanhoe recorded a quarterly adjusted EBITDA of $87 million in Q3. The key driver of the lower adjusted EBITDA was really the lower sales at Kamoa-Kakula, as I've already explained, and its impact on Ivanhoe's share of the Kamoa-Kakula's EBITDA. This was partly offset by the increase in Kipushi's EBITDA as exploration expenditure and overheads remained largely consistent. Ivanhoe's profit for the third quarter was $31 million compared to $35 million in Q2 2025. Turning to a liquidity snapshot on the next slide. Ivanhoe had $1 billion of cash and cash equivalents on hand at the end of September, while Kamoa had cash on hand of $125 million. We completed a private placement with Qatar Investment Authority, as Robert already mentioned in September for gross proceeds of $500 million and received a further $70 million from Jun as they exercise their anti-dilution rights. And Kamoa Copper concluded a 2-year term facility of $500 million during the quarter and drew down $370 million in early October. Both Ivanhoe Mines and [indiscernible] also funded our proportionate share of a $135 million cash flow from Kamoa-Kakula in September. Turning to the CapEx spending plans on the next slide. We lowered both the top and the bottom end of Kamoa-Kakula's 2025 capital expenditure by $100 million and just shifted that into 2026. The work on Kamoa-Kakula’s updated life of mine integrated development plan is well underway. And then the 2026 CapEx will be narrowed and better defined as that is completed and worked into the guidance. Expenditure at Platreef is tracking at the lower end of the 2025 guidance and the capital expenditure guidance range for 2025 and 2026 is kept unchanged. The first feed of the ore into the Phase 1 concentrator took place, as Robert mentioned, recently. And the Phase 2 expansion is proceeding as it's laid out in the feasibility study completed earlier this year, which plans then for the Phase 2 concentrator module to come online in the fourth quarter of 2027. We are also working on a senior project finance facility for Platreef Phase 2 for a total of $700 million, and that's progressing pretty well and expected to close in the first quarter of next year. Kipushi's debottlenecking program was completed in August, ahead of schedule, under budget, and I've already mentioned, Mark will take you through that. And we have slightly raised CapEx for Kipushi just to cater for accelerated construction of the second tailings facility Paddock as we prepare for increased production following that debottlenecking. On the next slide, this slide shows our consolidated pro rata financial ratios, which have improved compared to where we were at the end of last quarter. That's mainly due to the cash received from the September private placement from QIA. And we are in a very healthy pro rata cash position with over $1 billion of cash on hand. And we are taking on a little bit of more debt at the Kamoa-Kakula level, but EBITDA and therefore, the net debt ratio will improve as we continue to execute on the turnaround plans at Kamoa-Kakula and as EBITDA from Kipushi increases and Platreef's EBITDA is added in the future. Our target net leverage ratio remains 1x through the cycle, and we still believe that, that will come down in the near term as these -- as we progress our plans. I now hand over to Mark Farren, our Chief Operating Officer, to start the operations update portion of today's presentation. Mark Farren: Thank you, David. If you go to the next slide, please. Thanks. Okay. So we have spoken about this, and we do think this was the bottom. It wasn't really the milling so much. I mean we milled 3.4 million tonnes, but it's the grade. It's really the grade. And it's -- if I can explain to the listeners, it's really about 2 things. So mainly, it's getting into the higher-grade areas of the Kakula mine, which is all in the lower section of the mine, obviously, where the water issue is. And then as we move and develop the footprint at Kamoa 1 and Kamoa 2, the grade improves. So you're going to look at a number of things that will influence the grade over the next immediate short term and then over the longer term. So that's why we're sort of pretty sure that we've hit the bottom of everything, hopefully, and we'll see a big turn from now going forward. What is encouraging is Phase 3 concentrator is running sustainably at about 30% above its design capacity. And when we talk long term, you will see the references always to 17 million tonnes. So setting up this infrastructure that we have to get to the 17-odd million tonnes and then to put -- to increase the grade in all the different areas to get that target -- short-term target, I think, of getting over the 550,000 tonnes of copper. That will be in all the project plans and all the long-term plans that you see coming forward. And my belief is that -- and there will be some further increases above that in the longer term. Next slide, please, David. Just to talk about the water. The blue looks like a fish. We call it a whale. It actually looks like a whale. But you'll see the West and the East have been joined. Between the 2, it was sort of flooded between the 2 and in the lower sections of both. The mining was actually taking place in the top sections of the West and the top sections of the East a little bit. And those areas are actually the lower grade areas, so the 2% grade areas. The light blue on the Western side is going to be the first target area that we dewater. And we've done this in stages. So Stage 1 was to install temporary pumping capacity and stabilize the water levels at levels way above where they are now. And then Stage 2 was to put these high-capacity centrifugal pumps down these vertical shafts and then pump out at 2,600 liters per second. Those pumps were imported. They were installed within 6 weeks, and I think the team on site has done an absolutely fantastic job to get all that pumping infrastructure working. Stage 3 is really going down the declines and opening up within the existing infrastructure, pumping infrastructure and rehabilitating the underground infrastructure and then dewatering first the West and then the East. And we believe in the month of November, the West will be completely dewatered and then we will target the East. And I believe that early next year, the total East will be dewatered. And as you can imagine, all the crews are waiting to go back into the higher-grade Western section. It's all been scheduled, and I'll talk about the life of mine planning in the next couple of slides as well. But there's a proper solid pumping plan to get the infrastructure back on track and to get the crews back into the higher-grade mining. Thank you. Next slide. So this is just a picture of what we've had to do. We had to go down through ventilation shafts, about 300 meters deep put in very high capacity pumping systems in. I thought the idea was very clever and it's worked extremely well. It's probably going to be used in the longer term as well because these pumps are working really well as long as the water is clean. So I guess, going forward, we'll use these high-capacity pumps in different areas of the mine. Thank you. Next slide. This is just a picture to show you what we're dealing with when we talk about rehabilitation. So you'll see the spalling on the side walls, and that was really what that whole incident was about. The seismic activity we referred to is mainly side wall spalling. It's a pillar spalling, which has to be then rehabilitated as you go down and then recapacitate the pumping infrastructure as you go down. The next slide will just show you what it looks like when it's rehabilitated. Next slide, please. So if you have a look at this, the side walls and the hanging walls are re-supported and it looks like a new mine, and it goes quite fast. We've made very good progress, I believe, with the rehabilitation. And I think, like I said, the month of November, we should open up the whole Western front, which is about 50 new faces that the teams can mine. Next slide. Yes, and a different approach to planning. This is just one of the pictures, but it's done the same principles are applied to the new mines, the Kamoa 1 and 2 mines, they have the same principles applied. You've got a very good and Marna referred to it, a very good competent team that's working on the mine design of the future. We do believe it will be finished by quarter 1, 2026. And we'll move as fast as we can to give short-term production guidance, aiming for the next 3 years and then the longer term as well. We do believe the engineering is being done with the best experts in the industry to make sure that we get back and that we don't have a repeat of any of this again. The plan short term, in my opinion, is to get back to 70 million tonnes with the best possible grades. And then you can see that little block in green, which means that we will exceed the 550,000 tonnes per annum in the medium term. Medium term to me is the next 2, 3 years. So -- and then take it on from there to grow the business. Next slide, please. The smelter, we did speak about the smelter. It's sort of coming in at the right time for us because of a couple of things. Number one is obviously, the thing we've always spoken about is our logistics costs. So we're now half the logistics cost. We dropped it to less than half, I guess, because we're going to report -- we're going to export now 99.7% blister copper, anode copper actually. And the other thing that's just coming sort of -- it's going to help us quite a bit is the asset credits. And you can see that we're expecting to receive prices of in and around $500 per tonne, which is very high in the industry. But there have been Zambia -- there have been export bans in Zambia, which means that the logistics cost to bring asset in from other countries is going to cost a lot more. So we're sitting right in the DRC where we need the asset for all the other mines. And so I think it's going to be very useful for us. And then obviously, David, a little piggy bank needs to be broken that 59,000 tonnes of unsold copper needs to be fed into our smelter. And what we've had to do because of the [indiscernible] interruptions. [indiscernible] is still not perfect. We're doing a lot of work to stabilize the infrastructure as well, and we did speak about Inga being commissioned, which was done very, very well. There are other things that we're doing on that network to stabilize the network completely, and they will take a little bit more time. But we've put in uninterrupted power supply of 60 megawatts. It's a huge project on its own, and it's being commissioned as we speak, which means that we can start feeding our direct to blister smelter. It's over $1 billion project that was done extremely well in my opinion. I think one of the best installations in that country or the best installation that the country has ever seen. I'm very proud of the work that's been done. And that thing will be heated up in the month of November and first heat in December. So we are very excited for those reasons. We're going to make money on the asset, and we're going to drop the transport cost a lot. Thank you. Next slide. The turbine at Inga is complete. It's online at the moment. It's a huge project on its own. It's been done very, very well. And we will be receiving the first 50 megawatts of power in November, and then that ramps up. If you cast your minds to what it was, it's 180-odd megawatts of power that comes out of that turbine, of which we will be able to receive 150 megawatts. As we fix, like I said earlier, we strengthened the transmission. There are upgrades that we're busy with, such as these resistor banks that we're going to complete in quarter 2 2025, 2026 to increase and improve the stability of the whole infrastructure. There are capacitors that we're also installing as additional projects. But generally, we're strengthening the network for the country. So that whole DC line and its changes over to AC are being strengthened as we speak. Thank you. Next slide. The green power, we're busy executing 2 of 30 megawatt on-site solar facilities with battery storage. I think these are 2 fantastic projects that also bring our operating cost, our power cost down compared to diesel hugely. It's less than half of the diesel cost. So we're having -- our first 2 will be running in quarter 2, 2026. They're big installations, they have fantastic installations, and we are working on work to expand that on-site solar facility to 120 megawatts. So the first 2 will give us about 25% -- 20% to 25% of our energy requirements, and you can work out what the rest will do. And I think it's expandable. It's something that we want to take forward and expand incrementally as we grow our business and as we expand into the Western Forelands. It has a very good benefit of being clean and cheap and it complements hydropower very nicely. So I think -- as we move into the future, we'll be working on clean hydropower and clean solar power to expand our business. Thank you. Next slide. Kipushi, we did speak about Kipushi, I think, a couple of times. We were dealing with the debottlenecking projects. Both of them are now complete. It was split into 2 basically, a shutdown in June and a shutdown in August. Both are complete. There's a little bit of work that we're still doing to add energy back up basically, diesel back up just as contingency back up, and that will be complete in November. We are taking Kipushi to about just north of 250,000 tonnes -- 250,000 to 300,000-odd tonnes of zinc. That will happen from next year and there will be a strong quarter. This last quarter, quarter 4 will be stronger than quarter 3, which was quite a significant improvement over quarter 2. But we are moving to set up Kipushi to do about 250,000 to 300,000 tonnes of zinc next year, which puts it on the next slide, I think, next slide. Yes, puts it #3 in the world. So it's a small mine, but it's very high grade. And you can just have a look at that grade. It's north of 30%, that little red dot, and it takes us to pretty much the third biggest in the world. Also, I might add that the zinc price has gone up quite nicely. Our C1 cash cost has been contained very well by the operational people. And the project has been done, I think, competitively on time, on budget. It's gone really well. And we're looking forward to see what Kipushi does over the next couple of years. Thank you. I think, Alex, are you going to do Platreef? Steve Amos: I'm going to take this Mark. Thanks. I'll take it. Yes. So yesterday was a big day for Platreef. We fed the mill with first ore in a long time, ran the mill for 4 hours at 30% bore load, which is in line with mill hot commissioning strike ramp-up. We've since stopped the mills. We're going to add the rest of the ball, so up to 100% charge. That will probably take us a day, 1.5 days, and then we'll restart the plant and start the ramp-up. I would expect approximately a week or so from when we restart the mill, hopefully tomorrow until when we get the first concentrate. So that will be an exciting thing for Platreef. Next slide, please. I'll talk a bit about Shaft 3. Shaft 3, 4 million tonne per annum rock hoisting shaft. It's the picture in the middle. You can see the sinking head gear, the brown construction there. Really necessary for Phase 1, to sustain Phase 1, but also very important for Phase 2 to ramp up the production to 4 million tonnes plus and to create a nice big stockpile before we start the Phase 2 plant. With this shaft and with Shaft 1, Shaft 1 is the shaft on the left-hand side in the background, we'll have a total of 5 million tonnes of hoisting capacity. Shaft 1 will, for the most part, be used for mine and material and Shaft 3 will be used for rock hoisting. In the foreground, you can see a whole lot of steel work that is the permanent head gear structure for Phase 3, which we will load into place. The schedule, and we're on schedule is end of March 2026 to start hoisting rock from that shaft. That includes underground rock handling, which is a crusher to conveyors and a tip and then obviously hoisting the -- hoisting through the shaft. Next slide, please. I'll talk a bit about Phase 2 and Shaft 2. So Phase 2, for those of you who don't know, is a 4 million tonne mine and concentrator, produces about 450,000 ounces, platinum, palladium, rhodium and gold, about 10,000 tonnes of nickel, about 5,000 tonnes of copper. We've awarded the EPCM contract to DRA based in South Africa. They're the same contractors that did the Phase 1 work. We've started the early procurement. We plan to break ground with the earthworks in Q1 next year. And then Q3 or Q4 2027, we start the big plant. So that's a total of 4 million tonnes with the hoisting capacity. For Shaft 2, which we require for Phase 2, but it also opens up Phase 3. We've just awarded what we call the Slype and line contract. What we've got on site at the moment, you can see the head gear complete. We've got a 3.1 meter diameter raise bore all the way down to 950 meters. What the Slype and line contract does is that it slype the 3.1-meter diameter shaft to a 10-meter diameter shaft. We then line the barrel and equip the barrel. And by Q4 2028, we plan to use that shaft for mining material. At a later stage, we equip that shaft to hoist rock -- and eventually, that shaft will be an 8 million tonne per annum rock hoisting shaft, which will support Phase 3 of the project. Yes. So very exciting. We will mobilize the crew for the slype and line in Q1 next year. And that's about an 18 -- 24 to 30-month project. Next slide, please. Do you want to take that, Alex? Alex Pickard: Yes. Thank you, Steve, and good day to everybody on the call. It's Alex Pickard here. We added this slide really just to congratulate ourselves, I think, on the impeccable timing of first production at Platreef after certainly more than 25 years of effort. We're just past LME Week here in London, and there's obviously been a lot of emphasis in the market on the gold price and also the copper price. But in fact, the PGMs, the Platinum Group Metals are the best-performing metals year-to-date. So platinum is up approximately 78% and palladium is up 56% since January. So this means that Platreef will produce even stronger margins, remembering, of course, that as we ramp up to Phase 2, we expect to be one of the lowest cash cost producers in the whole industry because of the large-scale mechanized underground mining and also the byproduct credits that we received from nickel and copper. So on the chart on the right-hand side, you can see the spot basket price for Platreef today, which includes platinum, palladium, rhodium and gold is $1,900 per ounce. And then the target cash cost once Phase 2 is up and running is $600 per ounce. Phase 1 is certainly sub-$1,000 once we are fully ramped up. If you look also at the sensitivity analysis that we put in our most recent feasibility study, which was published earlier this year, at spot prices, the NPV is 40% to 45% higher than the base case we presented. And I think we're very firmly of the view that the NPVs that you see here on the bottom left are not really reflected in Ivanhoe Mines share price today. But hopefully, that will start to change as we will be reporting revenues and earnings from Platreef from the next quarter, which is quite exciting. So moving to the next slide and to exploration, starting as usual with the Western Forelands. So across the Western Forelands this year, we've drilled over 40,000 meters of diamond drilling, and that includes a lot of work that we've been doing around the Makoko district, which is pictured here. I'll ask the audience just to look quite carefully at this graphic, which is showing the 18-kilometer long strike length. And what you can see is the outline of the Makoko West and Kitoko ore bodies where we announced the upgraded resource in May of this year and over 9 million tonnes of contained copper between those 3 ore bodies. You can also see, if you look to the east, the proximity of Kakula West, which is only 8 kilometers away. And then on this chart, what you're looking at, the larger colored circles that you can see are the holes that we've drilled this year subsequent to the new resource, and you can reference the grade of those holes against the scale that's shown in the key. So what you can see is that we've been very productively infilling the area between Makoko West and Kitoko with some good grade intersections. And as well as that, we've been stepping out to the south of Kitoko and also to the east of Makoko with some success. And I think what we have in the Western Forelands really is some of the best banquet book copper drilling that you will find anywhere in the world. Our discovery cost is demonstrated at less than $10 per tonne of copper across the Western Forelands. We're now moving into the wet season. It's sort of starting in November and certainly in December. But we've made preparations, again, I think it's the third year running that we'll be drilling through the wet season. So watch this space at the Makoko District, but also elsewhere in the Western Forelands license package. On the next slide, -- so really the continuation of the strategy that we have at the Western Foreland is the work that we are doing in neighboring Zambia and Angola. So starting first with Angola, we have a huge license package, over 22,000 square kilometers. So that's multiple the size of the Western Forelands. We've been conducting baseline geochem and geophysics, which is now complete. And we are about to start our first drilling on this land package in the fourth quarter. So that's quite exciting. We have 2 drill rigs mobilized for over 6,000 meters of drilling. Zambia is not quite advanced. We only recently acquired that large land package. And really, we're doing the sort of foundational work to set up to commence drilling in Zambia in Q2 of 2026. So watch this space on both of those fronts. And then the final slide, moving even further afield, I think Marna mentioned new horizons and Kazakhstan is certainly a new horizon where we've formed an exploration joint venture to earn up to 80% over time, and that is over 16,800 square kilometers. So again, it's, I think, about 7x the size of what we're looking at in the Western Forelands. I think given that we only signed this joint venture in the first quarter and we really state the licenses in Q2, the team -- the joint venture team have done a fantastic job of mobilizing very quickly, and we are already drilling. So we've already started a 17,500 meter diamond drilling campaign. And then some very good initial news is that we have seen visible copper mineralization in the first drill hole on that license package. So we are very excited about the future in Kazakhstan and looking to leverage from that. So that concludes the presentation, and I will pass back to Matt Keevil to chair the Q&A. Matthew Keevil: Thanks very much, Alex, and thanks, everybody. We'll now proceed with the Q&A period. First and foremost, we're going to clear the phone lines of any questions coming in through the phones from our analysts. So operator, please do move forward with the phone Q&A period. Thank you. Operator: [Operator Instructions] Your first phone question will be from Ralph Profiti at Stifel Nicolaus. Ralph Profiti: Very pleasing to see the recovery plan at Kamoa-Kakula going accordingly. And congratulations on the landmark investment by QIA. Marna, as the mine has been dewatering and continues so, have you seen or do you expect to see inflow rates increase basically due to the pressure differential between sort of external and in situ pressures on dewatered workings. It sounds like judging from the progress that inflow rates have at least been relatively stable. And at last, I remember, sort of 3,800 liters a second was kind of that rate. And is this still the case? Martie Cloete: Thank you, Ralph. I'm going to let Mark answer the question. It's quite a complicated setup because you've got horizontal pumping as well as vertical pumping. And obviously, as you go ahead and dewater, you need to move infrastructure down. There's temporary installations and permanent installations. So it's not -- you don't sort of measure it per meter day by day. But we haven't seen increased inflow rates. I think that's safe to say. But Mark maybe just explain to you how the meters that we dewater differentiate from day-to-day as a result of sort of these different pumping installations that we are busy with. Mark Farren: Thanks, Marna. No, that's right. You're actually not wrong, you're pretty good. So we pump around about 4,000 liters a second. It hasn't changed yet. And then we're trying to lower the whole system, let's call it the system, which relies on the vertical pumping system, but also the horizontal -- let's call it the horizontal or the [indiscernible]. So your rehabilitation and your [indiscernible] system also needs to go down at the same rate. So vertically, it's about a meter per day that we lower. We have not really significantly increased anything. So we're running at about 4,000 liters a second for now. We have updated our hydrological model, which tells us over in the future. So in the future, when you carry on mining, particularly towards the West, we will increase our pumping rates. So in other words, we will encounter more water. We know about it as we move further West when we're mining. But that's going to be all in hand. If you add the pumping capacity that we have currently, we're sitting with about north of 10,000, about 11,000 liters -- let's say, 10,000 liters a second of pumping capacity with an inflow of 4,000. As we increase hydrologically, as the water increases as we move West, we increase that vertical and horizontal pumping capacity where it's needed. So it's nothing out of the ordinary and nothing that we don't expect. Thank you. Ralph Profiti: Understood. I appreciate that. If I can sort of switch gears, a completely different topic and encouraging to see the progress on Platreef. Can you help me bring you up to date on the offtake agreements negotiations with multi-parties and counterparties. I'd just like to know what the milestones we should be looking for as those are secured in the future. Martie Cloete: I'm happy to take that. But Alex, maybe you can also just augment. So the Phase 1 concentrate we've placed with Northam, and that's pretty much finalized and in place. And then a portion of our second phase concentrate we've placed with Sibanye. We actually had a meeting this morning with SFA, and they're currently doing a tour of South Africa and capacity. And we understand that there's likely to be capacity for the remainder of our concentrate, but those portions we still need to tie in as we bring Phase 2 online. But we are quite confident that we will find a home for the remainder. There's also expansion capacities at some of the existing fully integrated producers where one can join forces to do capital expansions if need to be, but we don't even think that would necessarily be needed. Operator: [Operator Instructions] Next, we will hear from Andrew Mikitchook at BMO Capital Markets. Andrew Mikitchook: Yes. So some great questions already been asked and answered. But maybe if I could just get a few more comments from Mark on -- maybe on the basis of Slides 20 and 21, where you showed the before and after of the rehabilitation in Kakula. Is that representative of what you're seeing? Or what's the range of impact you're seeing as you're dewatering and your crews are going in there to rehabilitate. And generally, I don't personally consider myself an expert in rehabilitation. Is what we're seeing in those pictures extensive or expensive or time-consuming to rehabilitate? Mark Farren: That's a good -- yes, so it's a good question. It is representative of what we're finding. There are some areas that are much better than that. And there are some -- there's 1 or 2 areas on the eastern side that are worse than that, that we're busy with. But we haven't found anything that we can't deal with. So we're finding the pillars falling as we lower the pumps, we rehabilitate them with crews that are trying to do it. I think there's 7 different crews that are doing different areas, and they've done 10-plus kilometers of this. So they're pretty familiar with what to do. They're making the progress. They're keeping us on track. And like I said to you, we should get the West open and dewatered in this month, in the month of November, which is a major breakthrough for us. And then we can put the resources in and make sure we get the eastern side reestablished with their pumping systems, et cetera, et cetera. So I do believe they've made the progress we needed them to make. The risk to me was putting in those big pumps that we didn't know about. We didn't know or I didn’t used them before. We didn't know if it was going to work, and it worked exceptionally well. So we have made the progress that we wanted to make, and we continue to make good progress. We will talk to you if something goes wrong, we will talk to the market and say, look, we hit this problem or that problem. But so far, I think it's going very well. Thank you. Andrew Mikitchook: And just to come back to the other project of the moment, the Platreef. We just come back to the Shaft 1 and 3 and how those are performing so far in terms of ramping up the Phase 1 because they're the key that are holding together both the ramp-up and the expansion to Phase 2. Just how has the performance been so far? Mark Farren: I'll do that one as well, if you don't mind. So Phase 1, we sort of pushed out the commissioning of that plant to focus in on the critical infrastructure to get Phase 2 running. So Phase 2 really had to be done through shaft #3. Shaft #3, as Steve pointed out, it is a 4 million tonne hoisting shaft. That shaft will be commissioned and running in quarter 1, basically by March next year. Remember, Phase 1 is something like 700,000 or 800,000 tonnes a year. It's a tiny little mine. It's a small little mine. But we have gone very quickly. We were executing Phase 2 in parallel. That shaft, that shaft #3 is what we needed. And that I'm telling you now will be running at the end of quarter 1 next year, which completely derisks Phase 1 hoisting. So in other words, the longer open stoping that you need to do in Phase 1 is completely derisked. You can put mining material down, you can blast, you can hoist, you can do everything else you need. and it accelerates the development towards the footprint of Phase 2. So we can increase the development as much as we need to. We can open up the long-haul stoping phases for ourselves while Steve Amos is busy building the concentrator. So I think the decision to do that shaft #3 was a good decision. And he also spoke about shaft #2, which we also do Phase 2, although it's for Phase 3. So it's sort of derisking Phase 1 by doing shaft #3, getting Phase 2 ready early and then longer term, setting up Phase 3 by doing shaft #2. So the sequencing is working, in my opinion. The risk is much lower than it would have been. And I think we've done a good job there. It's going to work. Thank you. Operator: [Operator Instructions] And next question will be from [indiscernible] at Bloomberg Intelligence. Unknown Analyst: I just had 3, if you don't mind. Firstly, on recoveries, you've mentioned that you're aiming to target recoveries of 90%. Obviously, recoveries have been lower than that given the grades you've been processing. And of course, then you'll move up to that 95% later on when things are fully recovered. But just on that 90%, we're roughly at, I think, around 82% in the quarter. When should we apply that 90%? Is that potentially going to come in as early as kind of Q1 next year? Or is that a little bit later? Alex Pickard: Maybe I can answer that one. So the reason for the lower recovery, the 82-odd percent is twofold. Low grade, which means a couple of percent -- low feed grade, which means a couple of percent reduction in recovery. And there's also some oxidized copper that had been sitting on the stockpiles. The stockpiles have been there for a number of years, which is not recoverable. The sulfide is oxidized, it's not recoverable by [indiscernible]. So I think once the stockpiles will be depleted by the end of the year, and once we start mining fresh rock, we will get back to the close to 90% recovery, which we were sort of achieving before we had the issues. I'm not sure if we mentioned that we are busy with a project called Project 95 at Kamoa Phase 1 and Phase 2. It's basically installing a whole lot of regrind capacity. And the reason we call it Project 95 is we're going to take the 90-odd percent recovery up to 95% recovery, and that will be commissioned in Q2 next year. So Q2 next year, we'll be mining fresh rock, the grade will be better and the plant will be achieving 95% recovery on Phase 1 and Phase 2. Unknown Analyst: Okay. So it's 95% from Q2 next year on Phase 1 and Phase 2 and potentially is 90% by Q1. Is that correct? Alex Pickard: Yes, correct. Unknown Analyst: Okay. Got it. And then just another question on the stockpiles, which you're working through, which have helped kind of feed the concentrators while you rehabilitate the mine. So the plan is those stockpiles are depleted by the end of Q1, although I think I may have misheard, but you may have just mentioned they may be depleted by the end of this year. But I just want to kind of try and understand the transition from stockpiled ore feeding the concentrators to mined ore, so kind of having run-of-mine feed come through. Is there a risk? How are you kind of managing that transition? Kind of is there a risk that you deplete some of your inventories, your stockpiles, your surface stockpiles before you've got sufficient run of mine ore to feed the concentrators? David Van Heerden: So yes, I think there will be a reduction in throughput through the concentrators, in particular, at Kakula. The additional tonnes we mined at Kamoa will tram across to Kakula to try and assist there as well. I think there's an upside in terms of the material being fresh in terms of recovery and processing. But the production rate at Kakula Phase 1 and Phase 2 will reduce slightly just because there's not enough fresh run of mine to fill those plants to fill the 10.5 million tonnes that we've -- capacity that we've got installed there. Unknown Analyst: Okay. Understood. And then final question, just on the stockpiles, the copper and concentrate stockpiles at 59,000 tonnes. How should we think about how that gets drawn down over the course of 2026? Kind of what's the optimal level that, that hits and by when? Unknown Executive: I think the optimal level from what I can remember is about 19,000 tonnes. That's the inventory and the stocks ahead of the smelter. They've got a ramp-up plan, which completes in about Q3 2026. So certainly by Q3 2026, that 59,000 tonnes will be down to 19,000 tonnes. Operator: And at this time, I would like to turn the conference back over to Matthew Keevil. Matthew Keevil: Thanks very much, operator. And we've come up on the hour here, and there are no questions sitting in our webcast queue. So with that, we'll wrap up for the day. Thanks again, everybody, very much for joining us, and we're looking very much forward to a lot of great news coming out of the recovery program and the ramp-up of Platreef over the next few months. So we look forward to talking to you again, and have a great day. With that, please wrap up, operator. Operator: Thank you, sir. Ladies and gentlemen, this does indeed conclude your conference call for today. Once again, thank you for attending. And at this time, we do ask that you please disconnect your lines.
Operator: Hello, and thank you for standing by. My name is Mark, and I will be your conference operator today. At this time, I would like to welcome everyone to the LXP Industrial Trust Third Quarter Earnings Call and Webcast. [Operator Instructions] Now I would like to turn the call over to Heather Gentry, Investor Relations. Please go ahead. Heather Gentry: Thank you, operator. Welcome to LXP Industrial Trust Third Quarter 2025 Earnings Conference Call and Webcast. The earnings release was distributed this morning and both the release and quarterly supplemental are available on our website in the Investors section and will be furnished to the SEC on a Form 8-K. Certain statements made during this conference call regarding future events and expected results may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. LXP believes that these statements are based on reasonable assumptions. However, certain factors and risks, including those included in today's earnings press release and those described in reports that LXP files with the SEC from time to time could cause LXP's actual results to differ materially from those expressed or implied by such statements. Except as required by law, LXP does not undertake a duty to update any forward-looking statements. In the earnings press release and quarterly supplemental disclosure package, LXP has reconciled all non-GAAP financial measures to the most directly comparable GAAP measure. Any references in these documents to adjusted company FFO refer to adjusted company funds from operations available to all equity holders and unitholders on a fully diluted basis. Operating performance measures of an individual investment are not intended to be viewed as presenting a numerical measure of LXP's historical or future financial performance, financial position or cash flows. On today's call, Will Eglin, Chairman and CEO; and Nathan Brunner, CFO, will provide a recent business update and commentary on third quarter results. Brendan Mullinix, CIO; and James Dudley, Executive Vice President and Director of Asset Management, will be available for the Q&A portion of this call. I will now turn the call over to Will. T. Wilson Eglin: Thanks, Heather, and good morning, everyone. We had a great third quarter, highlighted by the transformative sale of our 2 vacant million square foot development projects in Central Florida and Indianapolis to a user buyer. This transaction was exceptionally impactful to our overall business, providing immediate earnings accretion while also materially reducing leverage, 2 positive outcomes rarely achieved in tandem. The aggregate gross sale price of $175 million represented a 20% premium to the gross book value of the properties and is a superior outcome compared to leasing the assets. The transaction drove portfolio occupancy up 370 basis points, significantly decreased leverage to 5.2x net debt to adjusted EBITDA from 5.8x and will generate an estimated 6% accretion to adjusted company FFO per share, reflecting the property operating cost savings and interest expense savings from debt reduction. The net proceeds from the sale of $151 million were used to repay $140 million of our $300 million, 6.75% senior notes due in 2028, pursuant to a cash tender offer that closed subsequent to quarter end, considerably improving our balance sheet and financial flexibility. We have now successfully leased or sold 98% of our development program. Our program has contributed to LXP having the youngest industrial portfolio in the public market with 15 facilities developed since 2019, totaling 9.1 million square feet at a weighted average estimated stabilized cash yield of 7.1%. Additionally, the 2 development property sales and a leased land sale completed late last year produced gains of $91 million or 54% over our cost of $170 million. Year-to-date sales volume totaled $273 million with an average cash capitalization rate of 5.1% on stabilized assets. The investment sales market remains healthy, and we are currently marketing approximately $115 million of assets for sale in our nontarget markets for opportunistic reinvestment, which may include opportunities in our land bank. During the quarter, we further added to our target market exposure and acquired an approximately 157,000 square foot Class A industrial facility in the Atlanta market for $30 million to satisfy a 1031 exchange requirement. We continue to focus on our 12-market investment strategy in the Sunbelt and select lower Midwest states, which account for approximately 85% of our gross assets. Market fundamentals improved during the third quarter with our 12 target markets outperforming the broader market. We continue to see robust net absorption in our target markets, which accounted for roughly 33 million square feet of the overall U.S. net absorption of approximately 45 million square feet in the third quarter. Dallas, Houston, Phoenix and Indianapolis were standouts with net absorption of between 4 million and 8 million square feet in each of these markets. Furthermore, Atlanta, Greenville-Spartanburg, Columbus and Central Florida each experienced net absorption of over 2 million square feet. In addition to demand from large retailers and 3PLs, it's notable to highlight that manufacturing-related demand has been a meaningful contributor to demand in our markets, reflecting the significant onshoring investment across our geographic footprint. During the quarter, flight to quality continued with large corporate users driving the absorption into newer facilities, and we saw an increase in demand for larger spaces. We stand to benefit from both of these trends, given our portfolio is the newest in the industrial REIT space and our focus is on bulk logistics. U.S. vacancy held relatively steady around 7%, primarily due to positive demand and a further decline in new completions. Construction starts remain below historical levels with the construction pipeline in our 12 markets of approximately 88 million square feet, down nearly 73% from the 2022 peak of approximately 330 million square feet. Today, we also announced that the Board of Trustees authorized an annualized dividend increase of $0.02 per share to an annualized rate of $0.56 per share on a pre-split basis. The newly declared common share dividend represents an increase of 3.7% over the prior dividend and will be paid in the first quarter of 2026. In summary, our company is in a great position. The sale of the development projects accelerated and derisked several of our most critical operating objectives, resulting in meaningfully higher occupancy, lower leverage and earnings accretion. We believe this outcome, combined with our high-quality young portfolio of primarily Class A assets in markets that are outperforming, consistent contractual rent growth, inexpensive rents in relation to market, above-average tenant credit with an investment-grade balance sheet, moderate payout ratio and a land bank to be utilized for accretive growth opportunities, positions us well for success going forward. With that, Nathan will now discuss our financials, leasing and balance sheet in more detail. Nathan Brunner: Thanks, Will. We produced adjusted company FFO in the third quarter of $0.16 per diluted common share for approximately $47 million. This morning, we increased the midpoint and tightened the range of our 2025 adjusted company FFO guidance to $0.63 to $0.64 per share. The revised guidance reflects the accretive impact from the sale of the development projects and debt repayment. As Bill discussed, the Central Florida and Indianapolis development properties were sold for an aggregate gross sale price of $175 million, which represented a 20% premium to the cost basis or $29 million over the gross book value of the properties. Based on our underwriting of market rents, TI, leasing and holding period costs and free rent, we estimated the yield implied by the sale price to be approximately 5%, which demonstrates the attractive valuation achieved in the sale. Our share of net proceeds of approximately $151 million was used to tender for the 6.75% senior notes due 2028. The tender resulted in the repayment of bonds with a principal amount of $140 million and will produce savings in interest expense and amortization of deferred financing costs of approximately $10 million per year. We will also save roughly $1.8 million of property operating costs per year at these 2 properties, which were previously expensed in the income statement. In aggregate, these interest and property operating costs totaled approximately $12 million per year or $0.04 per share, which represents 6% accretion versus our adjusted company FFO in the third quarter. This significant earnings accretion is paired with a 0.6 turn reduction in leverage, making this transaction even more compelling. Turning to the same-store portfolio. We produced same-store NOI growth of 4% year-to-date and 2% for the third quarter with our same-store portfolio 96.9% leased at quarter end. We narrowed our full year 2025 same-store NOI growth guidance to 3% to 3.5%. As a reminder, our same-store pool does not include the 1 million square foot development property in Greenville that we leased in May and the benefit of this lease is not included in the same-store growth metrics. Our portfolio occupancy increased to 96.8% during the quarter, up from 94.1% in the previous quarter, primarily driven by the successful execution of the sale transaction. We also continue to see our rent escalators trend higher with an increase in the average annual escalator to 2.9%. As market fundamentals trend upward, tenant sentiment appears to be improving with increased activity, although decision-making time lines continue to be extended. Our current mark-to-market on leases expiring through 2030 remains attractive with in-place rents 17% below market based on brokers' estimates. Regarding 2025 expiration, subsequent to quarter end, we leased a 380,000 square foot facility in the Indianapolis market to a new tenant for 10 years with 3.5% annual rent bumps. This was a July 2025 expiration in which the previous tenant held over through the end of September. This was a great outcome with the new rent representing a 34% increase over the prior rent. We continue to see promising activity where we have experienced tenant move-outs with lease rents approximately 30% below market. We've made good progress on our 2026 lease expirations, addressing approximately 1.8 million square feet or 27% of total 2026 expirations at an average base cash rental increase of approximately 31%, excluding one fixed rate renewal. Our remaining 2026 lease roll represents roughly 8.5% of our ABR with good prospects for attractive mark-to-market outcomes. During the third quarter, this leasing included a 3-year renewal with 3.25% annual bumps on a September 2026 expiring lease at our approximately 500,000 square foot facility in the Dallas market. The new rent represents an 8% increase over the prior rent. Subsequent to quarter end, we extended a June 2026 expiring lease at our 70,000 square foot facility in the Greenville-Spartanburg market for 5 years with 3.5% annual bumps, representing an increase in rent of approximately 7% over the prior rent. Additionally, the tenant at our approximately 650,000 square foot facility in Cleveland with an October 2026 expiration, exercised their 5-year fixed rate renewal option with 2.5% annual escalators. Our 600,000 square feet of redevelopment projects continue to progress. As a reminder, this includes a 350,000 square foot redevelopment in Orlando and a 250,000 square foot redevelopment in Richmond. Both facilities are expected to be completed in the first quarter of 2026 and producing yields on cost in the low teens. Moving to balance sheet. At quarter end, our net debt to adjusted EBITDA was 5.2x. We had $230 million of cash on the balance sheet at quarter end and approximately $80 million pro forma for the bond tender. As we noted in our earnings release, the Board approved a 1-for-5 reverse stock split, which is scheduled to take effect on November 10 for trading on a post-split basis beginning on November 11. The earnings press release includes further details. The dividend for first quarter 2026, reflecting the dividend increase announced today, will be adjusted for the reverse stock split on a pro rata basis. With that, I'll turn the call back over to Will. T. Wilson Eglin: Thanks, Nathan. In closing, we're pleased with our third quarter results and our outlook moving forward. The accretive sale of the vacant development projects addressed our most important operating objectives in 2025 and positions LXP for a strong 2026 and beyond. We remain focused on creating value for our shareholders by marking rents to market, raising rents through annual escalators, capitalizing on our lease-up opportunities and concentrating on our 12-market investment strategy. With that, I'll turn the call back over to the operator. Operator: And our first question comes from the line of Jon Petersen with Jefferies. Jonathan Petersen: Congrats on the property sales. Your debt is now down to 5.2x debt to EBITDA. So I wonder if you could just talk about the decision-making on deploying capital in the future for external growth, whether it's acquisitions or development. Or are you guys more focused on, I guess, internal growth at the moment? T. Wilson Eglin: Well, we have a very good internal growth profile, Jon, beginning with contractual rent escalations and expensive rents and hopefully some occupancy gains that we're working on. Our orientation on the external growth side would still be focused on build-to-suit. And there are a handful of places in the land bank where some modest spec development could be in the cards next year if tenant demand continues to stay strong, but those would be smaller boxes and the overall scale would be pretty small in relation to our overall liquidity. Acquisitions are really not something that we're looking at from time to time. As we've discussed, if we have a property sale and we're trying to manage tax gain, we may purchase something like we did with the Atlanta asset. Jonathan Petersen: Got it. All right. That's helpful. And then in your presentation, there's a lot of focus on your 12 target markets. So it kind of raises the question, what about the other markets? I think it's about 15% of your revenue comes from outside of those 12 markets. Is that something we should think about as a medium-term disposition target? T. Wilson Eglin: Yes. We've been selling assets out of those markets and creating liquidity for redeployment, and we have a handful of things in the market that meet that criteria. So we do view that portfolio as a source of liquidity for other initiatives, but we're committed to taking -- it will be a process where we realize as much value as we can in each case. And there are some assets that require a lease extension would be supportive of the best sale outcome, that sort of thing. So I think slow and steady. But we're looking at that portfolio as a source of liquidity for reinvestment. Operator: And your next question comes from the line of Todd Thomas with KeyBanc Capital Markets. Todd Thomas: Will, I just wanted to go back to your comments. You mentioned the company is marketing on the non-target market side, about $115 million of assets. Can you just elaborate on that a little bit, what the time line might be for some additional dispositions to materialize and what the disposition cap rate might sort of look like for those assets? Perhaps you can sort of book... T. Wilson Eglin: Yes, Todd, it's 4 buildings. They're not under contract at the moment, but we think there's a good chance that they close this year in December. And in terms of cap rates, probably something in the low 6s, which is a little bit higher than where we may trade early in the year, but we're kind of looking at the plan in its entirety, which should land somewhere in the sort of 5.5% to 5.75% area, which we think is -- it's a good outcome and where we've redeployed capital this year, there's some accretion. Todd Thomas: Okay. And then Nathan, you talked about the stronger in-place escalator that you've been sort of achieving here. You're close to 3%. You have about 10% of ABR expiring in '26. Sorry if I missed this, but can you talk about the expected mark-to-market in '26, what that might look like and whether there are any other meaningful considerations that we should be thinking about as it relates to same-store NOI growth? T. Wilson Eglin: James, do you want to address the mark-to-market first? James Dudley: Yes, sure. So we're projecting about a 20% mark-to-market for 2026 remaining lease expirations, which is up slightly from last quarter because we did pull that Dallas deal out that had a slightly lower mark-to-market on it. I do want to talk about that one just for a second, though we marked it up 8%. But if you remember, that was a 3-year deal that we marked up 3% in the duration. Nathan Brunner: And then just layering on top of that, some other observations. You pointed out the contractual rent escalators, which are creeping up. We're almost at 3% now. On average, it's 2.9% across the portfolio. With regard to the expirations. At quarter end, we were around 10% in terms of expirations in '26. But with the subsequent events, we're -- it's around about 8.5%, and we've addressed 27% of the '26 expirations in totality. And then the one other thing I would mention, Todd, with regard to the same-store metric next year is we will get the benefit of the income from the 1 million square foot Greenville property, which will move into the same-store pool for '26. It is not in the metrics for 2025. Todd Thomas: Okay. And then it sounded like you see an opportunity for occupancy growth as well. What level of retention are you anticipating in '26? And what's that been trending like in '25, if you can just remind us? T. Wilson Eglin: So in '26, we're anticipating around 80% to kind of return to the norm on what we've had historically. And we've got a decent amount of visibility there. I mean it is back-end loaded. The majority of the lease expirations are in the back half of the year. But we just addressed 2 of the big ones in the Dallas asset and then in the Cleveland asset. So we're moving along and knocking that out as we kind of go along. '25 was a unique year in the fact that we had some 3PL exposure. So I think it was -- we had quite a bit of vacancy. We're working through that vacancy now. We've got about 1 million square feet of second-generation leasing that needs to be done, and we've got really good activity across that portfolio right now. So hoping to have some good outcomes, and we're excited about the mark-to-market opportunity, which is a little above 30%. Operator: And your next question comes from the line of Mitch Germain with Citizens Bank. Mitch Germain: Congrats on the sale. How long were those discussions ongoing? I'm just trying to -- I'm curious to see kind of how the leasing versus the sale discussions kind of were transpiring. T. Wilson Eglin: Well, it was an unsolicited offer that we got on the buildings. And we were under access agreement dating back to sometime in May. So we were in possession of material nonpublic information for a long time, both in second quarter and third quarter. So it was -- it took a long time to get from May to the closing, but it was in the works for a pretty long time. Mitch Germain: Great. That's helpful. And then how much of the portfolio is subject to these fixed renewals versus you able to kind of drive rents kind of within line with kind of what your expectations are for '26 and beyond? T. Wilson Eglin: Yes, it's probably about 15% of the portfolio. We do have some near-term large ones that kind of drive down that mark-to-market. Mitch, I would just remind you that our mark-to-market numbers always incorporate those fixed rate renewals. We have 3 more that are coming up this year, and then we have a couple of large ones with our Nissan leases in 2027. When we have the opportunity and it does present itself periodically, sometimes we can negotiate around them if the tenant is looking for capital dollars or something else kind of outside the base lease terms. Mitch Germain: Okay. Great. And then I guess my last question. Same-store results this quarter, is a little bit of that driven by some of -- I think you had a couple of assets go vacant. Is that kind of what happened this quarter to drive that result a little bit lower versus where you were trending? Is there anything specific that you want to call out? Nathan Brunner: Yes, Mitch, on same-store, you're spot on, the delta between Q2 and Q3 is the impact of those move-outs at the end of Q2 and during the course of Q3. So simplistically, the building blocks of the outcome are top line contractual rent escalators and the benefit of renewals and new leasing outcomes is about 4.75% as a positive impact, and then the drag from lower occupancy was about 2.7%. Mitch, just as a reminder, Greenville asset is not in the pool, but had it been in the pool for the quarter, we would have had a 1.8% positive impact and so the result for Q3 rather being 2%, would be 3.8%. As I said earlier, we'll obviously get the benefit of that next year. Operator: [Operator Instructions] And your next question comes from the line of Vince Tibone with Green Street. Vince Tibone: I just wanted to follow up on same-store NOI as well. If I heard correctly, it looks -- I think full year guidance was brought down at the high end from 4% to 3.5%. I thought all the move-outs in the third quarter were expected. So can you just talk about what drove kind of the lowering of the high end of expectations? Was it bad debt or just kind of taking out any new leasing that maybe would have got you to the high end? Because it looks like -- some rough math, looks like fourth quarter is expected to accelerate further on a same-store basis. So if you just talk about those few pieces, that would be helpful. Nathan Brunner: Yes. Thanks, Vince. So we did narrow the guidance range for same-store. It was 3% to 4% previously. It's 3% to 3.5%. As a reminder, that outcome will still be in the range of outcomes we expect in Q2, but also in the range of outcomes we expected at the beginning of the year when we initially released guidance. Clearly, the change on the high end is really a reflection of the passage of time since our last call. The high end on our last call really required a conversion of a lot of leasing prospects with very near-term needs. We have good activity across the move outs we've had in 2025, but the conversion of those spaces to tenancies is going to take a little bit more time and not going to result in us getting to high end of the Q2 guidance. Vince Tibone: No, that's helpful. And then just to confirm, it doesn't sound like bad debt at all is an issue. Can you just confirm that's the case, spot on, bad debt? Nathan Brunner: So no bad debt in the quarter or year-to-date in these collective rents. Vince Tibone: Great. And then maybe just one last one for me. And sorry if you already touched on this. But just on the press release, you mentioned 1.1 million square foot of leasing post quarter end. Are you able to split that between renewals and new leasing on a square footage basis? Nathan Brunner: Yes, they are renewals. Just to clarify, there were 2 renewals and there was one new lease, which is the 380 in Indianapolis that we described in the prepared remarks. Operator: And your next question comes from the line of Jim Kammert with Evercore ISI. James Kammert: With the apparent mania happening in data centers and AI, I'm just curious what your latest thoughts are on the Phoenix land. If there's any additional opportunity for Lexington there to monetize, sell to other developers or proceed on your own? Just curious. Brendan Mullinix: Well, this is Brendan. It's an avenue that we're certainly very interested in. In Phoenix, most of the data center markets in the country, the limiting factor is power and access to power. So that's the focus there. I think that we'll continue to explore whether there are opportunities to power the site, which would allow for data center development. But in the meanwhile, we're incredibly encouraged by the tightening in that market, which will put us in a great position to compete on build-to-suit and in the future potentially consider spec there. So the market fundamentals there for just conventional warehouse distribution are improving really dramatically there. James Kammert: Fair enough. And second question, I forgotten are the 2 large Nissan expirations, I realize not until Q1 '27, but are those fixed escalations, do they extend or not? Nathan Brunner: Yes, they have -- they certainly have no adoptions. James Kammert: Okay. Can you say the percentage or you're not disclosing? Nathan Brunner: 1.5%. Operator: [Operator Instructions] There's no further questions at this time. I will now turn the call back over to Will Eglin for closing remarks. Will? T. Wilson Eglin: We appreciate everyone joining our call this morning, and we look forward to updating you on our progress over the balance of the year. Thanks again for joining us today. Operator: This concludes today's call.
Operator: Good afternoon. This is the conference operator. Welcome, and thank you for joining the TF1's 9 Months 2025 Results Conference Call and Webcast. [Operator Instructions] At this time, I would like to turn the conference over to Mr. Pierre-Alain Gerard, Executive VP, Finance, Strategy and Procurement. Please go ahead, sir. Pierre-Alain Gerard: Thank you very much. Good evening, everyone, and thank you for joining us for our 9 months results presentation. Let's start with our key highlights on Page 3. Audience first. In the first 9 months, the TF1 Group made progress in all targets year-on-year and reinforced its leadership. Audience share rose by 0.8 points to 33.8% among women below 50 and by 0.7 points to 30.7% among individuals aged 25 to 49. The TF1 channel maintained its high audience share in the 4+ target, reaching 18.8%, up 0.2 points year-on-year. With a distinctive editorial stance on the latest international political and economic news, LCI has achieved an audience share of over 2% in the 4+ target since it moved to DTT Channel 15 in June, already ahead of our year-end expectation. In digital, TF1+ attracted 36 million streamers per month on average in the first 9 months and 41 million streamers in September 2025, a new record. Second, our financial performance. The group's consolidated revenue amounted to EUR 1.6 billion in the first 9 months of 2025, stable year-on-year. This amount includes an advertising revenue of EUR 1.1 billion. The 2% decline compared to last year reflects an uncertain and unstable environment. Also bear in mind that the first 9 months of 2024 had been a strong period for the group, fueled by a dynamic market in H1, the broadcasting of the Euro and the halo effect from the Paris Olympics. Now focusing on TF1+. Advertising revenue maintained its strong growth momentum, rising by 41% year-on-year to EUR 134 million. Regarding our COPA and net profit, excluding tax surcharge, we successfully managed to mitigate the impact of ad market headwinds as they only declined by a few million euros compared to last year. We will come back to this in more detail later. The group also maintained a strong financial position with net cash of EUR 465 million at September with an increase of more than EUR 100 million year-on-year. Capitalizing on its successful strategy, the group confirms the following 2025 targets: strong double-digit revenue growth in digital, aiming for a growing dividend policy in the coming years. The current phase of political and fiscal instability in France adversely impacted the advertising market in October, linear in particular. First indications for November are also below expectations. Given this context and with limited visibility until the end of the year, the group has adjusted its 2025 guidance for margin from activities to a level between 10.5% and 11.5% versus a broadly stable margin compared to 2024. This margin level remains solid given adverse market conditions combined with the rollout of our digital strategy. Let's go now into more details. On today's agenda, we'll first give you an update on our business segments. We will then provide additional information on our financial results. After that, we'll update you on our strategy and outlook, and we'll close with a Q&A session. For those of you who are joining us by phone, note that we are broadcasting this presentation as a webcast. You can also find it on our corporate website. Let's start with a quick update on our linear streaming and studio businesses. Now turning to Page 6 and our audience performance. Reach is the key underpinning factor of the value we deliver to customers. In the first 9 months, TV's overall daily reach stood at 76%, while TF1 Group maintained an unrivaled position, covering 52% of French people every day, well above any other media such as YouTube, SVOD services or TikTok. The group maintained its leadership across commercial targets and the TF1 channel retained a significant lead over its main commercial competitor, ahead by 9 points among women below 50 with an audience share of 23%, ahead by 8 points among individuals aged 25 to 49 with an audience share of 20%. Over the first 9 months, the TF1 channel recording high ratings in its genre, ranking #1 in French drama, news, entertainment and movies. Let's turn now to our streaming activities on Page 7. Our strategy is to leverage the group's solid content lineup to address both linear and non-linear expectations. 20% of total viewing comes from non-linear perception among individuals aged 25 to 49 for the TF1 channel. This share is even higher on our strong franchises, reaching, for example, more than 80% for the reality TV genre and more than 50% for our daily soaps, Plus Belle La Vie and ICI Tout Commence. Now looking at the right-hand side of the page, let me give you an update on the platform's building blocks. On consumption, TF1+ attracted 36 million streamers per month on average in the first 9 months and hit a new monthly record with 41 million streamers in September. Overall, streamers watched 834 million hours of content on TF1+ in the first 9 months of 2025 according to Mediametrie, 1.4x the figure achieved by the Second Rank platform. In terms of site-centric figures, which cover all streaming usage not captured by Mediametrie such as specific AVOD and aggregated content, streamed hours rose by 14% year-on-year. On ad inventories, ad load reached 5 minutes and 4 seconds per hour on average in the first 9 months versus 5 minutes on average in 2024. On the value front, CPM reached EUR 13.2 per CPM, a 1% increase year-on-year. As a result, advertising revenue generated by TF1+ rose by 41%, reaching EUR 134 million at end September. On next page, after launching TF1+ in January 2024 and having positioned it as the advertising -- in the advertising market as a premium alternative to YouTube, the group has entered the second phase of its strategic plan. The first key aspect of the second phase is the new form of monetization on TF1+ involving micro payments. Streamers can now take advantage of new features, giving them a la carte access to a wide range of high-quality works and content in return for small payments. Since September, streamers have had access to previews of our top programs. This feature has been rapidly adopted by TF1+ streamers with close to 200,000 transactions recorded over the month of September. These initial figures are very promising, especially since the micro payment offer is not yet available across all telcos and only covers a small portion of our content. On the TF1+ app, the only environment where this offer was fully deployed in September, this already corresponds to 2.6 transactions per converted streamer. We have continued to enrich our offer with new features like ad-free content and exclusive live channel for Star Academy launched in October. Now turning to Page 9 for an update on Studio TF1. Its revenue totaled EUR 213 million at end September, growing by 11% year-on-year, supported by a good momentum, notably in the third quarter. COPA reached EUR 20 million at end September, up EUR 13 million year-on-year. I will come back to this in more details in a few minutes. Highlights in the first 9 months included the launch of TF1, TF1+ and Netflix of our daily series Tout Pour La Lumiere, All For Light in English, the production of Flemish version of Dancing with the Stars for the Belgian channel VTM, the delivery of the documentary series From Rockstar to Killer to Netflix, the third season of Memento Mori for Prime Video, the theatrical releases of the movie, Jouer Avec Le Feu, Avignon and Yapas de Reseau. Let's move now to a more detailed breakdown of our financial results for the first 9 months of 2025. You will find additional information in our consolidated financial statements and their notes as well as our management report, all of which are available on our website. First, a word on revenue on Page 11. The group's consolidated revenue amounted to EUR 1.6 billion in the first 9 months of 2025, stable year-on-year and above the company compared consensus. Revenue from the Media segment declined by 1% to EUR 1.4 billion. Advertising revenue amounted to EUR 1.1 billion, down 2.2%. In linear, the trend in the third quarter was similar to that seen in the first half, with spending by advertisers adversely affected by an uncertain environment. By comparison, the first 9 months of 2024 had been a strong period for the group due to the dynamic market in H1, the broadcasting of the Euro and the halo effect from the Paris Olympics on our revenue. Despite these headwinds, TF1 gained market share as the overall linear market at end September is estimated to be down by a low double-digit percentage year-on-year. In terms of digital advertising revenue, TF1+ continued to demonstrate its appeal for advertisers, rising by 41% to EUR 134 million in the first 9 months of 2025 and significantly outperforming the market. And again, let me remind you that we only disclose here advertising revenue and not a broader streaming revenue, which would be much higher. Non-advertising revenue in the Media segment amounted to EUR 264 million in the first 9 months, up 5% year-on-year. Revenue from interactivity and music and live shows in the first 9 months offset the impact resulting from the deconsolidation of My Little Paris and PlayTwo in the third quarter. Studio TF1's revenue totaled EUR 213 million, an increase of 11% year-on-year. That figure includes a EUR 25 million contribution from JPG compared with EUR 8 million last year. As a reminder, JPG has been consolidated in Studio TF1 financial statements since the third quarter of 2024, and its activity is skewed towards the second half of the year. Excluding JPG, Studio TF1's revenue still rose in the first 9 months, notably thanks to premium deliveries to platforms and successful theatrical releases, as mentioned earlier. COPA amounted to -- on Page 12, COPA amounted to EUR 191 million in the first 9 months of 2025, slightly declining by EUR 7 million and above the company compiled consensus. Margin from activities stood at 11.9%. As a reminder, in Q3 2024, COPA included a EUR 27 million capital gain from the disposal of the Ushuaïa brand. In Q3 2025, the group completed the disposal of the disposals of My Little Paris and PlayTwo that we announced during our H1 results, which generated a capital gain of EUR 17 million. Excluding those items, COPA in the first 9 months of 2024 rose slightly year-on-year by EUR 3 million. The Media segment reported COPA of EUR 171 million. This represents a year-on-year decrease of EUR 20 million, resulting from a decline in advertising revenue and lower gains from the disposal that I just mentioned. Studio TF1 generated COPA of EUR 20 million, a strong increase of EUR 13 million, notably thanks to the JPG's contribution. Studio TF1 margin was up 5.7 points year-on-year, reaching 9.4%. Regarding the income statement on Page 13, I have already commented on consolidated revenue and COPA. Looking further down, operating profit totaled EUR 175 million, broadly stable year-on-year. That figure includes EUR 9 million in amortization charges relating to intangible assets arising from the JPG acquisition and EUR 7 million in nonrecurring expenses related to the group's digital acceleration plan. Net profit attributable to the group, excluding exceptional tax surcharge, was EUR 138 million, slightly down EUR 8 million. Compared with last year, net profit includes lower gains from disposals and a decrease in financial income due to lower interest rates. Income tax expense for the first 9 months included an exceptional contribution levied on French companies under the 2025 finance bill. This exceptional EUR 15 million tax surcharge for the period comprises EUR 10 million based on 2024 taxable profits fully recognized in Q1, as you remember. Moving on Page 14 on the net cash position. At September 2025, the TF1 Group had a solid financial position with net cash of EUR 465 million, up EUR 101 million year-on-year. Our solid balance sheet is an asset to navigate the volatile environment and keep rolling out our digital road map. Note that the EUR 238 million in CapEx compared to EUR 183 million last year, but it includes EUR 27 million proceeds from Ushuaïa. The difference between EUR 238 million and EUR 210 million of 2024 reflects future deliveries for Studio TF1. The EUR 41 million decrease compared with end December 2024 mostly reflects free cash flow after working cap of EUR 84 million and the dividend payment by TF1 of EUR 127 million in April. Before turning to our outlook, let me wrap up the key takeaways of our first 9 months. In a very uncertain and unstable environment, the group successfully tackled advertising market headwinds, thus mitigating the impact on COPA. First, we managed to gain market share across the board in a more challenging market than expected, underlying the competitiveness of our ad sales. Digital grew by 41%, significantly ahead of the market, while the decline in linear was limited to 6% compared with an estimated low double-digit percentage market decline. Second, we keep a tight control on cost, as illustrated by the EUR 9 million decrease in programming costs and the savings achieved in operational costs. And on the other hand, we safeguard the resources required to fuel the second phase of our strategy. Lastly, we actively manage our portfolio, both on media and on studio, as illustrated by the disposals of My Little Paris and PlayTwo and by the successful integration of JPG. Let's now have a look at our targets for the rest of the year. First, in terms of lineup, we will maintain in Q4 the best offer of free family-oriented and serialized entertainment as illustrated by the return of Star Academy, a 360-degree experience that will be broadcast across TF1, TFX and TF1+ alongside a social media presence that will drive strong engagement, particularly among younger targets. Q4 highlights also include the new premium French drama, Monmartre as well as 6 matches involving France National Football and Rugby teams. About Rugby, as you know, TF1 has secured the rights to broadcast the 2027 Rugby World Cup and the 2026 and 2028 Nations Championship as well as the 2027 and 2029 Autumn Nations Series. The deal reinforces TF1 Group's long-term strategy to make the most popular sporting events available to French viewers on free-to-air television. As you know, our objective is to sustainably finance this premium lineup going forward. After launching TF1+ in January 2024 and establishing it as a premium alternative to YouTube, the group is in the second phase of its strategic plan, which involves 3 pillars. The first pillar of this new phase is micro payment. As mentioned earlier, this feature, which was launched in September 2025, previews has been rapidly adopted by TF1+ users. New features, ad-free content and an exclusive live channel for Star Academy were launched in October. And again, if you do the math, the additional revenue potential of this initiative is significant if a portion of our monthly streamers transact several times a month. The second pillar is the extension of the group's distribution strategy illustrated by a landmark deal signed with Netflix. Starting in the summer 2026, we will show all 5 of our linear channel on Netflix as well as more than 30,000 hours of content available on demand. This unprecedented alliance will unlock additional reach for TF1 as a significant portion of Netflix subscribers consider Netflix as their primary source of TV entertainment. In addition, TF1 will benefit from Netflix's unrivaled expertise in content recommendation. Finally, the third pillar of this new strategic phase is the expansion of TF1+ distribution among French speakers worldwide. TF1+ has been available in Belgium, Luxembourg and Switzerland since 2024 and in 22 French-speaking African countries since June 2025. Moving on Page 18. Capitalizing on its successful strategy, the group confirms the following 2025 targets: strong double-digit revenue growth in digital, aiming for a growing dividend policy in the coming years. And the current phase of political and fiscal instability in France is undermining the confidence of economic actors and is resulting in a more challenging advertising market than expected, particularly in linear. The general trend seems to be the same across Europe, but the magnitude of the decline in October, low double-digit percentage appears to be specific to France. First indications for November are also below expectations and visibility remains limited until the end of the year. At this stage, we conservatively assume that it will be the same in December. In this context, the group adjusts its 2025 margin from activities target from broadly stable compared to 2025 to between 10.5% and 11.5%, a solid margin level. Many thanks for your attention, and now I'm ready for your questions. Operator: [Operator Instructions] Pierre-Alain Gerard: We have a written question on the platform here. So it is about the organic growth of Studio TF1 in the third quarter of the year. So the perimeter effect is EUR 11 million over the 9 months. And on a like-for-like basis, the growth is 6%. Operator: [Operator Instructions] At the moment, there are no questions from the phone. I'll turn the call back to you for any closing remarks. Pierre-Alain Gerard: Thank you very much. So to summarize these results, what you need to bear in mind is that we managed to gain market share across the board. We have a tight control on cost and active portfolio management, which led us to gain market share both in linear and in digital. So in this turbulent market, this is why we adjust the margin between 10.5% and 11% which is still a strong level. Thank you very much. Operator: Ladies and gentlemen, thank you for joining. The conference is now over. You may disconnect your telephones. Thank you.